Vidarbha Industries Power Limited -vs- Axis bank Limited

Admission of application u/s 7 of IBC is not a mechanical process
In an appeal filed by Vidarbha Industries Power Limited (“VIPL”) against the order of NCLAT whereby the NCLAT refused to stay the proceedings initiated by the Axis Bank Limited against VIPL under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), the Hon’ble Supreme Court (“SC”) vide its order dated 12th July, 2022 held that section 7(5)(a) of IBC, confers discretionary power on the Adjudicating Authority/NCLT to admit an application of a Financial Creditor (“FC”) under section 7 of the IBC for initiation of Corporate Insolvency Resolution Process (“CIRP”).

In its said judgement, SC observed that NCLT is required to ascertain the existence of default from the records of the information utility or any other evidence furnished by the FC under section 7(3) of the IBC, within 14 days of the date of receipt of the application filed u/s 7 of the IBC.

SC was of the view that there can be no doubt that a Corporate Debtor(CD) who is in the red should be resolved expeditiously, following the timelines in the IBC and no extraneous matter should come in the way. However, the viability and overall financial health of the CD are not extraneous matters. It was further observed that the existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. NCLT might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the CD. NCLT may, in its discretion, not admit the application of a FC.

SC has further observed that in section 7(5)(a) of the IBC, Legislature has, in its wisdom, chosen to use the expression “may” but has used the expression ‘shall’ in the otherwise almost identical provision of section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor (OC). Ordinarily the word “may” is directory. The expression ‘may admit’ confers discretion to admit whereas the use of the word “shall” postulates a mandatory requirement. The use of the word “shall” raises a presumption that a provision is imperative (even though the presumption is rebuttable).

It was observed that the Legislature intended section 9(5)(a) of the IBC to be mandatory and section 7(5)(a) of the IBC to be discretionary. An application of an OC for initiation of CIRP under section 9(2) of the IBC is mandatorily required to be admitted subject to compliance of the requisites of the IBC.

It was further observed that NCLT has been conferred with the discretion while deciding on the application u/s 7 of the IBC. If facts and circumstances so warrant, the NCLT can reject the application. It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP. Therefore, Section 7(5)(a) of the IBC, confers discretionary power on the Adjudicating Authority to admit an application under section 7 of the IBC.

While admitting the appeal filed by VIPL, the SC has concluded that even though section 7 (5)(a) of the IBC may confer discretionary power on the NCLT, such discretionary power cannot be exercised arbitrarily or capriciously; NCLT would have to exercise its discretion to admit an application under section 7 of the IBC on satisfaction of the existence of a financial debt and default on the part of the CD in payment of the debt, unless there are good reasons not to admit the petition; NCLT has to consider the grounds made out by the corporate debtor against admission, on its own merits.

In other words, the judgement can be said to be indicating that admitting an application filed u/s 7 of IBC cannot be just a mechanical process.

Analysis written by Mr. Damodara Rao BM. – Joint Managing Partner
 

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