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Between The Lines… August 2022 – Shareholders



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Article by Vijay Pal Dalmia, Advocate, Supreme
Court of India and Delhi High Court, Partner & Head of
Intellectual Property Laws Division, Vaish Associates Advocates,
India

I. Supreme Court: NCLT has discretion to not admit Financial
Creditor’s CIRP Application even if Corporate Debtor is in
default.

The Hon’ble Supreme Court (“SC“)
has in its judgment dated July 12, 2022 in the matter of
Vidarbha Industries Power Limited v. Axis Bank Limited
[Civil Appeal No. 4633 of 2021]
held that it is not
mandatory for the adjudicating authority to admit an application to
initiate Corporate Insolvency Resolution Process (“CIRP”)
even if the existence of debt and default in payment of debt by the
corporate debtor is established.

Facts

Vidarbha Industries Power Limited
(“Appellant“), being the corporate
debtor, is an electricity generating company within the meaning of
Section 2(28) of the Electricity Act, 2003 and has set up a 600 MW
coal-fired thermal power plant comprising of two units each of 300
MW capacity, within the Butibori Industrial Area in the Nagpur
District in Maharashtra.

The Appellant is short of funds, for the time being on account
of a pending litigation before the SC, more particularly, Civil
Appeal Number 372 of 2017 preferred by the Maharashtra Electricity
Regulatory Commission (“MERC“) against
an order dated November 3, 2016 passed by the Appellate Tribunal
for Electricity (“APTEL“), pursuant to
which a sum of INR 1,730 Crores is due to the Appellant. Subject to
the outcome of Civil Appeal Number 372 of 2017 pending before the
SC, implementation of the order dated November 3, 2016 would enable
the Appellant to clear all its outstanding liabilities.

On or about January 15, 2020, Axis Bank Limited
(“Respondent“), in the capacity of
financial creditor of the Appellant, preferred an Application under
Section 7(2) the Insolvency and Bankruptcy Code, 2016
(“IBC“) before the National Company Law
Tribunal, Mumbai (“NCLT“) seeking
initiation of the CIRP against the Appellant. The Respondent had
claimed a total amount to the tune of INR 533 Crores as due from
the Appellant.

In view thereof, the Appellant preferred a Miscellaneous
Application for seeking stay on the adjudication of CIRP admission
proceedings, until the above-mentioned Civil Appeal is pending
before the SC. However, by order dated January 29, 2021, the NCLT
dismissed the Miscellaneous Application filed by the Appellant for
seeking stay on the CIRP admission proceedings and refused to stay
the CIRP initiated against the Appellant. The NCLT, inter alia,
held that the objective of IBC is to decide petition seeking
initiation of CIRP of a corporate debtor in a time bound manner and
relied upon the landmark judgment of the SC in the matter of
Swiss Ribbons Private Limited and Another v. Union of India
and Others [(2019) 4 SCC 17] (“Swiss Ribbons
Judgment”)
to arrive at the aforesaid
observation.

Aggrieved by the order dated January 29, 2021 passed by the
NCLT, the Appellant preferred an appeal before the National Company
Law Appellate Tribunal, New Delhi
(“NCLAT“). However, the NCLAT dismissed
the appeal by order dated March 2, 2021 (“Impugned
Order
“). The NCLAT, inter alia, observed that the
Appellant has no jurisdiction in stalling the process and seeking
stay of CIRP, with the hidden intent of blocking the passing of
order of admission of the Application preferred by the Respondent
under Section 7(2) of the IBC for seeking initiation of CIRP of the
Appellant. As such, the NCLAT held that there is no merit in the
appeal and no infirmity in the order dated January 29, 2021 passed
by the NCLT.

Aggrieved by the Impugned Order passed by the NCLAT, the
Appellant preferred an appeal before the SC.

Issue

Whether Section 7(5)(a) of IBC is a mandatory or a discretionary
provision. In other words, is the expression ‘may’ to be
construed as ‘shall’, having regard to the facts and
circumstances of the case.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that considering the facts and
circumstances of the case, the Appellant is unable to realize a sum
of INR 1,730 Crores in terms of the order dated November 3, 2016
passed by the APTEL due to Civil Appeal Number 372 of 2017 pending
adjudication before the SC, the application preferred by the
Respondent under Section 7 of the IBC should not have been admitted
against the Appellant.

The Appellant further contended that the use of the word
‘may’, and not ‘shall’, in the language of Section
7(5)(a) of the IBC, confers a discretion to the NCLT to reject an
application, even if there is existence of debt, for any reason
that the NCLT may deem fit, for meeting the ends of justice,
keeping in mind the objective of the IBC, which includes revival of
the company and value maximization. It was further submitted by the
Appellant that Rule 11 of the National Company Law Tribunal Rules,
2016 (“NCLT Rules“) provides inherent
power to the NCLT to pass such orders as may be necessary for
meeting the ends of justice or to prevent abuse of the process of
the Tribunal. In view thereof, the Appellant submitted that on a
conjoint reading of Section 7(5)(a) of the IBC read with Rule 11 of
the NCLT Rules, it cannot be said that NCLT has no power, except to
examine whether a debt exists or not and accordingly accept or
reject the application under Section 7 of the IBC.

Contentions raised by the Respondent:

The Respondent submitted that the Appellant had admittedly
defaulted in payment of its dues and the NCLT has rightly declined
stay of proceedings initiated by the Respondent. It was further
contended that Section 7(5)(a) of the IBC cast a mandatory
obligation on the adjudicating authority to admit an application of
the financial creditor under Section 7(2) of the IBC, once
established that a corporate debtor has committed default in
repayment of dues of the financial creditor. As such, there are no
grounds to interfere with the concurrent findings of the NCLT and
the NCLAT.

The Respondent further relied on the judgment of the SC in the
matter of Innoventive Industries Limited v. ICICI Bank
and Another [(2018) 1 SCC 407]
to argue that the
object of the IBC is resolution of the insolvency and bankruptcy in
a time bound manner

Observations of the Supreme Court

The SC observed that placing reliance upon the Swiss Ribbons
Judgment, the NCLT held that the imperativeness of timely
resolution of a corporate debtor, who was in the red, indicated
that no other extraneous matter should come in the way of deciding
petitions filed under Section 7 and Section 9 of the IBC. However,
in this regard, the SC held that the viability and overall
financial health of the corporate debtor are not extraneous
matters.

The SC further examined the question as to whether an award of
the APTEL in favour of the Appellant for a sum of INR 1,730 Crores,
that is, an amount far exceeding the claim of the financial
creditor, can be completely disregarded. The SC answered the
aforesaid question in the negative.

The SC observed that both, the NCLT and the NCLAT proceeded on
the premises that an application must be necessarily entertained
under Section 7(5)(a) of the IBC, upon existence of a debt and
corporate debtor found to be in default. In this regard, the SC
held that the NCLAT and the NCLT erred in deciding that if the
aforesaid two aspects are being satisfied, it is sufficient to
trigger CIRP of the corporate debtor. In fact, the existence of a
financial debt and default in payment in respect thereof only gave
the financial creditor the right to apply for initiation of the
CIRP. However, the adjudicating authority is supposed to apply its
mind to all relevant factors including feasibility of initiation of
CIRP and the overall financial health and viability of the
corporate debtor under its existing management.

The SC agreed with the contention raised by the Appellant that
the legislature has consciously used the word ‘may’ and not
‘shall’ in Section 7(5)(a) of the IBC. However, while
arriving at the conclusion that it is discretionary upon the
adjudicating authority to admit an application filed by financial
creditor seeking initiation of CIRP of a corporate debtor, the SC
has made it clear that in case of rejection of such application,
the financial creditor will not be precluded from applying afresh
for initiation of CIRP of that corporate debtor, if the dues
continue to remain unpaid.

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© 2020, Vaish Associates Advocates,

All rights reserved

Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy
Marg New Delhi-110001 (India).

The content of this article is intended to provide a general
guide to the subject matter. Specialist professional advice should
be sought about your specific circumstances. The views expressed in
this article are solely of the authors of this article.



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