Reflecting on a Year: Revisiting the Aftermath and Significance of the Vidarbha Industries Power Ltd. v. Axis Bank Ltd. Case
Legal Manager at Shubhashray Housing India Pvt. Ltd.
As we commemorate a year since the landmark ruling in the Vidarbha Industries Power Limited v. Axis Bank Limited (2022) ibclaw.in 91 SC case (“Vidarbha Industries/ the Ruling”), we find ourselves at a juncture of profound transformation within India’s insolvency landscape. This article embarks on a comprehensive exploration of the post-ruling landscape, unravelling the implications and ramifications that have reshaped the contours of insolvency law in the country.
Hon’ble Supreme Court in the Ruling significantly broadened the scope of power wielded by the National Company Law Tribunal (“NCLT”) under section 7(5)(a) of the Insolvency and Bankruptcy Code (“IBC”). The ruling underscored the NCLT’s discretionary authority to either admit or reject petitions for initiating the Corporate Insolvency Resolution Process (“CIRP”), even in the presence of an undisputed default.
An application for initiation of CIRP was filed by Axis Bank Limited (“Creditor”) against Vidarbha Industries Limited (“Corporate Debtor/CD”) who owed the former approximately Rs. 533 Crores. The CD opposed the admission of such an application on the ground that an award from the Appellate Tribunal for Electricity (“APTEL”), worth Rs. 1730 Crore, in his favour, was pending in appeal at the Supreme Court. It was contended that owing to a pending appeal against the award, the CD was unable to realize Rs. 1730 Crore which was due and payable to it. Thereby, unable to repay the debt. It was further the contention of the CD that NCLT is not bound to accept every application where there is an admitted default. The word “may” under section 7(5)(a) indicates the discretionary power of the NCLT to accept or reject the application.
NCLT-Mumbai and National Company Law Appellate Tribunal (“NCLAT”) rejected the contentions of the CD and held that NCLT under section 7 is required to ascertain only (a) the existence of a debt and, (b) default in repayment of such debt. If these two conditions are satisfied, CIRP can be triggered. It further noted that no other extraneous matter should come in the way of expeditious disposal of the application for initiation of CIRP.
Contrastingly, Supreme Court rejected the findings holding that NCLT was required to apply its mind to relevant factors including the feasibility of initiation of CIRP. It was noted that Legislature in its wisdom has used the word ‘may’ in section 7(5)(a), making it apparent that power under the said section is discretionary in nature. The NCLT has to consider the grounds made out by the Corporate Debtor against admission, on its own merits.
Expanding NCLT’s Discretion: Unfolding Ambiguities
The plain reading of section 7(5)(a) of IBC provides for NCLTs to enquire into only three aspects for the initiation of CIRP:
(a) Existence of a debt
(b) Default by CD in its repayment
(c) No pending disciplinary proceedings against the proposed Resolution Professional.
The Ruling expanded the scope of inquiry by NCLT under section 7. Notably, this extension ushers in the scrutiny of factors such as pending appeals and unresolved debt realization, intensifying the complexity of NCLT’s decision-making process. In Bank of Maharashtra v. Newtech Promoters and Developers Private Limited, the NCLT, New Delhi, dismissed the application from Bank of Maharashtra (Financial Creditor). Despite successfully establishing the elements of ‘debt’ and ‘default’ under Section 7 of the Code, the NCLT exercised its discretion to safeguard the interests of third parties – specifically, homebuyers involved in an ongoing housing project by the corporate debtor.
Contrasting this scenario is the perspective upheld by a different bench of the NCLT, New Delhi, in Induslnd Bank Limited v. Hacienda Projects Private Limited. In this instance, the NCLT rejected arguments by the corporate debtor, a real estate developer, that its ongoing project was near completion and that initiating CIRP would prove futile. The NCLT’s rationale diverged from the debtor’s claims, asserting that financial viability cannot be solely inferred from project completion. It further emphasized that a company’s financial health could not be sound if default had occurred. The NCLT’s stance underscored the significance of default as a pivotal factor, rejecting the notion that a project’s completion alone was indicative of a company’s financial stability.
This delineation of parameters showcased how the interpretation of ‘default’ and ‘financial viability’ can diverge in distinct legal scenarios, influencing the initiation of CIRP proceedings.
Further, in the Central Bank of India v. Simplex Infrastructures Ltd. case, the Kolkata NCLT rejected a Section 7 application, despite a confirmed debt of around Rs 105 crores. The Corporate Debtor claimed to have secured Rs 554.17 crores in arbitral awards, but only Rs 3.38 crores had been upheld, with the rest under challenge. Nevertheless, citing Vidarbha Industries, the NCLT denied the application.
Similarly, in HDFC Bank Ltd. v. John Energy Ltd., the Ahmedabad NCLT rejected a Section 7 application, despite an established Rs 86 crore debt. NCLT held that respondent was a prominent player in the oil and gas service sector with substantial contracts, thereby financially stable for loan restructuring. Moreover, its liquidation value was nearly half its fair value, and CIRP initiation could disrupt existing contracts and valuation. NCLT Ahmedabad also relied on Vidarbha Industries while rejecting the application.
While including financial soundness and ability to restructure the debts as a reason for rejection of an application under section 7 was a liberal reading of the provision, NCLT Indore pushed the envelope even further. NCLT Indore kept an application for initiation of CIRP at abeyance for 6 months citing that the Corporate Debtor was trying its best to repay the debt.
These recent rulings illustrated a growing trend of denying CIRP initiation applications, often citing Vidarbha Industries. While section 7 of the IBC initially emphasized debt, default, and the absence of pending disciplinary proceedings as key factors for CIRP initiation, recent rulings introduced a broader array of considerations.
In response to the nuanced implications of the Vidarbha Industries case, the Ministry of Corporate Affairs, in January 2023, invited comments on proposed amendments to the IBC. These amendments aim to confine the NCLT’s interference under section 7(5)(a) to the core aspects of debt existence, default, and the absence of pending disciplinary proceedings against the proposed Resolution Professional.
The proposal reiterates that it was never the intention of the of the legislators to allow NCLTs to delve into reasons beyond the already defined prerequisites.
Suresh Kumar Reddy v. Canara Bank & Ors.: Vidarbha Industry Ruling Not a Rule but Exception
In a significant ruling on May 11, 2023, a Division Bench of the Supreme Court, in M. Suresh Kumar Reddy v. Canara Bank & Ors. (2023) ibclaw.in 67 SC, emphasized that once the NCLT is convinced of the occurrence of a default, its discretion to reject admission of applications under Section 7 of the IBC, becomes extremely limited.
The said served as a critical course-correction in the interpretation of the IBC following the Vidarbha Industries Ruling. While the Vidarbha Industries Case introduced a degree of discretion to the NCLT in admitting applications under Section 7 of the IBC, the Suresh Kumar Reddy ruling clarified that such discretion does not exist when it comes to cases of established defaults. The Supreme Court’s decision emphasized that the NCLT’s authority to admit applications under Section 7 is mandatory once a default is proven, aligning with earlier judgments and affirming a more rigid interpretation of the IBC’s provisions.
The Apex court referred to their judgment in Innoventive Industries Limited v. ICICI Bank and Another  ibclaw.in 02 SC, wherein it was enunciated that if NCLT is satisfied there is a debt and default, it is bound to admit a petition under Section 7 of the IBC.
Supreme Court in Suresh Kumar observed that the decision in Vidarbha Industries was given under a very specific set of facts. Therefore, the Supreme Court held that the decision in Vidarbha Industries cannot be read and understood as taking a view that is contrary to the view taken in Innoventive Industries.
This clarification was much needed to restore a consistent and uniform approach, ensuring that the initiation of the CIRP is a more objective and timely process. By overturning certain aspects of the Vidarbha Industries Case, the ruling provided a clearer and more robust framework, enhancing the efficiency and effectiveness of the insolvency regime in India.
In the aftermath of the Vidarbha Industries Power Limited v. Axis Bank Limited (supra) case, a year of introspection reveals profound shifts within India’s insolvency realm. The far-reaching influence of the NCLT’s discretionary powers and the subsequent proposed amendments unveiled the evolving contours of the IBC.
The mandate of the Code, stipulating a 14-day window for the NCLT to ascertain defaults and adjudicate applications for CIRP, seeks to instill efficiency and decisiveness in the resolution process. The potential consequence of the Vidarbha Industries judgment, allowing a Corporate Debtor to utilize pending appeals to challenge undisputed defaults, could have sowed the seeds of uncertainty, disrupting the very essence of the Code’s objectives.
The inherent delays in appeal proceedings in India, which can span over a decade, would have further compounded the issue, leaving creditors in a state of limbo, jeopardizing the fundamental intent of the Code – timely resolution and financial recovery. Moreover, the substantial quantum of debt involved in cases like that of Vidarbha Industries, where creditors are owed hundreds of crores, underscores the criticality of promptly addressing defaults and initiating resolution mechanisms. Subjecting rightful creditor claims to prolonged uncertainties would have cast a pall of financial instability and discouraged investment in the insolvency process.
The Suresh Kumar Reddy v. Canara Bank & Ors. (supra) ruling, emerging as a beacon of clarity, has redirected the course. It reinforces the urgency of prompt CIRP initiation upon establishing defaults, buttressing the Code’s timeline-driven approach. By doing so, the ruling curtails the potential harms that the Vidarbha Industries judgment could have unleashed. This precise alignment with the core intent of the Code not only instills confidence in the insolvency regime but also fosters a conducive environment for economic growth and financial stability. The ruling’s nuanced interpretation and application harmonize with the broader objectives of insolvency laws, upholding creditor interests and bolstering the Indian banking sector’s resilience.
 C.P. (IB) No. 2465/NCLT/ND/2019 decided on 14.10.2022.
 2023 SCC OnLine NCLT 246.
 SBI v. Krishidhan Seeds (P) Ltd., C.P. (IB) No. 500/NCLT/MP/2018.
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.