The Supreme Court has reaffirmed that the initiation of corporate insolvency under Section 7 of the Insolvency and Bankruptcy Code hinges solely on the existence of a financial debt and a default, irrespective of subsequent restructuring attempts that remain unfulfilled. This judgment clarifies the limited scope of judicial review at the admission stage and reinforces the primacy of statutory timelines over commercial negotiations.
Background & Facts
The Dispute
The dispute arose from a Rs. 1,859 crore term loan extended to Hiranmaye Energy Ltd. in 2013 for a thermal power project. Due to cost overruns, an additional Rs. 446.97 crore was advanced in 2015. By 2018, the Corporate Debtor defaulted on repayments, prompting the Financial Creditor, REC Ltd., to classify the account as a non-performing asset. Subsequent negotiations led to two restructuring proposals - dated 21.02.2020 and 29.09.2020 - intending to reschedule repayment until 2042. However, these proposals were contingent on pre-implementation conditions, including securing a tariff order from WBERC, establishing a Debt Service Revenue Account, demonstrating 72 hours of continuous plant operation, and providing Rs. 83 crore in priority debt and Rs. 125 crore in working capital. None of these conditions were met by the stipulated deadline of 28.02.2021.
Procedural History
- 31.03.2018: Corporate Debtor defaults under original loan agreement.
- 21.02.2020 & 29.09.2020: Two restructuring proposals proposed, subject to pre-conditions.
- 28.02.2021: Pre-conditions unmet; lenders reject revival of restructuring.
- 05.06.2021: REC Ltd. files Section 7 application before NCLT, citing default as 31.03.2018.
- 02.07.2021: Single Judge of Calcutta High Court dismisses writ petition challenging Section 7 filing.
- 07.10.2021: Division Bench directs lenders to consider tariff order, but restructuring still rejected.
- 02.01.2024: NCLT admits Section 7 application and dismisses Corporate Debtor’s applications seeking to invalidate the default.
- 25.01.2024: NCLAT upholds NCLT’s order.
- 12.09.2025: Supreme Court grants interim stay on CIRP, subject to deposit of Rs. 125 crore.
Relief Sought
The Appellant, Power Trust, sought to set aside the admission of the Section 7 application, arguing that the default date was reset by the restructuring proposals and fell within the Section 10A moratorium period. It also sought to stay the CIRP and compel the Committee of Creditors to consider its settlement proposals, which it claimed were more viable than the approved resolution plan of Damodar Valley Corporation.
The Legal Issue
The central question was whether the initiation of corporate insolvency under Section 7 of the Insolvency and Bankruptcy Code can be barred by a restructuring proposal that was never implemented, and whether the Adjudicating Authority must assess the commercial viability of the Corporate Debtor before admitting a Section 7 application.
Arguments Presented
For the Appellant
The Appellant contended that the restructuring proposals dated 21.02.2020 and 29.09.2020 novated the original loan agreement, resetting the default date to 31.03.2021 - within the Section 10A moratorium window (25.03.2020 to 24.03.2021). It argued that partial payments made by the Corporate Debtor, including Rs. 50 crore in December 2021, constituted deemed acceptance of the restructuring terms. It further relied on Vidarbha Industries Power Ltd. v. Axis Bank Ltd. to assert that the Adjudicating Authority has discretion to reject Section 7 applications where the Corporate Debtor is viable and capable of repayment.
For the Respondent
The Respondents countered that the restructuring proposals never crystallized into binding agreements due to non-fulfillment of pre-conditions. They emphasized that Section 10A does not apply to defaults occurring before 25.03.2020, and the original default date of 31.03.2018 remained valid. They cited Innoventive Industries Ltd. v. ICICI Bank and M. Suresh Kumar Reddy v. Canara Bank to argue that the Adjudicating Authority’s role is strictly limited to verifying the existence of a default, not evaluating business viability. They also stressed that the commercial wisdom of the Committee of Creditors in rejecting settlement proposals is non-justiciable.
The Court's Analysis
The Court undertook a rigorous statutory interpretation of Section 7, Section 10A, and the definitions of financial debt and default under the IBC. It held that the Explanation to Section 10A explicitly excludes defaults occurring before 25.03.2020, and since the original loan agreement dated 19.06.2013 was breached on 31.03.2018, the moratorium did not apply. The Court rejected the Appellant’s claim of novation, observing that restructuring proposals contingent on unmet conditions cannot alter the original debt’s due date.
"Even if the Appellant’s case is assumed that the 1st restructuring plan had been accepted, the same was subsumed in the 2nd restructuring plan dated 29.09.2020 whereby the first instalment fell due on 31.03.2021, beyond the Section 10A period which operated from 25.03.2020 to 24.03.2021."
The Court further clarified that partial payments made during the restructuring phase do not constitute acceptance of the proposal or extinguish the original debt. It emphasized that Section 7 is a summary procedure designed for speed and certainty, and the Adjudicating Authority has no discretion to inquire into the Corporate Debtor’s viability or the merits of settlement proposals.
The Court distinguished Vidarbha Industries as a fact-specific exception, noting that its observations were confined to the unique context of statutory regulation of power generation and a pending APTEL award exceeding the debt. It reaffirmed that Innoventive Industries remains the authoritative precedent: "It is of no matter that the debt is disputed so long as the debt is ‘due’ i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date."
Regarding settlement proposals, the Court held that Section 12A and Regulation 30A now provide the exclusive statutory mechanism for withdrawal of CIRP post-admission, requiring 90% approval by the Committee of Creditors. Since the Appellant’s proposals were repeatedly rejected by overwhelming majorities, judicial intervention was impermissible.
The Verdict
The Appellant’s appeal was dismissed. The Supreme Court held that the original default date of 31.03.2018 governs Section 7 admission, unaltered by unimplemented restructuring proposals. The Court affirmed that the Adjudicating Authority’s role under Section 7 is limited to verifying the existence of a financial debt and default, and commercial wisdom of the Committee of Creditors is non-justiciable. The interim stay on CIRP was vacated.
What This Means For Similar Cases
Restructuring Proposals Are Not Binding Without Fulfillment
- Practitioners must now prove that restructuring terms were formally accepted and all pre-conditions were satisfied before arguing novation or reset of default date.
- Merely negotiating or partially performing under a restructuring proposal does not extinguish the original debt.
- Financial creditors may rely on the original default date even if restructuring discussions occurred during the Section 10A window.
Admission Under Section 7 Is Not a Viability Test
- Section 7 applications cannot be resisted on grounds of business viability, cash flow, or future revenue potential.
- Evidence of ongoing operations, power purchase agreements, or EBITDA is irrelevant at the admission stage.
- Courts must resist the temptation to conduct a ‘business audit’ - the Code’s design is to prioritize creditor rights over debtor sentiment.
Settlement Proposals Require CoC Approval, Not Judicial Intervention
- Post-admission settlement proposals must be submitted to the Committee of Creditors and require 90% approval under Section 12A.
- Courts cannot stay CIRP merely because a settlement offer exceeds the resolution plan amount.
- Any attempt to invoke Article 142 to override CoC decisions post-Section 12A is now legally untenable unless exceptional circumstances exist.
