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NCLT Has Discretion to Not Admit Financial Creditor’s CIRP Application Even If Corporate Debtor Is in Default: Supreme Court

[13 July 2022] The Supreme Court observed that it is not mandatory for the Adjudicating Authority to admit an application to initiate Corporate Insolvency Resolution Process even if a debt existed and the corporate debtor is in default. However, such discretionary power cannot be exercised arbitrarily or capriciously, the bench comprising Justices Indira Banerjee and JK Maheshwari cautioned.

The court observed that, ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition.

The bench noted that the expression ‘shall’ is used in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor.

The court, therefore, said:

“The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC but a different word, that is, ‘shall’ in the otherwise almost identical provision of Section 9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. An application of an Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the Corporate Debtor by the Operational Creditor and no notice of dispute has been received by the Operational Creditor. The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor”