Supreme Court Reaffirms “Debt And Default” Rule; Clarifies Limits of Section 10A and Discretionary Admission

The Hon’ble Supreme Court, in its judgment dated February 18, 2026, addressed the critical issue of whether a Corporate Insolvency Resolution Process (CIRP) is barred by Section 10A when a debt, originally in default since 2018, was subject to later restructuring proposals that fell within the COVID-19 “prohibited period.”

The appeal arose from an order of the Ld. NCLAT which upheld the admission of a Section 7 application against Hiranmaye Energy Ltd. (Corporate Debtor) filed by REC Ltd. The Appellant, a promoter of the Corporate Debtor, argued that the CIRP was barred by Section 10A because a 2020 restructuring agreement had reset the repayment schedule, making the first instalment due in December 2020. They further contended that the Corporate Debtor was a viable, ongoing power project earning significant revenue, and therefore should not have been admitted into insolvency.

The Respondents (Financial Creditors) contended that the restructuring proposals never ripened into binding contracts because the Corporate Debtor failed to fulfil mandatory pre-implementation conditions, such as obtaining favourable tariff orders and creating a Debt Service Revenue Account (DSRA). Consequently, they argued the original 2018 default date remained the valid trigger for insolvency.

The Hon’ble Supreme Court, while dismissing the appeal, held as follows:

1. Section 10A Interpretation: The bar under Section 10A is a “non-starter” if the original default occurred before March 25, 2020. Failed restructuring proposals that were never fully implemented do not shift the date of default into the protected window.

2. Novation of Contract: For an earlier loan agreement to be novated by a restructuring plan, all pre-conditions must be strictly satisfied. Part payments made by a debtor during negotiations do not constitute “deemed approval” or full satisfaction of the debt.

3. Vidarbha vs. Innoventive: The Court clarified the “apparent dichotomy” between Innoventive Industries and Vidarbha Industries. It held that the observations in Vidarbha regarding the National Company Law Tribunal ‘s (NCLT) discretion were restricted to the specific facts of that case (involving an electricity regulatory award) and that the mandatory “debt and default” rule in Innoventive still holds good.

4. Commercial Wisdom: The commercial wisdom of the Committee of Creditors (CoC) in rejecting a promoter’s settlement proposal in favor of a resolution plan (such as that of Damodar Valley Corporation) is non-justiciable.

5. Section 12A Limits: Post-admission withdrawal or settlement can only be directed under the statutory framework of Section 12A (requiring 90% CoC approval), and the Court will not typically use its inherent powers to stall a CIRP for further settlement talks once a resolution plan has been approved.

The ruling reinforces the objective of the IBC to provide a “complete code” for the prompt resolution of insolvency without getting mired in broad inquiries into business viability or equities at the admission stage. Ultimately, the Court clarified that while a company may be an “ongoing concern,” the existence of a clear default on a financial debt is sufficient to trigger the resolution process. Importantly, the Court also rejected an application by a secured creditor (SEFL) to seize the deposit made by the Appellant during the appeal, noting that such deposits are made to satisfy court conditions and not to secure third-party claims against promoters.