Vidarbha Industries Power Limited Vs Axis Bank Limited (Supreme Court)
Date -12th July, 2022
The Supreme Court of India in the cited case was considering SLP of the defaulting company which had defaulted on loan from Axis Bank Limited being a financial creditor. The appellant pleaded that the default was on account of dispute relating to the price of the electricity which was to be settled by Maharashtra Electricity Regulatory Commission (MERC) and upon which the appellant was expecting to receive substantial amount which would enable the appellant to pay off the debt.
Sections 6 and 7 of the IBC provide:
“6. Persons who may initiate corporate insolvency resolution process.—
Where any corporate debtor commits a default, a financial creditor, anoperational creditor or the corporate debtor itself may initiate corporateinsolvency resolution process in respect of such corporate debtor in themanner as provided under this Chapter.
7. Initiation of corporate insolvency resolution process by financialcreditor.—(1) A financial creditor either by itself or jointly with otherfinancial creditors, or any other person on behalf of the financialcreditor, as may be notified by the Central Government, may file anapplication for initiating corporate insolvency resolution process againsta corporate debtor before the Adjudicating Authority when a defaulthas occurred:
Provided that for the financial creditors, referred to in clauses (a) and
(b) of sub-section (6-A) of Section 21, an application for initiatingcorporate insolvency resolution process against the corporate debtorshall be filed jointly by not less than one hundred of such creditors inthe same class or not less than ten per cent. of the total number ofsuch creditors in the same class, whichever is less: Provided further that for financial creditors who are allottees under areal estate project, an application for initiating corporate insolvencyresolution process against the corporate debtor shall be filed jointly bynot less than one hundred of such allottees under the same real estateproject or not less than ten per cent. of the total number of suchallottees under the same real estate project, whichever is less:
Provided also that where an application for initiating the corporateinsolvency resolution process against a corporate debtor has been filedby a financial creditor referred to in the first and second provisos andhas not been admitted by the Adjudicating Authority before thecommencement of the Insolvency and Bankruptcy Code (Amendment)Act, 2020, such application shall be modified to comply with therequirements of the first or second proviso within thirty days of thecommencement of the said Act, failing which the application shall bedeemed to be withdrawn before its admission.
Explanation.—For the purposes of this sub-section, a default includes adefault in respect of a financial debt owed not only to the applicantfinancial creditor but to any other financial creditor of the corporatedebtor.
(2) The financial creditor shall make an application under sub-section (1)in such form and manner and accompanied with such fee as may beprescribed.
(3) The financial creditor shall, along with the application furnish—
(a) record of the default recorded with the information utility or suchother record or evidence of default as may be specified;
(b) the name of the resolution professional proposed to act as an interimresolution professional; and
(c) any other information as may be specified by the Board.
(4) The Adjudicating Authority shall, within fourteen days of the receiptof the application under sub-section (2), ascertain the existence of adefault from the records of an information utility or on the basis of otherevidence furnished by the financial creditor under sub-section (3):
Provided that if the Adjudicating Authority has not ascertained theexistence of default and passed an order under sub-section (5) withinsuch time, it shall record its reasons in writing for the same.
(5) Where the Adjudicating Authority is satisfied that—
(a) a default has occurred and the application under sub-section (2) iscomplete, and there is no disciplinary proceedings pending against theproposed resolution professional, it may, by order, admit suchapplication; or
(b) default has not occurred or the application under sub-section (2) isincomplete or any disciplinary proceeding is pending against theproposed resolution professional, it may, by order, reject suchapplication:
Provided that the Adjudicating Authority shall, before rejecting theapplication under clause (b) of sub-section (5), give a notice to theapplicant to rectify the defect in his application within seven days ofreceipt of such notice from the Adjudicating Authority.
(6) The corporate insolvency resolution process shall commence fromthe date of admission of the application under sub-section (5).
(7) The Adjudicating Authority shall communicate—
(a) the order under clause (a) of sub-section (5) to the financial creditorand the corporate debtor;
(b) the order under clause (b) of sub-section (5) to the financialcreditor, within seven days of admission or rejection of suchapplication, as the case may be.”
By the judgment and order impugned, the NCLAT held:
“On consideration of the issues raised in this Appeal we are of theconsidered opinion that the Appellant has no justification in stalling theprocess and seeking stay of CIRP, which in essence has manifested inblocking the passing of order of admission of Application of Respondentunder Section 7 of I&B Code. There is no merit in Appeal as we find nolegal infirmity in the impugned order. The Adjudicating Authority isconscious of the mandate of law and the course it has to take as per I&Bprovisions, which practically stands stalled. This is impermissible. Theflow of legal process cannot be permitted to be thwarted onconsiderations 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.”
Under Section 7(1) of the IBC, a Financial Creditor may, either by itself, or jointly with other financial creditors, file an application for initiating CIRP against a Corporate Debtor, before the Adjudicating Authority (NCLT) when a default has occurred. Default includes a default in respect of a financial debt owed not only by the applicant Financial Creditor but to any other Financial Creditor of the Corporate Debtor.
Under Section 7(2) of the IBC, a financial creditor is required to make an application in the prescribed form and manner, along with the prescribed fee. Along with an application, the financial creditor is required to furnish record of the defaults recorded with the information utility or such other record or evidence of default as may be specified, the name of the Resolution Professional proposed to act as an Interim Resolution Professional and any other information as may be specified by the Board.
From a perusal of the application filed by the RespondentFinancial Creditor under Section 7(2) of the IBC in the statutory form;
However, the NCLT as well as NCLAT decided that u/s 7(5)(a) of the IBC, once an application is filed by the Financial creditor then extraneous consideration cannot be taken into account to stall the insolvency proceedings.
However, the Supreme Court interpreted the provisions of Section 7(5)(a) by comparing the same with the provisions of Section 9(5)(a) which dealt with the operational creditor where the language used was “shall” as against “may” in Section 7(5)(a) and thus it was held that though the existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP, NCLT was require to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC’s appeal, pending in this Court, and the over all financial health and viability of the Corporate Debtor under its existing management.
Thus the appeal was allowed by directing NCLT to consider stay of the proceedings on merits in accordance with the law.
This judgement is welcome judgement in this complex corporate world where genuine default in payment due to circumstances beyond control cannot lead to the promoters getting ribbed off the control of the companies.
“Insolvency and Bankruptcy Code” makes it amply clear that the statute deals with and/or tackles insolvency and bankruptcy. It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP. Section 7(5)(a) of the IBC, therefore, confers discretionary power on the Adjudicating Authority (NCLT) to admit an application of a Financial Creditor under Section 7 of the IBC for initiation of CIRP.
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