INTRODUCTION
The recent judgment passed in the case of Vidarbha Industries Power Limited v. Axis Bank Limited by the Supreme Court addressed the issue of whether Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016, (IBC) which pertains to the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor, is a mandatory or discretionary provision.

In its ruling, the Supreme Court stated that the existence of debt and default only gives a financial creditor the right to apply for initiating the process, and the Adjudicating Authority must consider various relevant factors, such as the financial health and viability of the debtor and the feasibility of the resolution process, before admitting the application. The objective of the IBC is not to bring an end to the debtor’s existence but rather to revive it. The Supreme Court further explained that the use of the word “may” in Section 7(5)(a) and “shall” in other provisions of the IBC conveys different meanings, indicating that the Adjudicating Authority has the discretion not to admit an application even if the criteria are met.

 

RELEVANT FACTS OF THE CASE

* The company Vidarbha is classified as a “generating company” under section 28 of the Electricity Act, 2003. In the year 2013, the Maharashtra Electricity Regulatory Commission (MERC) authorized a different company to purchase electricity from one of Vidarbha’s units, and a contract was signed to formalize the agreement.

* There was a disagreement between Vidarbha and the Maharashtra Electricity Regulatory Commission (MERC) regarding the determination of tariff, as MERC had disallowed a significant portion of the fuel costs claimed by Vidarbha and had capped the tariff for the fiscal years 2016-2017 to 2019-2020. Vidarbha filed an appeal with the Appellate Tribunal for Electricity (APTEL) to challenge MERC’s decision.

* The APTEL allowed the appeal, and Vidarbha was entitled to receive a payment of INR 1,730 crore. However, MERC filed a civil appeal before the Supreme Court in 2017, challenging the APTEL’s decision. The Supreme Court has yet to make a ruling on this matter.

* In the year 2020, Axis Bank Limited (ABL) filed an application under section 7(2) of the Insolvency and Bankruptcy Code (IBC) with the National Company Law Tribunal (NCLT) against Vidarbha, claiming unpaid dues of INR 553 crore. Vidarbha argued that its inability to repay the debt to ABL was a direct result of MERC’s failure to pay INR 1,730 crore.

* The issue of MERC’s liability to pay the aforementioned amount was pending before the Supreme Court in a civil appeal filed by MERC. As a result, Vidarbha requested that the NCLT proceedings be stayed until the appeal is resolved.

* Vidarbha’s application to stay the Corporate Insolvency Resolution Process (CIRP) initiated by Axis Bank Limited (ABL) for non-payment of dues amounting to INR 553 crore was rejected by the National Company Law Tribunal (NCLT). The NCLT emphasized that the only requirement for the Adjudicating Authority is to establish the existence of debt and whether the corporate debtor has defaulted on payments. If both requirements are met, it would lead to corporate insolvency.

* The NCLT further noted the importance of timely resolution for a corporate debtor in financial distress. Vidarbha appealed this decision before the National Company Law Appellate Tribunal (NCLAT), which also dismissed the appeal in March 2021, citing no legal errors in the NCLT’s order.

As a result, Vidarbha filed an appeal under section 62 of the Insolvency and Bankruptcy Code (IBC) before the Supreme Court, challenging the NCLAT’s decision dated March 2, 2021.

ARGUMENTS OF THE PARTIES

Vidarbha’s contention is that its failure to repay the debt owed to ABL was directly linked to the non-payment of INR 1,730 crore by Maharashtra Electricity Regulatory Commission (MERC). Vidarbha argues that since the issue of MERC’s liability to pay the said amount was pending before the Supreme Court, the CIRP proceedings initiated by Axis Bank Ltd should be stayed until the matter is resolved.
On the other hand, Axis Bank Ltd’s contention is that Vidarbha has defaulted on its payments, and the existence of debt and default in payments are the only requirements needed to trigger the CIRP process. Axis Bank Ltd argues that the NCLT’s decision to reject Vidarbha’s application and continue with the CIRP proceedings was legally sound, as the timely resolution of a debtor in financial distress is essential to maintain a healthy economy.

FINDING’S OF THE HON’BLE SUPREME COURT

* The Supreme Court has clarified that Section 7(5)(a) of the Insolvency and Bankruptcy Code (IBC) is not mandatory but discretionary in nature. The objective of the IBC is to revive a company, and the financial health and viability of the corporate debtor must not be ignored. The SC has stated that when a corporate debtor has an order in its favor that, if implemented, would allow the debtor to pay its dues, the NCLT has the discretion to either admit or reject the application of a financial creditor for the initiation of CIRP under Section 7.

* The NCLT is not restricted to merely examining the existence of a debt and default in payment of dues to trigger CIRP. Instead, it must consider various relevant factors, including the feasibility of initiating CIRP and the viability of the corporate debtor under its current management. The SC has emphasized that the resolution process must be resolved expeditiously, but the focus should be on reviving the company rather than triggering insolvency proceedings.

* In addition, the SC stated that the intention of the legislature must be interpreted according to the language used in the statute. If the provision was intended to be mandatory, the word “shall” would have been used instead of “may”. The SC relied on the Lalita Kumari v. Government of Uttar Pradesh and Ors. case to emphasize the principle of literal interpretation of statutes. Furthermore, the SC explained that the legislature used the word “may” when referring to the Adjudicating Authority’s duty in an application for CIRP initiated by a financial creditor under Section 7(5)(a), but used the word “shall” when referring to an application for the same process initiated by an operational creditor under Section 9(5)(a).

* The SC differentiated the Swiss Ribbons case, stating that it did not consider whether S.7(5)(a) of the IBC was discretionary or mandatory. It clarified that Swiss Ribbons only dealt with the vires of the IBC and that language in a judgement cannot be read like a statute.

* The SC stated that an award in favor of a Corporate Debtor cannot be ignored by the Adjudicating Authority when deliberating on a S.7(5)(a) application. While S.7(5)(a) confers a discretionary power on the Adjudicating Authority to admit or not admit an application of a financial creditor for initiation of CIRP, the NCLT had erred in disregarding APTEL’s award in favor of Vidarbha. The SC observed that the IBC is not intended to penalize solvent companies or companies that are temporarily defaulting in repayment of their financial debts. The NCLT was required to apply its mind to the impact of MERC’s appeal on the financial health and viability of Vidarbha, which operated under statutory control.