The Supreme Court states in Vidarbha Industries Power Limited v. Axis Bank Limited that IBC Section 7(5)(a) is discretionary – Insolvency/Bankruptcy

In Vidarbha Industries Power Limited v. Axis Bank Limited,1 The Supreme Court, among others,held that Section 7(5)(a) of the Insolvency and Bankruptcy Code (“Code”https://www.mondaq.com/”IBC”) confers discretionary power on the judgment to allow a financial creditor’s claim under Section 7 of the Code for the initiation of CIRP. The Supreme Court, with its above-mentioned finding, therefore departed from the long-established view that once the contracting authority is satisfied that a breach has occurred, the claim must be allowed unless it is incomplete.2

In Vidarbha Industries Case, an appeal has been filed against the order dated March 2, 2021 issued by the Appellate Authority (NCLAT) in Company (AT) (Insolvency) Appeal No. 117 of 2021, whereby the NCLAT declined to suspend the proceedings initiated by the defendant, Axis Bank Limited against the appellant for the opening of CIRP under Article 7 of the Code. It was among others asserted by the Appellant that under an order issued by the Electricity Appeals Tribunal (APTEL), a sum of Rs.1,730 Crores is due to the Appellant. For the purpose of executing the aforementioned APTEL order, the Appellant filed a petition with the Maharashtra Electricity Regulatory Commission (MERC). However, MERC had filed Civil Appeal No. 372 of 2017 in the Supreme Court challenging APTEL’s order and said appeal is pending. According to the Appellant’s position, given the MERC’s pending appeal, it is unable to implement APTEL’s instructions and the Appellant is, for the moment, short of funds. Therefore, according to the Appellant, the execution of APTEL’s orders would allow the Appellant to discharge all of its unpaid debts.

The contracting authority and the appeal authority allowed the claim filed by the respondent on the basis that a claim must necessarily succeed under Article 7(5)(a) of the Code if a debt existed and that the debtor company was in default of payment of debt. The Supreme Court, however, ruled that there is no doubt that a corporate debtor that is in the red should be resolved quickly, following the timelines set out in the BAC and that no extraneous matters should arise. However, the viability and overall financial health of the debtor company are not extraneous matters. It was also held that the existence of a financial debt and the failure to pay it gave the financial creditor only the right to request the opening of the CIRP. The procuring authority is still required to consider relevant factors, including the feasibility of initiating CIRP, against a power generation company operating under statutory control, the impact of the pending MERC appeal, APTEL’s order and the overall financial health and viability of the Debtor Company under its current management.

With respect to the meaning and intent of Section 7(5)(a) of the Code, it was held that the same must be ascertained from the phraseology of the provision in the context of the nature and of the design of the Code. The phrase “may admit” confers the discretion to admit. On the other hand, the use of the word “must” postulates an imperative prescription. If the legislator had intended paragraph 7(5)(a) of the Code to be a mandatory provision, the legislator would have used the word “shall” and not the word “may”. There is no ambiguity in Article 7(5)(a). The Court further distinguished between the intent of Section 7 and Section 9 and held that the legislature’s use of “may” in Section 7(5)(a) of the IPC , but a different word, i.e. “shall” otherwise An almost identical provision of Article 9(5)(a) shows that “may” and “shall” in both provisions are intended to have a different meaning. Thus held, it is clear that the legislator intended that Article 9(5)(a) of the IPC be mandatory and that Article 7(5)(a) of the IPC be discretionary. A request from an Operating Creditor for the opening of a CIRP under Article 9(2) of the IBC must be granted if the request is complete in all respects and in compliance with the requirements of the IBC and the rules and regulations resulting from it, there is no payment of the unpaid operating debt, if notices of payment or the invoice have been given to the Debtor Company by the Operating Creditor and that no notice of dispute has been received by the Operating Creditor. On the other hand, in the case of a request from a Financial Creditor who could even initiate proceedings as a representative on behalf of all the financial creditors, the Judgment Authority could examine the advisability of initiating the CIRP , taking into account all relevant facts and circumstances, including the overall financial health and viability of the debtor company. The procuring authority may, at its discretion, not accept the request of a financial creditor.

With respect to the exercise of discretion by the adjudicating authority, the Supreme Court held that even though Section 7(5)(a) of the IBC may confer discretion on the adjudicating authority , this discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant the exercise of discretion in a particular manner, the discretion should be exercised in that manner. Normally, the contracting authority should exercise its discretion to admit a request under Article 7 of the IBC and initiate the CIRP upon satisfaction of the existence of a financial debt and a default in payment of the part of the debtor company, unless there are good reasons for not admitting the petition. The Tendering Authority must examine the reasons invoked by the Debtor Company against admission, on its own merits. For example, when admission is opposed on the grounds of the existence of a decision or decree in favor of the debtor company, and the amount granted/decree exceeds the amount of the debt, the procuring authority should exercise its discretion under Section 7(5)(a) of the IBC to withhold admission of the Financial Creditor’s application, unless there is good reason not to do so . The Contracting Authority may, for example, allow the request of the Financial Creditor, notwithstanding any award or decree, if the amount of the award/decree is not achievable.

In view of the above-mentioned findings and observations, the Supreme Court quashed the orders issued by the Adjudicating Authority as well as the Appeals Authority and ordered the Adjudicating Authority to reconsider the Appellant’s request for a stay of proceedings. rule on the merits in accordance with the law.

Conclusion

The aforementioned decision of the Supreme Court of Vidarbha Industries has become a benchmark and has paved the way for a new means of defense that can be opposed by a Debtor Company to the opening of collective proceedings against it by a financial creditor, in particular in cases where an award or decree exceeding the default amount is already rendered by the Company In favor of the debtor and such award or decree is either pending execution or an appeal against such decree or award is filed by the debtor of the award or the debtor of the judgement. In terms of saying in Vidarbha Industries As noted above, NCLTs should exercise the discretion provided in Section 7(5)(a) of the IBC to withhold admission of the financial creditor’s application in such cases, unless it there’s a good reason not to. It would be interesting to see how the Supreme Court judgment affects the pending Code Section 7 petitions filed with the NCLTs.

There is another issue to discuss here. An anomaly may arise where insolvency petitions under both provisions, i.e. Sections 7 and 9 of the IBC, are pending against the same debtor company. While following the Supreme Court’s decision in Vidarbha Industries, NCLT may have to hold the petition under Section 7 in abeyance, at the same time, such discretion could not be exercised when hearing petitions filed by an operational creditor under Section 9 of the Code . Let’s see how in the future such an anomaly can be resolved by the courts.

Footnotes

1 Civil Appeal No. 4633 of 2021, judgment of July 12, 2022.

2 Innovative Industries Ltd.. v. ICICI Bank Ltd., [2017] 84 taxmann.com320.

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