Whether NCLT has the Power to Look Into Merits and Stall Insolvency Proceedings When an Application is Filed by a Financial Creditor u/s 7 of the IBC


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, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter.

7. Initiation of corporate insolvency resolution process by financial creditor.—(1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has 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 initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish—

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;

(b) the name of the resolution professional proposed to act as an interim resolution professional; and

(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3):

Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such 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) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the 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 creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial creditor, within seven days of admission or rejection of such application, 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 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.”

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 Respondent Financial 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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