In Vidarbha Industries Power Limited v. Axis Bank Limited,1 the Supreme Court, inter alia, held that Section 7(5)(a) of the Insolvency and Bankruptcy Code ("Code"/"IBC") confers discretionary power on the Adjudicating Authority to admit an application of a financial creditor under Section 7 of the Code for initiation of CIRP. The Apex Court with its aforesaid finding thus differed from the long-settled view that the moment the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete.2
In Vidarbha Industries case, an appeal was filed against the order dated 2nd March 2021 passed by the Appellate Authority (NCLAT) in Company Appeal (AT) (Insolvency) No.117 of 2021 whereby the NCLAT refused to stay the proceedings initiated by the Respondent, Axis Bank Limited against the Appellant for initiation of CIRP under Section 7 of the Code. It was inter alia claimed by the Appellant that by virtue of an order passed by the Appellate Tribunal for Electricity (APTEL), a sum of Rs.1,730 Crores is due to the Appellant. For implementation of the aforesaid order of APTEL, the Appellant had filed an application before the Maharashtra Electricity Regulatory Commission (MERC). However, MERC had filed a Civil Appeal No.372 of 2017 before the Supreme Court challenging the order of APTEL and the said appeal is pending. It was the stand of the Appellant that in view of the pending appeal of MERC, it is unable to implement the directions of APTEL and the Appellant is, for the time being, short of funds. Therefore, according to the Appellant, implementation of the orders of the APTEL would enable the Appellant to clear all its outstanding liabilities.
The Adjudicating Authority and the Appellate Authority admitted the application filed by the Respondent on the premise that an application must necessarily be entertained under Section 7(5)(a) of the Code if a debt existed and the Corporate Debtor was in default of payment of debt. The Supreme Court, however, held that there can be no doubt that a Corporate Debtor 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 Corporate Debtor are not extraneous matters. It was further held 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. The Adjudicating Authority is still required to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC's pending appeal, order of APTEL and the overall financial health and viability of the Corporate Debtor under its existing management.
As regards the meaning and intention of Section 7(5)(a) of the Code, it was held that the same is to be ascertained from the phraseology of the provision in the context of the nature and design of the Code. The expression 'may admit' confers discretion to admit. In contrast, the use of the word "shall" postulates a mandatory requirement. Had it been the legislative intent that section 7(5)(a) of the Code should be a mandatory provision, Legislature would have used the word 'shall' and not the word 'may'. There is no ambiguity in Section 7(5)(a). The Court further differentiated between the intent of Section 7 and Section 9 and held that the fact that Legislature used 'may' in Section 7(5)(a) of the IBC but a different word, that is, 'shall' in the otherwise almost identical provision of Section 9(5)(a) shows that 'may' and 'shall' in the two provisions are intended to convey a different meaning. Thus held that, it is apparent that 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 Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the Corporate Debtor by the Operational Creditor and no notice of dispute has been received by the Operational Creditor. On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority 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 Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.
With regard 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 discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner. Ordinarily, the Adjudicating Authority would have to exercise its discretion to admit an application under Section 7 of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition. The Adjudicating Authority has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example, when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so. The Adjudicating Authority may, for example, admit the application of the Financial Creditor, notwithstanding any award or decree, if the Award/Decretal amount is incapable of realisation.
In view of the aforesaid findings and observations, the Supreme Court set aside the orders passed by the Adjudicating Authority and also the Appellate Authority and directed the Adjudicating Authority to re-consider the application of the Appellant for stay of further proceedings on merits in accordance with law.
Conclusion
The above decision of the Supreme Court in Vidarbha Industries has become a landmark and made way for a fresh defence that can be taken by a Corporate Debtor against the initiation of insolvency proceedings against it by a financial creditor, especially in cases where an award or decree exceeding the default amount is already passed in the Corporate Debtor's favour and such award or decree is either pending an execution or an appeal against such decree or award is filed by the Award-Debtor or Judgment-Debtor. In terms of the dictum in Vidarbha Industries as referred above, the NCLTs would have to exercise the discretion under Section 7(5)(a) of IBC to keep the admission of the application of the Financial Creditor in abeyance in such cases, unless there is good reason not to do so. It would be interesting to see how the Supreme Court's judgment impacts the pending petitions filed under Section 7 of the Code before the NCLTs.
There is one more issue to be discussed here. An anomaly may arise in cases where insolvency petitions under both provisions i.e. Section 7 and Section 9 of the IBC are pending against the same Corporate Debtor. While following the decision of the Supreme Court in Vidarbha Industries, NCLT may have to keep the Section 7 petition in abeyance, at the same time, such discretion would not be exercisable while hearing the petitions filed by an Operational Creditor under Section 9 of the Code. Let us see how in future such an anomaly can be resolved by the Courts.
Footnotes
1 Civil Appeal No. 4633 of 2021, Judgment dated July 12, 2022.
2 Innoventive Industries Ltd. v. ICICI Bank Ltd., [2017] 84 taxmann.com320.
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