NCLT Cannot Examine Corporate Debtor’s Viability at IBC S.7 Stage for CIRP: Supreme Court [Read Judgement]

The Supreme Court of India held that while deciding a Section 7 IBC application, the NCLT cannot examine whether the corporate debtor is viable or financially healthy and once debt and default is shown, admission cannot be refused on viability grounds.

The case came from the NCLT order dated 2 January 2024 admitting REC Ltd.’s Section 7 plea against Hiranmaye Energy Ltd., which was upheld by NCLAT on 25 January 2024. Power Trust, the promoter, challenged this before the Supreme Court.

Before the Court, the promoter’s counsel argued that the company is a running power plant with a 25-year PPA, fuel supply under SHAKTI scheme, and earning around Rs. 20 crore EBITDA per month. It relied on Vidarbha case and said NCLT should look at overall viability before admitting CIRP.

The respondents’ counsel argued that under Section 7, NCLT only has to see if there is a financial debt and default. They relied on Innoventive Industries and later cases to show that admission is mandatory once default is shown.

Justice Joymalya Bagchi, speaking for the Bench with CJI Surya Kant and Justice Vipul M. Pancholi, observed that IBC gives limited power at admission stage. The Court explained that NCLT cannot go into business viability or other issues. The court referred to Innoventive Industries and explained that NCLT must only see whether the debt is “due” and whether default occurred and nothing more.

The court observed that Vidarbha had been clarified in review, and later in M. Suresh Kumar Reddy it was made clear that Vidarbha was decided in its own facts and does not overrule Innoventive. The court held that Innoventive still lays down the correct law.

The court also observed that even on facts, Vidarbha did not help the promoter. In Vidarbha, there was an APTEL award in favour of the corporate debtor which was much higher than the creditor’s claim. In this case, the court observed that the corporate debtor’s outstanding liability as on 2 January 2024 was about Rs. 3103.31 crore which was far more than the revenue figures relied upon by the promoter. So the viability claim was doubtful.

On this reasoning, the Supreme Court held that NCLT was right in admitting the Section 7 application, and the admission could not be challenged by arguing that the corporate debtor was viable or capable of repayment.

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