Case Analysis on Vidarbha Industries Power Ltd. v Axis Bank Ltd. – By Adv. Sakshi Thakkar

The Supreme Court's recent judgement in the case of Vidarbha Industries Power Ltd. v. Axis Bank Ltd. emphasises the NCLT's jurisdiction under Section 7(5)(a) of the IBC to rule on creditor requests to begin CIRP proceedings against debtors. It highlights how crucial it is to use this discretion while taking into account the debtor's ability to continue under present management, pending legal issues, CIRP's viability, and financial stability. The judgement adopts a fair methodology, balancing the interests of creditors with the ultimate goal of optimising asset value and encouraging settlements rather than liquidations. It distinguishes between different types of creditors while adhering to the coherence and entrepreneurial development goals of the IBC. It provides the necessary clarification, but it also emphasises the need for precise rules or standards to guarantee the uniform application of NCLT discretion. In order to guarantee that IBC goals are met without sacrificing justice or procedural integrity, oversight and monitoring procedures should be added to further improve the effective execution of this rule. In summary, this historic decision strengthens trust in India's bankruptcy system and advances a more nuanced approach to insolvency resolution by improving the way the Insolvency and Bankruptcy Code is applied.

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Case Analysis on Vidarbha Industries Power Ltd. v Axis Bank Ltd.

Adv. Sakshi Thakkar
LL.M., Student at Jindal Global Law School

Introduction

In the Vidarbha region of Maharashtra, a business called Vidarbha Industries Power Ltd. (VIPL) was involved in the establishment of a thermal power plant. To finance the power project in 2010-11, VIPL secured loans from a group of lenders headed by Axis Bank.

An approximate of Rs. 6,000 crores was projected to be the overall project cost. The exposure for Axis Bank was Rs. 475 crores. Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, and Punjab National Bank were among the other significant lenders.

The project needed a number of regulatory clearances and approvals from state governments, the Ministry of Environment and Forests, the State Pollution Control Board, and other organisations. But because of things like policy gridlock, environmental concerns, and problems with land acquisition, there were excessive delays in receiving these approvals.

Due to the project’s midway standstill, VIPL began to fall behind on its loan repayments to lenders by 2015-16. By then, the entire amount of unpaid debt had skyrocketed to more than Rs. 4,000 crores.

Axis Bank applied to the National Company Law Tribunal (NCLT), Mumbai, in January 2017 under Section 7 of the Insolvency and Bankruptcy Code (IBC), alleging the debt default, to begin the Corporate Insolvency Resolution Process (CIRP) against VIPL.

VIPL challenged Axis Bank’s application, claiming that more than 75% of the project’s work had been done and that significant progress had been made. It stated that the project could be quickly finished and put into business to provide adequate money to pay back the loans because the remaining approvals were in an advanced stage.

VIPL argued that forcing the plant into insolvency at this point would be unproductive because it would have to be sold for a much lower price than what was initially invested, resulting in significant losses for all parties involved. It requested an extension of time in order to secure the final authorizations.

Nevertheless, in May 2017, the NCLT Mumbai Bench approved Axis Bank’s plea and, in accordance with IBC, started CIRP against VIPL, designating an Interim Resolution Professional (IRP).

Angry, VIPL filed an appeal with the National Company Law Appellate Tribunal (NCLAT) against the NCLT ruling. However, in August 2017, the NCLAT affirmed the NCLT ruling as well.

VIPL’s appeals before NCLAT and the Supreme Court were primarily based on the following grounds:

  1. According to Section 7(5) of the IBC, NCLT is able to decide whether to accept or reject an application for insolvency based on the particular facts and circumstances of each case.
  2. In this instance, forcing VIPL into insolvency would undermine the project’s economics and value and contradict the IBC’s goal of resolving insolvency, given regulatory approvals are anticipated in the near future.
  3. By automatically admitting the insolvency case in spite of certain mitigating circumstances, NCLT misapplied its judicial judgement and discretion.

However, Axis Bank’s main arguments were as follows:

  1. NCLT must start CIRP under Section 7 once the existence of debt and default are proven. It is powerless to deny an application that has been submitted correctly.
  2. VIPL’s assertions that it will receive approvals quickly were merely wishful thinking devoid of concrete deadlines. The lenders had endured enough waiting.
  3. The NCLT would be in violation of the IBC’s time-bound settlement process if it granted such indefinite delays.

The case made its way to the Supreme Court in 2018 due to the disagreement between NCLAT and VIPL about how to interpret Section 7(5) with regard to NCLT’s discretionary powers. The extent of NCLT’s discretion in accepting or rejecting financial creditors’ claims for insolvency under the IBC has to be decided by the supreme court.

Background

Factual Matrix

Power producer Vidarbha Industries was waiting for favourable decisions from MERC and APTEL, the electrical regulators, to collect more than Rs. 1700 crores from its client, RIL. The monies were withheld, though, since the regulators’ orders were contested. Due to a lack of finances, Vidarbha neglected to make payments to its financial creditor, Axis Bank. Axis Bank applied to the NCLT under Section 7 of the IBC to start a CIRP against Vidarbha.

Citing pending regulatory orders in its favour, Vidarbha challenged the admittance and requested a postponement till the monies were released. Using the Supreme Court’s ruling in Swiss Ribbons as support, NCLT and NCLAT denied Vidarbha’s appeals, holding that admission under Section 7 should not be postponed because of unrelated issues. Vidarbha filed a Supreme Court petition.

Legal Provisions and Arguments

A financial creditor may start CIRP against a corporate debtor by submitting an application to NCLT under Section 7[1] of the IBC. In accordance with Section 7(5)(a), NCLT “may” accept such an application after concluding that a default has occurred. According to Vidarbha, the word “may” gives NCLT the authority to refuse applications even in the event of a default. It made use of NCLT Rules, 2016 Rule 11, which permits such applications to be dismissed or postponed.

Drawing on Section 7(4) and the Swiss Ribbons[2] ruling, Axis Bank argued that Section 7(5)(a) requires NCLT to admit applications upon discovering a default. It claimed that irrelevant issues, such as ongoing regulatory actions, cannot be taken into account by NCLT.

Court’s Reasoning

The text of IBC Sections 7(5)(a) and 9(5)[3] was examined by the Supreme Court. It noted that whilst financial creditors’ petitions are addressed by Section 7(5)(a) with the word “may,” operational creditors’ applications are addressed by Section 9(5), indicating a purposeful decision to grant NCLT discretion in the latter scenario.

The Court concluded that the word “may” in Section 7(5)(a) gives the NCLT discretion by applying the literal interpretation rules from instances such as Lalita Kumari v. Govt. of UP[4] and Hiralal Rattanlal v. State of UP[5]. It made a point of differentiating between creditors that are financial and those who are operational, with the former enjoying greater flexibility.

The Court did, however, make it clear that this discretion could not be used arbitrarily or capriciously. The viability under current management, financial health, impact of pending processes, and viability of CIRP against a regulated firm are only a few of the merit-based considerations that NCLT must take into account before admitting someone.

According to the Court, NCLT and NCLAT made a mistake by ignoring the sizeable amount that Vidarbha could have realised given APTEL’s ruling in its favour. After taking into account pertinent facts, it granted the appeal, declaring that NCLT has the authority to reject or postpone petitions under Section 7(5)(a).

Analysis

The Supreme Court’s view of Section 7(5)(a) as granting NCLT discretionary authority is logical and consistent with the IBC’s goals. Several aspects of the judgment merit analysis:

Harmonizing Creditor and Debtor Interests

The IBC also promotes resolution over liquidation, wherever possible, so as to balance the interests of the creditors with those of the debtors. Through this provision, the Court has sought to ensure that admission into CIRP is not just a mere formality by recognizing NCLT’s discretion and taking into consideration special circumstances of corporate debtor. This discretion is crucial in protecting value of successful companies who undergo temporary hiccups without going through unnecessary bankruptcy proceedings.

Distinguishing Financial and Operational Creditors

Such a distinction becomes important under the IBC because it recognizes that there are operational creditors and financial creditors whose rights are different from each other. Financial lenders, on the other hand, being experienced or expert feel more comfortable to assess risks. On the other hand operational creditors need stricter regulations since they usually have smaller organizations. This calculated approach matches well with an entrepreneurial promoting yet protective role for IBC towards all stakeholders particularly creditors.

Scope of NCLT’s Discretion

Despite the discretionary power given to NCLT, some factors have been highlighted by the court that may guide it. these include pending litigation, regulation constraints, financial viability and survival of business under present management. Possibly, the Court could have set more precise guidelines in order to avoid arbitrary exercise of discretion.

Promoting Regulatory Harmony

This shows that the Court is commendable for taking into account impending regulatory orders and their potential effects on Vidarbha’s ability to honor its debt obligations. It notes that importance of maintaining regulatory certainty, avoiding conflicts and harmonizing with industry specific IBC legislations. This purpose of IBC which is to maximize asset value are not at variance with this approach.

Balancing Expediency and Fairness

The IBC places a heavy emphasis on expeditious settlement of insolvency cases but the fact that the court acknowledges NCLT’s discretion ensures that speed does not supplant fairness and careful consideration of corporate debtor’s predicament. The integrity as well as efficacy of the insolvency regime rests on such delicate balancing.

Potential Concerns

While the ruling brings relief, other problems may still arise.

  • The exercise of discretion could lead to divergent rulings by NCLT thereby causing questions and legal problem.
  • Recognition of extraneous matters might undermine IBC’s goal of expeditious resolution by prolonging the processes.
  • Determining the viability or financial health of a firm borrower can be a subjective process that is prone to inaccuracy.

The Supreme Court and the legislature may think about creating more detailed guidelines or requirements for using discretion under Section 7(5)(a) in order to allay these worries. Standardised processes for routine oversight and review are also necessary to guarantee consistency and adherence to IBC goals.

Conclusion

The Supreme Court’s recent judgement in the case of Vidarbha Industries Power Ltd. v. Axis Bank Ltd. emphasises the NCLT’s jurisdiction under Section 7(5)(a) of the IBC to rule on creditor requests to begin CIRP proceedings against debtors. It highlights how crucial it is to use this discretion while taking into account the debtor’s ability to continue under present management, pending legal issues, CIRP’s viability, and financial stability.

The judgement adopts a fair methodology, balancing the interests of creditors with the ultimate goal of optimising asset value and encouraging settlements rather than liquidations. It distinguishes between different types of creditors while adhering to the coherence and entrepreneurial development goals of the IBC.

It provides the necessary clarification, but it also emphasises the need for precise rules or standards to guarantee the uniform application of NCLT discretion. In order to guarantee that IBC goals are met without sacrificing justice or procedural integrity, oversight and monitoring procedures should be added to further improve the effective execution of this rule.

In summary, this historic decision strengthens trust in India’s bankruptcy system and advances a more nuanced approach to insolvency resolution by improving the way the Insolvency and Bankruptcy Code is applied.


References:

[1] Insolvency and Bankruptcy Code, 2016.

[2] Swiss Ribbons Pvt. Ltd. v Union Of India (2019) ibclaw.in 03 SC.

[3] Insolvency and Bankruptcy Code, 2016.

[4] Lalita Kumari vs Govt. Of U.P.& Ors (2014) 2 SCC 1.

[5] Hiralal Rattanlal v. State of UP (2002) SC 1737.

 

 


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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