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Introduction
The Supreme Court of India recently adjudicated and passed judgement in the case of Vidarbha Industries Power Limited v Axis Bank Limited [“Vidarbha”]. The judgement brought clarity to the longstanding ambiguity regarding whether the nature of Section 7(5)(a) of the Insolvency and Bankruptcy Code [“IBC”] is mandatory or discretionary in nature. The Supreme Court, by way of Justice Indira Banerjee, adjudicated upon the same. It emphasized that the Adjudicating Authorities must apply their minds and contextualize every CIRP proceeding application. The IBC must, first and foremost, strive to recover the company before it sounds its death knell. The use of the word “may” is specific and intentional. The Supreme Court observed that “may” and “shall” are used keeping in mind different purposes and the word “may” gives the Authorities leave way to adjudicating after considering the case specifically.
Facts Of The Case
The Appellant Vidarbha Industries Power Limited is a “generating company” defined under Section 2(28) of the Electricity Act, 2003. The company was awarded a Group Power Project Contract by the Maharashtra Industrial Development Corporation that was later converted into an Independent Power Project. The appellant approached the Appellate Tribunal for Electricity when the Maharashtra Electricity Regulatory Commission [“MERC”] disallowed the fuel costs for consecutive financial years and capped tariffs for four consecutive financial years. The Appellate Tribunal for Electricity [“APTEL”] allowed the appeal and directed MERC to pay INR 1,730 Crores that were claimed by the appellants. MERC filed an appeal in the Apex Court that is pending till date. Meanwhile, Axis Bank Limited approached the National Company Law Tribunal [“NCLT”] and filed an application u/s 7(2) of the IBC. This application to initiate Corporate Insolvency Resolution Proceedings [“CIRP”] was filed in 2020. The application came after Vidarbha had failed to pay INR 553 Crores worth of dues to Axis Bank. Vidarbha contested that their inability to pay dies is directly connected to the pending non-payment of INR 1,730 Crores by MERC. The NCLT dismissed Vidarbha’s applications to stay the proceedings until the adjudication of the proceedings pending against Vidarbha in the Apex Court. The NCLT held that the if it is proved that a debt exists, and corporate debtor has defaulted essential ingredients are met and would instantly trigger corporate insolvency. The National Company Appellate Tribunal [“NCLAT”] also dismissed the appeal and upheld the NCLT decision. This led to Vidarbha preferring an appeal u/s 62 of the IBC before the Supreme Court against the NCLAT.
Both, Axis Bank and Vidarbha brought forth contesting claims before the Supreme Court. Axis Bank relied on the various existing precedents and the bare reading of the provisions. It contested that because a debt existed, and the corporate debtor had defaulted the application for the CIRP proceedings must be admitted. Vidarbha contended that while it is true that they were unable to pay the dues, it was due to the pending appeal by which they were entitled to INR 1,730 Crores. Additionally, they contended that the objective of the IBC was to revive a company and the use of the word “may” gave the Authorities the discretion to reject an insolvency application even if the ingredients are fulfilled.
Supreme Court Judgement
On 12th July 2022 the Supreme Court in its landmark judgment laid down clarity for the provision of Section 7(5)(a) of the IBC. The Honorable Court held that the admission of an application filed before the Adjudicating Authority under Section 7(5)(a), for initiation of CIRP and other areas of business liquidation, is purely discretionary and not mandatory. On default in payment by the corporate debtor, the financial creditor is only conferred with the right to file for initiation of the CIRP and this does not mandatorily lead to its admission. The adjudicating authority holds the power to decide whether the application is admissible or not. There are several factors which must be considered before making a decision. Certain factors relevant that were to be considered by the authority in the present case are, the feasibility of initiation of CIRP, the overall financial health of the company, pending appeal before the Apex Court, order of APTEL and potentiality of the corporate debtor.
The most important question that came before the Supreme Court was whether the ignorance of the applicant’s matter pending before the Apex Court for discharging the amount due and initiating the CIRP against default in payment and overriding debt was correct on the part of NCLT and NCLAT. The appeal was allowed, and the Honorable Court abrogated the questions put forth by the parties. The language and intention of the IBC, Section 7 specifically was considered wherein it was noticed that the use of the word ‘may’ conveys that legislature confers discretionary power for admission of application. Literal Rule of Interpretation was applied by the Apex Court along with reliance on the judgment of Lalita Kumari v. Government of Uttar Pradesh & Ors. and B. Premanand v. Mohan Koika. Section 9(5) of the IBC, an almost identical provision to Section 7, uses the expression ‘shall’ which makes it mandatory for the authority to take a decision within the prescribed amount of time regarding acceptance or rejection of the application.
Analysis
The IBC is recognized as ground-breaking legislation that established a new framework for timely settlement of corporate insolvency in order to maximize value for all stakeholders. A crucial step in achieving these goals is the prompt admission of defaulting enterprises into CIRP, in order to stop additional value degradation due to delay. The criteria that NCLTs should take into consideration while deciding an application under Section 7 of the IBC were ambiguous. The Supreme Court’s twin objective standards of “debt” and “default,” which were established in the case of M/s Innoventive Industries Limited v ICICI Bank & Anr. [“Innoventive”], helped resolve and streamline the Section 7 application process, putting an end to this ambiguity. In Innoventive, the Court unequivocally said that “the application must be allowed the moment the adjudicating body is satisfied that a default has occurred, unless it is incomplete.” Since then, NCLTs and NCLAT have used this premise while evaluating Section 7 applications. The Court’s ruling in the Vidarbha case, however, represents a substantial deviation from this tenet.
The landmark judgment passed by the Apex Court will pave numerous paths for the corporate debtor to avoid the insolvency proceedings. It is also unjust that the preference will be given to the claims of operational creditors over the claims of financial creditors. There is a possibility that discretion will be utilized in resolving circumstances under IBC Section 7(5)(b), which states that the NCLT may reject applications if the resolution professional is subject to disciplinary procedures, or the application is incomplete. This discretion granted to the tribunals to admit, or reject can not only reduce the number of frivolous petitions that are admitted due to a single default by an otherwise solvent company, but it can also help a company deviate from the orchestrated practices of intentional payment defaults to the creditors and protecting itself under the terms of a moratorium. On the other hand, it must be observed that the justification given here was peculiar to the circumstances of the current case, in which there was a pending unrealized amount that was significantly greater than the defaulted amount. The ruling does not lay forth a framework or set of rules for the tribunals to adhere to or follow moving forward. This could have a negative effect in that various benches and tribunals may pass contradicting judgments or views as a result of the varying and subjective levels of discretion.
The extremely rigid ‘twin test’ which was time and again used for the initiation of insolvency procedure and sideling the corporate debtors’ interest is somewhat negated by the Court in the present. This creates wider scope for the debtor and at the same time can be proved to be a game changer if it is applied and implemented cautiously. Furthermore, a harmonious construction might have been used, allowing creditors to consider the surrounding and mitigating circumstances and arguments in a consistent manner. This would have been preferable than carving out the legislative meaning via a literal rule of interpretation.
Even though there are several diverse and opposing views and ideas on the precedent, other Benches and Courts will eventually follow the ruling of the Apex Court and line out a preferable framework.
