Debt, Default and Discretion: Addressing The Aberrations of IBC in the wake of Vidarbha Industries Judgment – By Adv. Charu Mathur with Adv. Siddharth Acharya

Debt, Default and Discretion: Addressing The Aberrations of IBC in the wake of Vidarbha Industries Judgment

Authored by:
Adv Charu Mathur, Advocate on Record Supreme Court of India, Adv Siddharth Acharya, Partner of Siddharth Acharya and Associates,
Ms. Aastha, 5th year student, NLC BVDU, Pune and Ms. Manshi Sinha, 4th year student, VIPS, GGSIPU, New Delhi.

Introduction

The Insolvency Bankruptcy Code, 2016 was a ground-breaking legislation which led a new way for resolution of corporate insolvency in a time-bound manner, to ensure value maximization in the best interests of stakeholders. As mentioned in the preamble of the Code its main aim was to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.[1] But, the jurisprudential flow of IBC has taken a hit in the past six years in terms of application of the Code, despite its constitutionality being already upheld.

There are catena of judgments on constitutionality of some of the most important provisions of the code and it has been accepted as an economic legislation. The Supreme Court discussed in detail those provisions for the first time in the landmark case of M/s Innoventive Industries Ltd v. ICICI Bank & Anr. [2017] ibclaw.in 02 SC[2], followed by another landmark case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited [2017] ibclaw.in 01 SC[3].

Justice Rohinton Fali Nariman in the case of Swiss Ribbons (P) Ltd. Vs Union of India [2019] ibclaw.in 03 SC interpreted the main objective of the Code and held that “One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process”.[4]

Debt: Definition and Interpretation

Financial Debt has been defined under Section 5(8)[5] of the Code as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes money borrowed against the payment of interest.

Debt under IBC has been interpreted by the Apex Court in plethora of judgments. In a recent judgment of M/s Orator Marketing Pvt Ltd v M/s Samtex Desinz Pvt. Ltd. (2021) ibclaw.in 68 SC [6], the Supreme Court clarified that a “financial debt” would include an interest-free loan advanced to finance the business operations of a corporate body.

Default

As per Section 3(12)[7] of IBC, “default” means “non-payment of debt when whole or any part or instalment of the amount of the debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.” It must be noted that for the purposes of Section 7(1)[8] of the IBC, default includes a default in respect of the financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

As per the precedents laid down under IBC and their interpretation by the Apex Court of the country, a debt and default existing on the part of the Corporate Debtor were the main ingredients to allow an application under Section 7[9]. But in the recent case of Vidarbha Industries Power Limited v. Axis Bank Limited (2022) ibclaw.in 91 SC[10], the Supreme Court has interpreted Section 7(5)(a)[11] of the Code in a way that gives a different angle to the  interpretation of  the terms, ‘debt’ and ‘default’. As per the present judgment, even if there’s an existing debt and default has accrued on the part of the corporate debtor, such debt wouldn’t necessarily allow an application for insolvency proceedings against the Corporate Debtor to be admitted. Thus, a discretionary power has been conferred on the Adjudicating Authority to in admitting such applications.

Brief Facts of the Case

Vidarbha Industries Power Limited (hereinafter referred as VIPL) is a power generating company. The regulation of its tariff is under Maharashtra Electricity Regulatory Commission (MERC) and the Appellate Tribunal for Electricity (APTEL). MERC permitted VIPL to implement a power purchase agreement with Reliance Industries Limited (RIL) according to which, VIPL had to supply electricity to RIL. During the said agreement disputes arose between the parties and the matter was taken to APTEL, which awarded VIPL a sum of INR 1,730.00 crore. VIPL sought implementation of the order passed by the APTEL before MERC. However, MERC took an appeal before the Supreme Court against the order of APTEL. In the meantime, Axis Bank Limited initiated an insolvency proceeding under section 7[12] of Code against VIPL. As a result of this, VIPL pleaded before the National Company Law Tribunal (NCLT) for stay on the proceedings until the proceeding before the Supreme Court was pending. However, it was refused on the ground that no extraneous matter should come in the way of expeditiously deciding insolvency proceedings.

NCLT was of the view that in order to initiate CIRP it is sufficient to show existence of a debt and default on the part of the corporate debtor. Further, the National Company Law Appellate Tribunal upheld the same view. Following the above incidents, an appeal was filed before the Hon’ble Supreme Court to ascertain the nature of Section 7(5)(a)[13] in terms of its discretionary power.

Held

Supreme Court, inter alia, held that Section 7(5)(a)[14] of the Insolvency and Bankruptcy Code, 2016 confers discretionary power on the Adjudicating Authority in admitting an application of a financial creditor under Section 7[15] of the Code for initiation of CIRP. This decision of the Court is in clear contrast with the long-settled view that as soon as the Adjudicating Authority is satisfied that a default has occurred, the application for CIRP must be admitted except when the application itself is incomplete.

In the landmark judgment, Innoventive Industries Ltd.[16], it was held by the Apex Court that if debt and default are established and Section 7[17] application is defect-free, it must be admitted by the NCLT. But, the interpretation of Section 7[18] in the present judgment has conferred discretionary power on the Adjudicating Authority and now NCLT has the discretion even not to admit a CIRP application filed by a financial creditor.

The court in Vidarbha emphasized on the meaning and intention of Section 7(5)(a)[19] of the Code.  It was held that the jurisprudence behind this section can be ascertained from the phraseology of this provision in the context of the nature and design of the Code. The expression ‘may admit’ confers discretion to admit. In contrast, the use of the word “shall” postulates a mandatory requirement. Had the legislative intent been that of making Section 7(5)(a)[20] mandatory, the legislature would have used the word ‘shall’ and not ‘may’. It was further interpreted by the court that using two different phrases in two otherwise identical sections convey a different meaning. The fact that Legislature used ‘may’ in Section 7(5)(a)[21] of the IBC and a different word, that is, ‘shall’ in Section 9(5)(a)[22] shows that Legislature intended Section 9(5)(a)[23] of the IBC to be mandatory and Section 7(5)(a)[24] of the IBC to be discretionary. However, it was clarified by the Court that such discretionary power conferred on the Adjudicating Authority must not be exercised arbitrarily or capriciously. Ordinarily, the adjudicating authority should admit an application made under Section 7[25] and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition. The grounds made out by the Corporate Debtor against admission of such petition has to be considered on merit by the Adjudicating Authority and it can exercise its discretion in not admitting the application filed under Section 7[26] of the code. 

Conclusion

The above judgment of the Supreme Court has become a landmark and has paved way for a fresh defense that can be taken by corporate debtor to avoid initiation of insolvency proceedings against them, especially in those cases where an award or decree exceeding the default amount has already been passed in Corporate Debtor’s favour and such award or decree is either pending an execution or an appeal against such decree or award is filed by the Award-Debtor or Judgment-Debtor. The impact this ruling creates on pending petitions filed under Section 7[27] of the IBC before NCLTs would be noteworthy.  

The present judgment has set a completely new view point for the initiation of insolvency proceedings against the corporate debtor by the financial creditors, which seems to put the financial creditors on a backfoot.

It must be noted that IBC was enacted for reasonably expeditious, time bound insolvency resolution of corporate bodies as observed by the Supreme Court in Swiss Ribbons[28]. It was observed in this case that timely resolution of a Corporate Debtor by an effective legal framework and process, would support the development of the credit market.

Prior to enactment of the Insolvency and Bankruptcy Code, 2016, there was no consolidated legislation in India that dealt with insolvency and bankruptcy. Provisions covering insolvency and bankruptcy for corporate bodies could be found in the Sick Industrial Companies (Special Provisions) Act (SICA), 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the Companies Act, 2013. The predicaments that these varied laws posed were existence of multiple fora for realization of debt and lack of harmony among them, which resulted in undue delay.

It is imperative to mention here that if the Apex Court continues to defy the main objective of the code by contradicting its own settled principles, then unfortunately the fate of IBC would be similar to that of the Sick Industrial Companies (Special Provisions) Act (SICA), 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993,  and would lead to flood of unnecessary litigation.

 

Reference:

[1] Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India).

[2] [2017] ibclaw.in 02 SC

[3] [2017] ibclaw.in 01 SC

[4] [2019] ibclaw.in 03 SC

[5] Insolvency Bankruptcy Code, 2016, § 5(8), No. 31, Acts of Parliament, 2016 (India).

[6] (2021) ibclaw.in 68 SC

[7] Insolvency Bankruptcy Code, 2016, § 3(12), No. 31, Acts of Parliament, 2016 (India).

[8] Insolvency Bankruptcy Code, 2016, § 7(1), No. 31, Acts of Parliament, 2016 (India).

[9] Insolvency Bankruptcy Code, 2016, § 7, No. 31, Acts of Parliament, 2016 (India).

[10] (2022) ibclaw.in 91 SC

[11] Insolvency Bankruptcy Code, 2016, § 7(5)(a), No. 31, Acts of Parliament, 2016 (India).

[12] Insolvency Bankruptcy Code, 2016, § 6, No. 31, Acts of Parliament, 2016 (India).

[13] Insolvency Bankruptcy Code, 2016, § 7(5)(a), No. 31, Acts of Parliament, 2016 (India).

[14]supra note 11.

[15] Insolvency Bankruptcy Code, 2016, § 7, No. 31, Acts of Parliament, 2016 (India).

[16] [2017] ibclaw.in 02 SC

[17] supra note 9.

[18] supra note 9.

[19] supra note 11.

[20] supra note 7.

[21] supra note11.

[22] Insolvency Bankruptcy Code, 2016, § 9(5)(a), No. 31, Acts of Parliament, 2016 (India).

[23] Id.

[24] supra note 11.

[25] supra note 9.

[26] supra note 9.

[27] supra note 9.

[28] supra note 4.

 

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