NCLT not required to go into inability of a corporate debtor to pay its debt – SC

Under IBC, Adjudicating Authority not required to go into the inability of a corporate debtor to pay its debt – Supreme Court

In a recent judgment, Hon’ble Supreme Court has held that under IBC, NCLT is not required to go into the inability of a corporate debtor to pay its debt unlike erstwhile Companies Act, 1956 which required satisfaction whether it is just and equitable to wind up the company.

ABCAUS Case Law Citation:
5046 (2026) (02) abcaus.in SC

In the instant case, the Corporate Debtor challenging the order of NCLAT dismissing the appeal against the order of NCLT (Adjudicating Authority) whereby it admitted the Section 7 application initiating Corporate Insolvency Resolution Process (CIRP).

It was fiercely contended that the Corporate Debtor (CD) was an ongoing concern and does not lack the ability to repay the debt. It was stated that CD had raised bills of high amounts pending realisation, it had a continuous fuel supply arrangement and had earned EBIDTA in crore per month during the CIRP.

The Hon’ble Supreme Court observed that the above said facts though attractive at first blush, do not yield either legal or factual justification to rebut the admission of the Section 7 application under IBC 2016.

The Hon’ble Supreme Court further observed that the scope and purpose for which IBC was promulgated must be born in mind. The main objective of its enactment was to create a complete code for easy, prompt and seamless resolution of insolvency process and thereby ensure that the net worth of the corporate debtor is not dissipated and the entity is salvaged from corporate death through a viable resolution plan accepted by its Committee of Creditors (CoC). The Code prescribes whenever a corporate debtor defaults on a debt that is due and payable, an insolvency process may be initiated. Section 3(12) defines “default” as non-payment of a debt which has become due and payable, and includes default in respect of a part or instalment thereof. Such insolvency process may be initiated either by the corporate debtor itself, or by its creditors who are classified as financial creditor or operational creditor.

The Hon’ble Supreme Court noted that the Code makes a distinction in the manner in which an insolvency process may be initiated by a financial creditor under Section 7, IBC in contradistinction to an operational creditor under Section 8 and 9, IBC. Unlike an operational creditor, a financial creditor may trigger an insolvency process under Section 7 in respect of default of any financial debt, whether owed to itself or to any other financial creditor. While the financial creditor may directly file an application under Section 7 setting out the particulars of the financial debt and evidence of default, the operational creditor, on the occurrence of a default, is to first deliver a demand notice of the unpaid debt to a corporate debtor and the latter may within 10 days of receipt of such demand notice bring to the notice of the operational creditor the existence of a dispute or record the pendency of a pre-existing suit or arbitration proceeding in respect of such debt.

The Hon’ble Supreme Court stated that once a corporate debtor demonstrates a dispute regarding the existence of the debt, the insolvency process stands aborted visà-vis the operational creditor. But when the financial creditor initiates the insolvency process for the purposes of admission, the Adjudicating Authority is only to ascertain the existence of a default from the records of the information utility or the evidence furnished by the financial creditor within fourteen days from the receipt of such application. At this stage, neither is a corporate debtor entitled nor is the Adjudicating Authority required to examine any dispute regarding the existence of such debt. This significantly reduces the scope of enquiry at the stage of a time-bound admission of an insolvency process by a financial creditor.

The Hon’ble Supreme Court observed that the Adjudicating Authority is not required to go into the inability of a corporate debtor to pay its debt which is a clear departure from the scheme of winding up envisaged under Section 433(e) of the erstwhile Companies Act, 1956 which required the Adjudicating Authority to come to a finding with regard to the inability of the company to pay the debt and thereby arrive at a requisite satisfaction whether it is just and equitable to wind up the company.

The Hon’ble Supreme Court observed that the IBC restricts the scope of enquiry for admission of an insolvency process by a financial creditor merely to the existence of default of a debt due and payable and nothing more. The legislative intent behind such prompt and summary intervention is “to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation

The Hon’ble Supreme Court noted that the Corporate Debtor heavily relied on its one of the judgment to argue that the Adjudicating Authority had ample discretion to apply its mind to relevant factors including the feasibility of initiation of insolvency process notwithstanding the existence of default on a debt due and payable by the Corporate Debtor. However, the Hon’ble Supreme Court observed that in review, the Court had clarified that observations made were restricted to the facts.

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