SC view on NCLT power to admit application under Section 7(5)(a) of the Code discretionary

 NCLT’s power to admit application under Section 7(5)(a) of the Code discretionary: SC’s view in Vidarbha Industries Power vs Axis Bank Limited

 Facts of the Case:

The Maharashtra Electricity Regulatory Commission ("MERC") authorised Vidarbha Industries Power Limited ("VIPL"), a power producing business, to enter into a Power Purchase Agreement with Reliance Industries Limited ("RIL"), under which VIPL was required to deliver power to RIL. During the term of the agreement, numerous arguments emerged between VIPL and MERC over increases in operating expenses and rate caps, which were finally resolved by the Appellate Tribunal for Electricity ("APTEL"). APTEL issued a decision granting VIPL INR 1,730.00 crore, in response to which VIPL filed an application with MERC for execution of the APTEL ruling, while MERC filed an appeal with the Supreme Court against the APTEL order. Because of the appeal, VIPL was short on finances and unable to clear its liabilities.

Meanwhile, Axis Bank Limited ("Axis Bank") filed an insolvency petition against VIPL with the National Company Law Tribunal ("NCLT") under Section 7 of the Code. Naturally, VIPL asked the NCLT to halt the insolvency proceedings due to MERC's ongoing Supreme Court appeal, but the request was denied on the grounds that no external matter may impede the quick resolution of bankruptcy proceedings. Furthermore, the NCLT determined that satisfaction on two factors, namely the presence of debt and default by the corporate debtor, are sufficient to initiate CIRP against a corporate debtor. When the NCLT ruling was challenged, the National Company Law Appellate Tribunal supported the NCLT's decision. Following that, an appeal was filed with the Supreme Court to examine whether Section 7(5)(a) is a required or discretionary provision. In other words, is the expression 'may' to be interpreted as 'shall' in light of the facts and circumstances of the case.

Contentions:

The contentions before the Court was that the use of the term ‘may’ in Section 7(5)(a) reflects the legislative purpose that the Adjudicating Authority does not have to accept an application by a financial creditor in every situation.

Held:

The Supreme Court, in its order dated 12 July 2022, held that Section 7(5)(a) of the IBC grants the Adjudicating Authority discretionary power to admit an application of a Financial Creditor ("FC") under Section 7 of the IBC for the initiation of the CIR Process and that factors relating to the borrower's business and liquidity are not external/ anterior factors qua admission of Corporate Debtor into CIR Process. The Supreme Court compared the language of Section 7(5)(a) to Section 9(5) of the IBC and noted the use of the word ‘may’ in Section 7(5)(a) versus ‘shall’ in Section 9(5) to reach the conclusion that fulfilment of twin test requirements merely give FC the right to initiate CIR Process and do not require admission of Corporate Debtor for CIR Process. The Supreme Court ruled that there is no set time restriction for admitting an application under Section 7. The Supreme Court also held that operational creditors and financial creditors have been consciously differentiated in this regard because the nature of the businesses carried out by the two categories of creditors differs, and that non-payment of dues is likely to affect operational creditors far more adversely than financial creditors.

The Supreme Court observed that the existence of debt and default only gave the FC the right to apply for CIRP initiation, and that the Adjudicating Authority was required to consider the 'expediency' of the application for CIRP initiation, taking into account, among other things, the Corporate Debtor's overall financial health and viability.  The Supreme Court further noted that “It is certainly not the object of the Code to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP”. The Supreme Court ruled that the Adjudicating Authority must consider the corporate debtor's grounds for refusing admission.

Conclusion:

Thus, Vidarbha Power Industries Limited vs Axis Bank is a landmark case law in which the Hon'ble Supreme Court has given a new ground of defence for corporate debtors for revival of companies that are not at fault and critically evaluating the situation, the Supreme Court has imposed more duty upon adjudicating authority to scrutinise and verify the contentions of the parties and their stance for debt default.

 This Article has been Compiled by Ayushi Misra (Senior Associate) and Arun Gupta (Partner). 

  You can direct your queries or comments to the author at info@factumlegal.com

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