Judgments

VIDARBHA INDUSTRIES POWER LTD. VS. AXIS BANK LTD.  : CASE SUMMARY

The Supreme Court in  Vidarbha Industries Power Ltd. Vs Axis Bank (2022)8SCC352 held that admission of Application under Section 7 of the Insolvency and Bankruptcy Code, 2016  on behalf of the Financial Creditor is discretionary even if Corporate Debtor has defaulted in payment of debt.

FACTS OF THE CASE

The Appellant is an electricity generating company.  (MERC) approved a power procurement agreement between Appellant and Reliance Industries Ltd (RIL).

On 19th July, 2013, the Maharastra Electricity Regulatory Commission (MERC) granted approval to Reliance Industries Limited ( RIL ) to procure power from Appellant’s Unit No. 1. Accordingly a consolidated Power Purchase Agreement was executed on 14th August between the Appellant and RIL. On 1st April the Appellant started supply of power to RIL.

In January, 2016 the Appellant filed application before Maharastra Electricity Regulatory Commission (MERC)  for determination of tariff in view of increase in fuel costs, consequential to the rise in the cost of procuring coal for the purposes of running the power plant.  Maharastra Electricity Regulatory Commission (MERC)  disallowed a substantial portion of actual fuel. The Appellant filed appeal before Appellate Tribunal for Electricity (APTEL), which allowed the appeal. The Appellant claims that Rs. 1730 Crore is due to the Appellant in terms of said order of APTEL. Maharastra Electricity Regulatory Commission (MERC) filed appeal before the Supreme Court which is pending for adjudication.

The Axis Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 for initiation of CIRP against the Appellant. The Appellant filed an application before the NCLT for stay the insolvency proceedings in light of pendency of matter before the Supreme Court. NCLT rejected the Application. An appeal was filed against the same before NCLAT which was also rejected.

FINDINGS OF THE COURT

The Supreme Court noted that Financial Creditor has claimed an amount of about Rs. 553 Crore out which the Principal Amount is around Rs. 499 Crore.  When an application is filed under Section 7 (2) of  the Code, the NCLT is required to ascertain the existence of default from the record of the Informational Utility or any other evidence furnished by Financial Creditor under Section 7 (3) IBC within 14 days of receipt. When the NCLT is satisfied that default has occurred, application is complete and no disciplinary proceedings are pending against the proposed Resolution Professional, the NCLT “may” admit the application. If no default has occurred or application is not complete or disciplinary proceedings are pending against the Resolution Professional, the NCLT may reject the Application.

The Supreme Court observed that both NCLAT and NCLAT proceeded on premises that an application must be necessarily entertained under Section 7 (5) (a) of the Code if a debt existed and Corporate Debtor was in default of payment of debt.  The NCLT and NCLAT interpreted Section 7 (5) (a) of the Code to be mandatory.

The Supreme Court observed that no doubt that a Corporate Debtor, which is in red, should be resolved expeditiously. However overall financial health and viability of the Corporate Debtor are not extraneous factors.  The claim of the Appellant that an amount of Rs. 1,730/- is realizable in terms of award of APTEL  cannot be disregarded.

The Supreme Court observed that the NCLT was required to apply its mind to relevant factors including the feasibility of initiation of CIRP, impact of MERC Appeal, order of APTEL, overall financial health and viability of the Corporate Debtor.

The Legislature has used the word “may” in Section 7 (5) (a) of the Code. Ordinarily “may” is directory. In contrast “shall” postulates mandatory requirement. The Supreme Court relied on  Lalita Kumari Vs State of Uttar Pradesh (2014) 2 SCC 1 Hiralal Ratanlal Vs State of Uttar Pradesh (1973) 1 SCC 216, B. Premanand Vs Mohan Koikal , (2011) 4 SCC 266  and observed that   It is well settled the first and foremost rule of interpretation is literal interpretation. If Section 7 (5) (a) of IBC is construed literally, the provision confers a discretion on the Adjudicating Authority.

The Supreme Court noted  that Legislature in its wisdom has used word “may” in Section 7 (5) (a) of IBC while word “shall” has been used in Section 9 (5) which provides procedure for initiation of insolvency proceedings on the instance of Operational Creditor. It is evident that the Legislature intended Section 9 (5) (a) IBC to be mandatory while Section 7 (5) (a) to be discretionary.

The Supreme Court observed that there are innate differences between Financial Creditors and Operational Creditors. Financial Strength of Financial Creditor cannot be compared with that of Operational Creditor who supply goods and services. Impact of non-payment of dues can be far more serious on the Operational Creditor in comparison to Financial Creditor.

The Supreme Court observed that the objective of the Code can not be penalize solvent companies temporarily defaulting in payment of debts. NCLT failed to appreciate that time bound initiation and completion of CIRP could only arise if companies were bankrupt or insolvent and not otherwise.

The Supreme Court set aside the order passed by NCLT and NCLAT and directed the NCLT to re-consider the application for stay of further proceedings.

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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Mukesh Kumar Suman

Mukesh Kumar Suman

Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

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