Vidarbha Power Industries Limited Vs Axis Bank- A New ground of revival for companies blocked with Decretal Amount – By Hariharran

Vidarbha Power Industries Limited Vs Axis Bank- A New ground of revival for companies blocked with Decretal Amount

-Authored by:
Hariharran,
B.Com.LL.B (Hons), Pursuing Graduate Insolvency Programme (GIP) at Indian Institute of Corporate Affairs 2022-2024 

Facts of the case:

The Appellant VPIL (Vidarbha Power Industries Private limited) is a power generating company which has a 600 MW thermal power plant in Maharashtra. Through bidding process, the MIDC (Maharashtra Industrial development corporation) awarded the appellant a contract for Group power project and later converted to independent power project. On 20/02/2013 the MERC (Maharashtra Electricity Regulatory commission) approved a Power procurement agreement between the RIL (Reliance Industries Limited) and the VPIL subject to Non objection certificate from MIDC for the Power project agreement.

On 01/04/2014 the appellant started supply of power to RIL as per PPA (Power purchase agreement) sanctioned under MERC. And MERC approved the final tariff of the power plant of the appellant for 2014-2015 &2015-2016.The dispute arises here that on Jan2016 the appellant filed a application for increasing the approved tariff rates sanctioned by MERC as there was increase in fuel costs consequence to cost of procuring coal for running the power plant. It was ironic as the appellant has no other option except to update the tariff rates if not the sale of power would be at a loss considering the constant raise of the fuel prices.

 But as on 20/06/2016 the MERC has disposed of the case disallowing the substantial portion of actual fuel costs claimed by the appellant for 2014-2015 &2015-2016 also capped up the tariff for 2016-2017 to 2019-2020. Being aggrieved by the order appellant filed an appeal against the MERC order in APTEL (Appellate tribunal for electricity) challenging the disallowance of actual fuel costs. The APTEL ruled in favour of appellant and allowed the actual cost of appellant which was a sum of Rs.1730 crores.

Once for execution of APTEL order filed before MERC they filed a case against the order of APTEL challenging their allowance of fuel cost before supreme court which is pending.

So, the Company was not able to pay the debts of financial creditor, i.e. Axis Bank.

National Company Law Tribunal, Mumbai Bench:

A section -7 application was filed by Axis bank against the Vidarbha power industries private limited (VPIL) in Mumbai NCLT for initiation of corporate insolvency resolution process (CIRP) against VPIL. The Respondent filed a miscellaneous application for stay of proceedings as there was a pending arbitral award case pending in supreme court. But the Adjudicating authority on 29/01/2021 dismissed the M.A. and initiated the CIRP against VPIL.

“22. This Authority is required only to see whether there has been a debt and the Corporate Debtor defaulted in making the repayments. These two aspects when satisfied would trigger Corporate Insolvency. Therefore, the decision of the Authorities as well as of the Hon ‘ble Apex Court would not affect the proceedings before this Authority one way or the other. Therefore, we are of the considered opinion that this Authority need not stay its hands from considering the Company Petition as prayed for. As it is, there has been a considerable delay in disposal of the Company Petition. It will accordingly be appropriate that the Company Petition is disposed of as expeditiously as possible. Hence ordered.”

National Company Law Appellate Tribunal, Delhi Bench

Aggrieved by the order the appellant went for an appeal against the aforesaid order before NCLAT Delhi and the court has dismissed the appeal as on 02/03/2021, reported (2021) ibclaw.in 227 NCLAT, and stated as follows.

“9. On consideration of the issues raised in this Appeal we are of the considered opinion that the Appellant has no justification in stalling the process and seeking stay of CIRP, which in essence has manifested in blocking the passing of order of admission of Application of Respondent under Section 7 of I&B Code. There is no merit in Appeal as we find no legal infirmity in the impugned order. The Adjudicating Authority is conscious of the mandate of law and the course it has to take as per I&B provisions, which practically stands stalled. This is impermissible. The flow of legal process cannot be permitted to be thwarted on considerations which are anterior to the mandate of Section 7(4) & (5) of I&B Code. The Appeal being devoid of merit is dismissed. However, we do not propose to impose any costs.”

Supreme Court Held that:

The Adjudicating Authority should also consider the grounds the CD stated for the occurrence of default with the financial creditor for example: Existence of award or Decretal amount which exceed the debt amount and NCLAT also fell in error holding the debt existed and CD award was pending.

The supreme court, reported at (2022) ibclaw.in 91 SC, held that the appeal is ALLOWED & set aside the NCLT and NCLAT order of dismissing the petition and ordered NCLT to reconsider the application of the appellant for stay of proceedings on merits and situation of CD.

A New ground of revival for companies blocked with Decretal Amount

This Decision by Supreme court in Vidarbha industries has become a landmark case for corporate debtor that can have a new enticing defence against the initiation of corporate insolvency resolution process. Specifically on situations when the decree in favour of CD is higher than the default amount. So, this has become a new criterion for the Adjudicating authority to cross verify the reason of stay on proceedings by the corporate debtor. If it’s found to be valid and decretal amount is higher than default then Adjudicating authority has an obligation to consider it.

The Supreme court has Mentioned the powers and functions of NCLT and their limitations. 

“Section 7(5)(a) of the IBC may confer discretionary power on adjudicating authority and such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner. Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC 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 Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example, when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so.”

Thus, Vidarbha Power Industries Limited Vs Axis Bank is a landmark case law and the Hon’ble supreme court has given a new ground of defence for corporate debtor for revival of companies which actually are not at fault and critically evaluating the situation Supreme court has imposed more duty upon Adjudicating authority to scrutinize and verify the contentions of the parties and their stance for default of debt.


 

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