Section 7 insolvency applications cannot be rejected merely for partial repayment or pledge invocation where financial debt and default remain established.

Under Section 7 of the Insolvency and Bankruptcy Code, the adjudicating authority must examine whether a financial debt and default exist, and cannot reject an application merely because part repayment was made or pledged shares were invoked where the default threshold remains satisfied. The record indicated that sale proceeds of the pledged shares had been credited, and the date of sale, not invocation alone, was material under the repayment and pledge terms. A prior rejected application against the principal borrower did not, by itself, warrant rejection of the connected application against the corporate guarantor, though the same debt could not be pursued beyond admission in parallel proceedings.

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Issues: (i) Whether rejection of the Section 7 applications on the ground that substantial repayment had been made and pledged shares had been invoked before default was sustainable; (ii) Whether the existence of a prior rejected application against the principal borrower justified rejection of the connected application against the corporate guarantor.

Issue (i): Whether rejection of the Section 7 applications on the ground that substantial repayment had been made and pledged shares had been invoked before default was sustainable.

Analysis: The relevant test under Section 7 of the Insolvency and Bankruptcy Code, 2016 is the existence of a financial debt and a default of the prescribed threshold. Default means non-payment of a debt when due, including non-payment of an instalment. The record showed that the pledged shares were sold after invocation and that credit had been given for the sale proceeds. The Court also noticed that the repayment clauses and pledge terms supported the view that the date of sale, and not merely the date of invocation, was material. In these circumstances, the finding that the applications were not maintainable because a substantial portion of the debt had been recovered was unsustainable.

Conclusion: The rejection of the Section 7 applications on this ground was set aside and the matter was remitted for consideration of admission on the basis of a complete record.

Issue (ii): Whether the existence of a prior rejected application against the principal borrower justified rejection of the connected application against the corporate guarantor.

Analysis: The Court held that the earlier rejection against the principal borrower could not, by itself, justify rejection of the connected application when the debt and default remained established. At the same time, it clarified that the same debt could not be pursued in two different insolvency proceedings beyond the stage of admission, and the application against the principal borrower should be taken up first.

Conclusion: The connected application against the corporate guarantor was also held to have been wrongly rejected, though the proceedings were directed to follow the sequence indicated by the Court.

Final Conclusion: The appeals succeeded, the impugned orders were set aside, and the matters were sent back for fresh consideration of admission after notice to the parties.

Ratio Decidendi: Under Section 7 of the Insolvency and Bankruptcy Code, 2016, the adjudicating authority must determine whether a financial debt and default exist, and cannot reject an application merely because some repayment has occurred or because pledged securities were invoked, where the default threshold remains satisfied.

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