The Supreme Court in a recent Judgement of Vidarbha Industries Power Ltd. vs Axis Bank Limited (2022 SCC Online SC 841), observed that the Adjudicating Authority while exercising power under Section 7 of the Insolvency and Bankruptcy Code 2016 inter alia admitting the application to initiate Corporate Insolvency Resolution Process ("CIRP"), such power should be on a discretionary basis and cannot be exercised in an arbitrary manner.
FACTS
Axis Bank Limited, the Financial Creditor ("FC"), filed an application on 15th January 2020 against the Corporate Debtor, Vidarbha Industries Power Ltd. ("CD"), under Section 7(2) of the IBC before the NCLT, Mumbai for initiation of CIRP against the Appellant. CD filed an application seeking stay of the proceedings under Section 7 of the IBC which was dismissed by the NCLT Bench Mumbai, the Adjudicating Authority on 29th January 2021 and refused to stay the CIRP initiated against the CD.
Thereafter, being aggrieved CD preferred an appeal before the NCLAT against the order dated 29th January 2021 where the NCLAT refused to interfere in the order of the NCLT and dismissed the appeal. Hence, CD preferred the appeal before the Supreme Court.
ISSUE BEFORE THE SUPREME COURT-
The main issue of this case was "Whether Section 7(5)(a) of the IBC is a mandatory or a discretionary provision?".
OBSERVATIONS BY THE SUPREME COURT-
The Supreme Court observed that the expression 'may admit' confers discretion to admit. However, in contrast, the use of the word "shall" postulates a mandatory requirement. The use of the word "shall" raises a prima facie presumption about the provision being imperative may be rebutted by other considerations such as the scope of the enactment and the consequences flowing from the construction.
The Supreme Court made a purposive interpretation that can only be resorted to when the plain words of a statute are ambiguous or if construed literally, the provision would nullify the object of the statute or otherwise lead to an absurd result.
As to Section 7(5)(a) of the IBC, the Supreme Court observed that 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 if it so deems fit.
The Supreme Court observed that ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on the satisfaction of the existence of 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 (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits.
The Supreme Court concluded its observations by pointing out that the statute deals with and/or tackles insolvency and bankruptcy. It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of their financial debts, by the initiation of CIRP.
The Supreme Court stated that 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 with 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, the Supreme Court also mentioned that in the case where an application is filed 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 at its discretion not admit the application of a Financial Creditor.
The Supreme Court concluded 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. The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits.
The Supreme Court observed that the Adjudicating Authority (NCLT) as also the Appellate Tribunal (NCLAT), fell in error in holding that once it was found that a debt existed and a Corporate Debtor was in default in payment of the debt there would be no option to the Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the IBC.
While allowing the appeal, the Supreme Court set aside the order dated 29th January 2021 and 2nd March 2021 and demanded the matter back to NCLT Bench Mumbai to reconsider the application for the stay of further proceedings on merits in accordance with the law.
Authors: Madhu Gadodia (Deputy Manging Partner) And Shashank Trivedi (Manager) At Naik Naik & Co. Views are personal.