Supreme Court: Failure To Fulfil Pre-Conditions Of A Loan Restructuring Does Not Amount To Novation And Restores The Original Financing Terms

A Bench of the Supreme Court ("Court") comprising Chief Justice Mr. Surya Kant, Justice Joymalya Bagchi and Justice Vipul M. Pancholi, in its judgment dated February 18, 2026, in Power Trust (Promoter of Hiranmaye Energy Limited) v. Bhuvan Madan (Interim Resolution Professional of Hiranmaye Energy Limited) (Civil Appeal Number 2211 of 2024), has held, inter alia, that the corporate debtor's failure to satisfy the pre-implementation conditions of a restructuring proposal/ approval renders the approval ineffective and thereby revives the original credit facility/ loan agreement between the parties.

Brief Background

Appellant/ Corporate Debtor Hiranmaye Energy Limited ("Corporate Debtor"/ "HEL"), and its creditors, REC Limited ("REC") and Power Finance Corporation Limited ("PFC") entered into a loan agreement on June 19, 2013 ("Loan Agreement"). Upon HEL's failure to repay outstanding dues within the stipulated time, HEL sent a letter to REC and PFC ("Lenders") proposing a restructuring plan. The lenders approved a restructuring proposal on February 21, 2020 ("1^st Proposal") wherein the first installment was due on December 31, 2020. However, due to non-compliance with the terms therein, the 1^st Proposal could not proceed, and the Lenders approved another restructuring proposal on September 29, 2020 ("2^nd Proposal"), revising the 1^st Proposal upon request of HEL. The 2^nd Proposal contained preconditions to the effective implementation of the Resolution Plan. However, upon HEL's failure to comply with pre-implementation conditions under the 2^nd Proposal, and default of approximately Rs. 2,000 crores under the Loan Agreement, REC filed a Section 7 application before the National Company Law Tribunal, Kolkata ("NCLT"/ "Adjudicating Authority") with date of default as March 31, 2018.

The NCLT, vide its order dated January 2, 2024, in CP IB No. 138 of 2021, admitted REC's application and directed initiation of Corporate Insolvency Resolution Process ("CIRP") of HEL. Against the said order, Power Trust, the Promoter of HEL ("Promoter"), preferred an appeal before the National Company Law Appellate Tribunal, New Delhi ("NCLAT"). The NCLAT, in appeal, upheld NCLT's findings by its order dated January 25, 2024.

Aggrieved by the NCLAT's decision, the Promoter approached the Supreme Court in appeal.

Issues before the Court

The primary issues raised before the Court were:

1. Whether the common loan agreement was novated by subsequent restructuring proposals, resulting in no debt being due and payable by HEL at the time of admission of Section 7 application.
2. Whether NCLT could admit the Section 7 application mechanically without assessing the viability of HEL as a going concern and its ability to repay the debts, in view of Vidarbha Industries Power Limited v. Axis Bank Limited, (2022) 8 SCC 352 ("Vidarbha").

Contentions raised by the Parties

The Appellant/Promoter contended that the date of default could not be determined based on the Loan Agreement, as the Loan Agreement was restructured through the 2^nd Proposal, and REC had accepted payments in terms of the proposal. The 2^nd Proposal novated the Loan Agreement and remained in force, as REC never terminated it. Further, since the 2^nd Proposal merely revised the 1^st Proposal, the date of default ought to be determined as per 1^st approval, i.e., December 31, 2020. As this date fell within the period covered under Section 10A of the Code (March 25, 2020, to March 24, 2021), initiation of CIRP was barred. Relying on Vidarbha, the Appellant contended that Adjudicating Authority ought to have considered the viability of Corporate Debtor while admitting the Section 7 application.

The Respondent REC contended that the 2^nd proposal was subject to the fulfilment of certain pre-implementation conditions by HEL, which were never complied with. It was argued that although HEL described proposals as "agreements", they never crystallised into enforceable agreements due to non-fulfilment of the pre-conditions. Thus, there was no novation of the original Loan Agreement. Since no proposal agreement validly existed at the time of failure on the part of HEL, the default date was correctly ascertained from the main Loan Agreement and not under the proposals. Relying on Innoventive Industries Limited v ICICI Bank (2018 1 SCC 407) ("Innoventive") and M. Suresh Kumar Reddy v. Canara Bank (2023 8 SCC 387) ("M Suresh"), REC contended that the role of NCLT was limited to examining the existence of financial debt and its default and the same could not be expanded into broad inquiries on the business viability of the CD.

Decision of the Court

While addressing the issue of date of default and the binding nature of restructuring proposals, the Court held that since the pre-implementation conditions to the proposals remained unsatisfied, the proposals did not fructify into binding agreements novating the original contract. The Court affirmed findings of the NCLAT in the judgment dated January 25, 2024, whereby the NCLAT observed that the pre-implementation conditions were akin to conditions precedent, which had to be fulfilled before the agreement could come into effect, and as they were not satisfied, the restructuring approval did not survive, and only the Loan Agreement remained a binding agreement between the parties. Thus, the date of default was correctly mentioned as March 31, 2018, under the Loan Agreement.

Although the Supreme Court does not refer to its earlier decisions recognizing observations made by the Courts in precedents such as United Bank of India v. Ramdas Mahadeo Prashad ((2004) 1 SCC 252), where it was held that in the absence of fulfilment of the conditions precedent, the novation does not take effect, it would appear that the principles laid down in the said judgments weighed with the Court while reaching to the conclusion that the restructuring of the loan did not amount to novation. A similar view has been expressed by the NCLAT in Alok Gaur, Suspended Board of Director of Jaypee Cement Corporation Limited v. State Bank of India (CA (AT)(Ins) No. 1565 of 2024).

With regard to the reliance on Vidarbha and the Appellant's argument that the viability of the Corporate debtor should be considered while deciding a Section 7 application, the Court observed that the findings in Vidarbha were confined to the facts of the case and did not operate as a binding precedent. The Court observed that the correct legal position was already laid down by the Court in Innoventive, and accordingly, the Adjudicating Authority is not required to examine the corporate debtor's inability to repay its debt.

Accordingly, the Court dismissed the appeal filed by the Promoter and held that the admission of the Section 7 application was lawful and did not call for interference.

Please find attached a copy of the judgment, here.

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