Aftermath of Vidarbha Judgment: An Insight – By Jahnvi Pandey

With the advent of the Vidarbha Judgment, a swift change occurred in giving excessive power to the Adjudicating Authority. This discretionary power would lead to unnecessary judicial intervention even after default. Several financial creditors will face unjust harm considering that even after multiple efforts are put in to recover the long-due debt, preference would still be given to the background situation of the Corporate Debtor. This article will highlight the empirical data and analysis of how an amendment is required in IBC due to the impossibility of undoing the harm caused by this judicial precedent.

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Aftermath of Vidarbha Judgment: An Insight

Jahnvi Pandey
(4th Year Student at University of Petroleum and Energy Studies, Dehradun)

1. Introduction

The dictum of Vidarbha Industries Power Limited v. Axis Bank Limited[1] (“Vidarbha”) was premised on giving discretionary power to the Adjudicating Authority for blatant rejection of the application even after the existence of debt and default under Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The settled notion of law before this judgment got passed was to mandatorily admit the Section 7 application if it passes the debt-and-default test[2] and complies with the procedure prescribed under IBC.

The Pre-IBC era showcased inefficiency in insolvency proceedings through the enactments such as Sick Industrial Companies Act, 1985 (“SICA”) and Board for Industrial and Financial Reconstruction (“BIFR”). The reason de facto has been an avoidance of taking effective legal action against the defaulters, creating delay in resolving the creditors’ issues and complexity in following the ‘creditor-in-control’ regime. The enforceability of IBC brought ‘n’ number of developments with core objectives ranging from resolution in case of default to completing the Corporate Insolvency Resolution Process (“CIRP”) in a time-bound manner.

With the advent of the Vidarbha Judgment, a swift change occurred in giving excessive power to the Adjudicating Authority. This discretionary power would lead to unnecessary judicial intervention even after default. Several financial creditors will face unjust harm considering that even after multiple efforts are put in to recover the long-due debt, preference would still be given to the background situation of the Corporate Debtor. This article will highlight the empirical data and analysis of how an amendment is required in IBC due to the impossibility of undoing the harm caused by this judicial precedent.

2. Empirical data on the rejection of applications

One of the key aspects concluded in Vidarbha was the Corporate Debtor’s scope to retain financial stability by letting them escape the payment of temporary default provided that the company is solvent. Hence, it becomes easy for Corporate Debtors to take this subjective defence of being a solvent company and that the default for repayment is temporary. Such a disruptive mechanism of taking defences has occurred in numerous cases for which specified data can be referred to below.   

On July 12, 2022, the Vidarbha Judgment was passed by the Hon’ble Supreme Court. Since then, several cases have quoted Vidarbha to take the defence of “inability to pay” to sway away the liability. The table[3] mentioned below will facilitate the statistics of the total number of times Vidarbha has been quoted, along with the rejection of applications based on the said judgement, which is the main point of concern.

Table

Total Number of cases where Vidarbha Judgment was quoted 57
Cases where Section 7 application was rejected with reliance on Vidarbha 24
Cases where an attempt was made for rejection of Section 7 application with reliance on Vidarbha 17
Miscellaneous 16

 

In lieu of the provided data, it is deduced that the rejection of Section 7 applications while relying on the Vidarbha Judgment can contribute to unforeseen harm that will be caused to all financial creditors. Moreover, sufficient attempts have been made to get the application rejected while relying on unwavering judgment. For now, the figures would seem minimal, but in case where no action is taken to amend the concerned provision,[4] the situation of the financial creditors can worsen with a large number of cases being rejected due to the ruling of the Supreme Court.

3. Contrast against NCLT’s settled practice

Since the start when IBC was made enforceable, the settled practice of law has been to admit the applications of financial creditors in distress due to default in repayment of debt. The intent of the legislature can be clarified from Clause 7 of the Insolvency and Bankruptcy Code Bill, 2015[5] wherein it emphasises that “default occurred” for financial creditors to get their application admitted by the Adjudicating Authority. Hence, the Vidarbha Judgment goes against the legislature’s intent of ascertainment of default to admit the said application.

The Supreme Court gave a landmark verdict on the issue of pending non-payments of debt even after the existence of default in the case of Innoventive Industries Limited v. ICICI Bank.[6] It stated that CIRP should be set in motion as soon as Tribunals determine the default. In another case,[7] the Supreme Court held that a quite apparent shift had been observed in handling matters of financial creditors due to the Innoventive case. This shift was recognized by starting to practice the determination of default instead of identifying the inability of the Corporate Debtor to pay for the admission of the application under IBC.[8] The Bankruptcy Law Reforms Committee Report (“BLRC”),[9] highlighted that while a reply is filed before the petition is admitted, the Adjudicating Authority must not decide the case on merits.

Therefore, going against the fundamental objective upon which the framework of IBC works is not a satisfactory call made by the Supreme Court in Vidarbha.

4. Analysis

4.1. Impossibility of Undoing the Harm

These judgments highlighted in the above-mentioned table showcase the inability of the Tribunals to facilitate the default caused against the financial creditor due to the set precedent. The review of these judgments, which several NCLTs and NCLAT reject, cannot be possible due to the law in force. Although there is no provision concerning the review process in IBC, an analogy can be drawn from the Code of Civil Procedure (“CPC”) for the purpose of applicability.[10]

The relevance concerning the impossibility of review of the already passed judgments rejecting Section 7 applications can be concluded from Order 47 Rule 1, Explanation of CPC. This provision states that in cases where the “question of law” is overturned by a Superior Court, the same cannot be posed as a ground for review in any given case. In the case of Krajoy Mog Choudhary v. State of Tripura,[11] it was held that a review cannot be done when the Court has already rejected the relief. This means that rehearing on the same grounds raised before the Court is not permissible.[12] In Vidarbha, a similar series of events happened in which the “question of law” was reversed by the Supreme Court as against the orders passed by NCLT and NCLAT.

In addition, a review of the rejected applications cannot be considered possible if the legislation makes necessary amends in law that change the basis established in Vidarbha. It is an understandable reality that passing an Amending Act to change the law retrospectively does not allow Courts to re-open past matters which were decided as per laws before the amendment.[13] This change of law cannot review cases considering one cannot fix past cases based on a subsequent turn of events.[14]

Therefore, no earlier or further judgments can be reviewed wherein reliance is placed upon the Vidarbha verdict. To stop the damage being caused against the financial creditors, the Code requires an amendment as soon as possible to control the large scale of disadvantage, thereby eroding the essence of IBC.

4.2 Res Judicata under CPC

As stated, even if CPC does not apply to insolvency proceedings, its analogy can be applied effectively. In furtherance to the same, Section 11 of CPC states about res judicata, which means that if the issue has already been adjudicated among the same parties by a former Court, then there can be no subsequent proceedings upon the same issue among the same set of parties. Herein, res judicata will apply given that the Vidarbha’s ratio has already been into force, and the same issue cannot be taken up by any other Court again.

In the case of Hope Plantations Ltd. v. Taluk Land Board Peermade & Anr.,[15] the Supreme Court elaborated upon the efficacy of res judicata. It was held that res judicata as a concept facilitates curbing endless litigation and lessening the burden of the Court. Moreover, initiation of proceedings can only take place on fresh cause of action. Hence, it is evident that neither re-opening nor assessing the same case can occur due to laws of review and res judicata being operational.

The Adjudicating Authority, as well as the objectives of IBC, has made it clear time and again that proceedings falling under it are not initiated with an effort to recover the debts. In the case of Gagan Deep Singh Dugal v. M/S Ninaniya Estates Limited,[16] it was held that “IBC is not a recovery proceeding where the party may repeatedly come to the Court.” The Vidarbha Judgment reinstated insolvency being a resolution process rather than a recovery medium.[17] However, it also suggests financial creditors file fresh applications in instances where their Section 7 application is rejected due to reliance on this landmark case.

Therefore, repeatedly going to the Courts with similar nature cases which have already been rejected would go against the Tribunal’s established principles and will ultimately make the institution a recovery forum. It is suggested that an immediate amendment is brought into effect for further financial creditors to avoid inconvenience and keep following the core principles of IBC.

4.3 Need for Amendment in the Code

This judgment of Vidarbha does not elucidate any guidelines concerning the determining factor of what can be called extraneous and vice versa. This will lead to deterioration in the subjective interpretation with contrasting judgments in all regions of established Tribunals. Earlier, we were functioning in a ‘debtor-in-control’ model where if the corporate debtor could not pay debts, the Tribunals used to grant the escape route to not repay the debt. However, the ongoing ‘creditor-in-control’ model provides the locus to decide upon the debtors’ assets solely by the creditors themselves.

The Vidarbha Judgment goes against the followed practice of the ‘creditor-in-control’ model. The amendment is proposed in two-fold ways under the IBC. First, the word “may” mentioned in Section 7 must be replaced by “shall”. This will nullify the discretionary powers provided to the Adjudicating authority through the said judicial precedent. Second, the aforesaid effect of this amendment must be applied retrospectively on all the pending proceedings of the Section 7 application to re-correct the harm caused to the state of affairs.

5. Conclusion

The commercial wisdom of CoC has been imbibed in the IBC practice since its inception. This directs us to the relevance of providing the opportunity to financial creditors to settle their debts as a consequence of non-repayment and the event of default. Section 433(e) of the Companies Act, 1956 expressed the circumstantial instance where companies are “unable to pay its debts”. Interconnection can be drawn towards the reason why it was considered as a defence before and how the settled practice no more allows it with a motive to resolve the financial damage to the creditors on the arousal of default. Thus, the judicial overreach created by Vidarbha against the ‘creditor-in-control’ regime should be amended to coincide with the foundation of IBC. The harm caused to financial creditors cannot be undone, but future harm can be put to a halt.

Reference

[1] (2022) ibclaw.in 91 SC.

[2] Innoventive Industries Ltd. v. ICICI Bank, [2017] ibclaw.in 02 SC.

[3] Manupatra, Vidarbha Industries: Cited in Courts & Tribunals: 57, https://www-manupatrafast-in.eu1.proxy.openathens.net/pers/Personalized.aspx.

[4] Section 7, Insolvency and Bankruptcy Code, 2016.

[5] Insolvency and Bankruptcy Code Bill, 2015, https://www.wbja.nic.in/wbja_adm/files/The%20Insolvency%20and%20Bankruptcy%20Bill,%20%20%202015.pdf.

[6] Supra Note 2.

[7] Swiss Ribbons Private Limited v. Union of India, (2019) ibclaw.in 03 SC.

[8] E S Krishnamurthy & Ors. v. Bharath Hi-tech Builders Pvt. Ltd., (2021) ibclaw.in 173 SC.

[9] The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, https://ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf.

[10] AVANT Garde Clean Room & Engg. Solutions Private Limited v. HLL Biotech Limited, (2022) ibclaw.in 917 NCLT.

[11] AIR 2014 Tri 33.

[12] Heerachand Swarankar v. Sri Radhe Shyam Jee Maharaj Virajman, AIR 2016 Pat 64.

[13] In re K. Vasudevan, AIR 1944 Mad 238.

[14] Sarfaraj Khan v. Ramchandra, AIR 1924 Nag 70.

[15] (1999) 5 SCC 590.

[16] (2023) ibclaw.in 171 NCLT.

[17] Ankit Goyat v. Sunita Agarwal & Anr., (2021) ibclaw.in 387 NCLAT.

 

 


Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.


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