Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022) 8 SCC 352
By Annie Mittal and Aarushi Singh, Advocates
Relevant Facts:
Vidarbha Industries Power Ltd. (“Vidarbha”) is a generating company as defined under Section 2(28) of the Electricity Act, 2003. It has established a 600 MW coal-fired thermal power plant, comprising two units of 300 MW capacity each, located within the Butibori Industrial Area in Nagpur, Maharashtra.
On 15 January 2020, Axis Bank, acting as the financial creditor of Vidarbha, filed an application under Section 7(2) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the National Company Law Tribunal (NCLT) in Mumbai, seeking the initiation of the Corporate Insolvency Resolution Process (CIRP) against Vidarbha. Axis Bank claimed that Vidarbha had defaulted on the repayment of a significant financial debt.
In response to Axis Bank’s application under Section 7 of IBC, Vidarbha filed an application requesting a stay of CIRP proceedings. Vidarbha contended that the National Company Law Tribunal (NCLT) erred in admitting the application for the initiation of CIRP filed by Axis Bank. Vidarbha asserted that it had a substantial recoverable amount stemming from an award issued by the Appellate Tribunal for Electricity (APTEL), which they claimed could offset the debt owed to Axis Bank.
In assessing the merits of this issue, the NCLT considered the nature of the claim presented by Axis Bank, which unequivocally highlighted a default in payment by Vidarbha.
Despite these assertions, on 29 January 2021, the NCLT refused to stay the CIRP proceedings. The NCLT held that while Vidarbha claimed the existence of recoverable amounts, the mere assertion of potential financial recovery does not negate the reality of existing debts or provide sufficient grounds to prevent the initiation of CIRP. NCLT emphasized the importance of adhering to the statutory framework outlined in the IBC. The NCLT determined that the existence of a clear default warranted the admission of the application to ensure a structured resolution of Vidarbha’s financial obligations. The NCLT referred to established legal precedents affirming that the initiation of CIRP serves as a mechanism to protect creditors’ interests and facilitate debt recovery processes.
Consequently, the NCLT held that it did not err in admitting the application, as the substantive evidence presented by Axis Bank demonstrated a valid claim of default. The mere potential for recoveries from the APTEL award could not substitute for the Appellant’s obligation to address the claimed debts. This was upheld by the National Company Law Appellate Tribunal (NCLAT), reinforcing the validity of the admission of the CIRP application. Subsequently, in 2022, Vidarbha filed a Special Leave Petition (SLP) before the Hon’ble Supreme Court of India, seeking relief from the orders of the Hon’ble NCLT and Hon’ble NCLAT. The Hon’ble Supreme Court set aside the orders of both NCLT and NCLAT, establishing the discretionary powers of courts to disallow an application for the initiation of the CIRP.
Issues:
- Did the NCLT err in admitting the application despite the Appellant’s claim of a substantial recoverable amount?
- Can the adjudicating authority exercise discretion under Section 7(5)(a) of the IBC when a corporate debtor disputes the existence of the debt?
Judgment:
The Supreme Court observed that the legislature has deliberately distinguished between the date of filing an application under Section 7 and the date of its admission for the purposes of computing timelines. It reiterated that CIRP officially commences on the date the application is admitted and not merely upon filing. The Court emphasized that there is no fixed time limit within which an application under Section 7 must be admitted, allowing for necessary discretion by the adjudicating authority.
The Court held that Section 7(5)(a) of the IBC grants discretionary power to the adjudicating authority (NCLT) but clarified that this discretion must not be exercised arbitrarily or capriciously. It held that if the facts and circumstances warrant a specific exercise of discretion, then the authority must act accordingly. The Court emphasised that the NCLT must consider the existence of financial debt and default on the part of the corporate debtor when deciding whether to admit the application.
NCLT must evaluate the grounds presented by the corporate debtor against admission on their merits. For instance, if admission is contested on the basis of an award or decree in favor of the corporate debtor, the authority must assess whether the awarded amount exceeds the claimed debt. In such cases, the NCLT has the discretion to keep the admission of the financial creditor’s application in abeyance unless compelling reasons suggest otherwise.
In the present case, the Court found that the NCLT had dismissed Vidarbha’s assertion that an amount of Rs. 1730 crores was realizable based on an order from the APTEL. The NCLT’s dismissal was deemed cursory and failed to adequately consider Vidarbha’s arguments regarding disputes between them and the electricity recipient or the Electricity Regulatory Commission.
The Supreme Court held that both the NCLT and NCLAT erred in concluding that the mere existence of a debt and a default in payment necessitated the admission of the petition under Section 7 of the IBC. The Court reiterated that the adjudicating authority must retain the authority to exercise discretion in determining the admissibility of the application.
Comments:
This Judgment marks a significant development in the interpretation of IBC, particularly concerning the exercise of discretion by the NCLT under Section 7. The Supreme Court underlines that the NCLT must not exercise its discretionary powers arbitrarily, rather, it should evaluate the merits of the corporate debtor’s arguments against admission comprehensively.
It highlights the importance of thoroughly assessing any awards or decrees in favor of the corporate debtor, especially when they exceed the debt in question. This approach reinforces the principle of due process and the integrity of the insolvency resolution process.
Overall, this Judgment enhances procedural fairness in insolvency proceedings, ensuring that the NCLT is diligent in its responsibilities. By clarifying the standards for admitting applications under Section 7, the Court sets a strong precedent for future adjudications, promoting a more efficient and equitable resolution process within the IBC framework.
