Admission of S. 7 IBC Plea Is Mandatory Once Debt and Default Are Proven: Supreme Court

The Supreme Court reiterated that an application filed under Section 7 of the Code by a financial creditor must be admitted once the existence of a financial debt and default is established. The Court emphasized that the adjudicating authority does not possess discretionary powers at this stage and cannot examine issues such as the corporate debtor’s commercial viability or broader equitable considerations. The bench of Chief Justice Surya Kant and Justices Joymalya Bagchi and Vipul M. Pancholi upheld the decision of the National Company Law Appellate Tribunal (NCLAT) and dismissed the appeal filed by the promoter of Hiranmaye Energy Ltd. against the admission of insolvency proceedings. Limited Scope of Inquiry Under Section 7 IBC The Court underscored that the IBC marks a clear departure from the regime of winding up under Section 433(e) of the Companies Act, 1956. Under the earlier framework, courts were required to examine whether a company was unable to pay its debts and whether it was just and equitable to wind up the company. However, under the IBC, the scope of inquiry at the admission stage is strictly confined to determining whether a debt exists and whether a default has occurred. The adjudicating authority is not required to examine the corporate debtor’s ability to pay, nor is it permitted to adjudicate disputes over the debt at this stage. The Court reiterated that upon receipt of a Section 7 application, the National Company Law Tribunal (NCLT) must ascertain the existence of default from the records of an information utility or other evidence provided by the financial creditor within 14 days. If default is established, admission of the application is mandatory. Importantly, the Court clarified that neither the corporate debtor is entitled nor the adjudicating authority required to delve into disputes regarding the debt at this preliminary stage. This interpretation reinforces the time-bound nature of insolvency proceedings envisioned under the IBC. Background of the Dispute The matter arose from a loan arrangement between REC Ltd., a public sector financial institution, and Hiranmaye Energy Ltd. On June 19, 2013, REC sanctioned a loan of ₹1,859 crore for setting up a thermal power plant at Haldia, West Bengal. In October 2015, an additional term loan of ₹446.97 crore was approved due to cost escalations. The loan account was classified as a non-performing asset (NPA) on June 30, 2018, with the date of default recorded as March 31, 2018. Two restructuring proposals were approved in principle in February and September 2020. However, both were conditional upon compliance with specific pre-implementation requirements, including: Securing a favourable tariff order Creation of a Debt Service Reserve Account Continuous operation of the power plant Infusion of priority debt and working capital The corporate debtor failed to fulfill these conditions within the stipulated timelines. Although a tariff order was eventually issued by the West Bengal Electricity Regulatory Commission on May 31, 2021, it came well after the agreed deadline. Subsequently, REC filed a Section 7 application before the National Company Law Tribunal, Kolkata, which admitted the insolvency plea on January 2, 2024. The decision was upheld by the National Company Law Appellate Tribunal on January 25, 2024, leading to the appeal before the Supreme Court. Appellant’s Argument: Reliance on Vidarbha Judgment Before the Supreme Court, the promoter of the corporate debtor contended that admission under Section 7 is discretionary and not automatic. The appellant relied heavily on the Supreme Court’s decision in Vidarbha Industries Power Ltd. v. Axis Bank Ltd., arguing that the adjudicating authority must apply its mind to surrounding circumstances, including whether initiating insolvency proceedings would be justified in the facts of the case. In Vidarbha, the Court had declined to admit a Section 7 application in light of a favourable award obtained by the corporate debtor from the Appellate Tribunal for Electricity (APTEL), which exceeded the financial creditor’s claim. Supreme Court Distinguishes Vidarbha The judgment authored by Justice Joymalya Bagchi distinguished the Vidarbha ruling on facts. The Bench noted that in Vidarbha, the corporate debtor had secured an award substantially exceeding the creditor’s claim, rendering the initiation of CIRP unwarranted in that specific context. In contrast, the present case involved substantial outstanding liabilities running into hundreds of crores, with no comparable award or recoverable claim in favour of the corporate debtor that could offset the admitted default. The Court observed that the corporate debtor’s claims of commercial viability were “highly dubious,” particularly in light of the significant outstanding liability recorded as on January 2, 2024. The NCLAT had also taken note of the magnitude of the unpaid dues while affirming the admission order. Strengthening the Mandatory Nature of Section 7 By dismissing the appeal, the Supreme Court reaffirmed that once a financial creditor establishes the existence of a financial debt and a default, the NCLT is bound to admit the application. The adjudicating authority cannot weigh extraneous factors or assess the debtor’s financial prospects at the admission stage. Case Details Case Title: Power Trust Versus Bhuvan Madan (Interim Resolution Professional of Hiranmaye Energy Ltd.) & Ors. Citation: JURISHOUR-36-SC-2026 Case No.: CIVIL APPEAL NO(s).2211/2024 Date: 18/02/2026 Click Here To Read Order Read More: ‘Packing’ Is Mandatory for Classification Under Cargo Handling Service; CESTAT Quashes Service Tax Demand

Admission of S. 7 IBC Plea Is Mandatory Once Debt and Default Are Proven: Supreme Court

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