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CIRP APPLICATION MADE BY FINANCIAL CREDITOR UNDER THE INSOLVENCY CODE: DOES NCLT HAVE ANY DISCRETION?

Date | Version August 04, 2022| 1.0
Keywords ‘Insolvency Code,’ ‘Discretionary nature, ‘Corporate Insolvency Resolution Process’, ‘Vidarbha Industries Power Limited v. Axis Bank Limited’.
List of Legislation Referred.
  1. The Insolvency and Bankruptcy Code, 2016
Jurisdiction India

 

Abstract- This article analyzes the recent judgement of the Supreme Court in the case of Vidarbha Industries Power Limited v. Axis Bank Limited, which upheld the discretionary power of the Adjudicating Authority to admit the application for initiation of the corporate insolvency resolution process under Section 7 of the Insolvency and Bankruptcy Code, 2016.

 

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (‘Insolvency Code’), is umbrella legislation which primarily aims at a resolution of distressed entities in a timely manner. The Insolvency Code schemes to first ensure resolution of such entity as and when a default occurs by an application to the Adjudicating Authority either by the corporate debtor itself or by a financial or operational creditor.

Section 7 of the Insolvency Code becomes relevant when an application for initiation of the Corporate Insolvency Resolution Process (‘CIRP’) is made by the financial creditor to the Adjudicating Authority. Sub-section (1) of Section 7 confers upon the financial creditor the right to file an application for initiation of CIRP when a corporate debtor defaults, i.e., non-payment of debt by the corporate debtor when such payment is due and payable.

Once an application has been made to the Adjudicating Authority, and the said authority is satisfied that a default has occurred, it may by order, admit such application.. While the literal interpretation of the Insolvency Code uses the term “may” and talks about the discretionary power of the adjudicating authority for admission of the application, in 2017, the Supreme Court took a contrary view and observed that “the moment the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 (seven) days of receipt of a notice from the Adjudicating Authority.”

However, recently, in Vidarbha Industries Power Limited v. Axis Bank Limited, the Supreme Court deferred from this well-settled position and observed that the existence of financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP and that the Adjudicating Authority must apply its mind to the relevant factors before deciding upon the admission of such application.

FACTUAL BACKGROUND

Vidarbha Industries Power Limited (the ‘appellant’), a generating company within the meaning of Section 2(28) of the Electricity Act, 2003, was awarded the contract for the implementation of a power project through a competitive bidding process conducted by Maharashtra Electricity Regulatory Commission (‘MERC’), pursuant to which the MERC approved a Power Procurement Agreement between the appellant and Reliance Industries Limited (RIL). In 2015, MERC approved the final tariff of the power plant for the appellant for financial years 2014-15 and 2015-16.

Consequently, the appellant filed an application before the MERC to determine tariff in terms of the MERC (Multi Year Tariff) Regulation, 2011. However, the case was disposed of by MERC, disallowing a substantial portion of the actual fuel costs claimed by the appellant for the Financial Years 2014-2015 and 2015-2016. Being aggrieved, the appellant filed an appeal before the Appellate Tribunal for Electricity (APTEL), which allowed the appeal and directed MERC to pay Rs.1730 crores to the appellant.

Aggrieved by the order of APTEL, MERC filed a civil appeal in the Supreme Court. The appeal is pending.

In January 2020, the respondent, Axis Bank Limited, as the financial creditor of the appellant, filed an application before the NCLT for initiation of a CIRP against the appellant. The appellant filed a miscellaneous application seeking a stay of the said proceedings before the NCLT and subsequently NCLAT, both of which were dismissed. In view of the same, the appellant preferred an appeal before the Supreme Court.

Issue

The issue before the Supreme Court was to determine whether Section 7(5)(a) of the Insolvency Code is a mandatory or a discretionary provision.

Observations

The Supreme Court, while answering the question concerning the discretionary or mandatory nature of Section 7(5)(a), took into consideration Section 9(5) of the Insolvency Code and pointed out that the Legislature had in its wisdom used the word ‘may’ in Section 7(5)(a) of the Insolvency Code in respect of an application for CIRP initiated by a financial creditor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the Insolvency Code relating to the initiation of CIRP by an operational creditor.

The Court, therefore, held that ‘the fact that Legislature used ‘may’ in Section 7(5)(a) of the Insolvency Code but a different word, that is, ‘shall’ in Section 9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the Insolvency Code to be mandatory and Section 7(5)(a) of the Insolvency Code to be discretionary’.

Further, the title of the Insolvency Code makes it amply clear that the statute deals with and/or tackles insolvency and bankruptcy. It is certainly not the object of the Insolvency Code to penalize solvent companies, temporarily defaulting in repayment of their financial debts by the initiation of CIRP. Section 7(5)(a) of the Insolvency Code, therefore, confers discretionary power on the Adjudicating Authority (NCLT) to admit an application of a Financial Creditor Under Section 7 of the Insolvency Code for initiation of CIRP.

However, even though Section 7(5)(a) of the Insolvency Code may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously.

CONCLUSION

The Court has rightly held that the nature of section 7(5)(a) of the Insolvency Code is discretionary and not mandatory. The approach and rationale undertaken by the Court will serve to guide matters relating to the exercise in the future of discretionary powers of the Adjudicating Authority i.e., National Company Law Tribunal. Arguably, the aspect of extent of such discretionary powers, including as to when and how such discretion is to be exercised, is a matter which requires consideration.