[Opinion] Axis Bank Case: Shadows on Insolvency & Bankruptcy Code, 2016

[2022] 140 taxmann.com 536 (Article)

Recently, in the case of Vidarbha Industries Power Ltd. v. Axis Bank Ltd. [2022] 140 taxmann.com 252, the Hon’ble Supreme Court had, by its order dated 12.7.2022, held that it was not mandatory for the Adjudicating Authority to admit the application filed under Section 7of the Code even though the Corporate Debtor had defaulted. The total debt due to the Financial Creditor Bank was about Rs.553 crores and to the consortium was about Rs.2,727 crores.

In this case, the Appellant Corporate Debtor was electricity generating company. They argued that they had applied for stay of the proceedings before NCLT, Mumbai in extraordinary circumstances, where the Appellant had not been able to pay the dues of the Respondent, only because an appeal filed by Maharashtra Electricity Regulatory Commission (MERC), against an order passed by Appellate Tribunal for Electricity (APTEL) in favour of the Appellant, was pending before the Supreme Court. Since the aforesaid appeal is pending and hence that considering the special nature of the business of the Appellant of production of electricity, tariff whereof is regulated by MERC and APTEL, the application under Section 7 of the IBC should not have been admitted against the Appellant. The Appellant argued that they were temporarily in short of funds and hence was unable to realize a sum of Rs.1,730 Crores, which is much more than what was due and payable to the Corporate Debtor.

The Corporate Debtor had, while seeking stay had brought to the notice of the Adjudicating Authority about the disputes between the Corporate Debtor and the recipient of the energy as well as the change in supply chain management of the recipient of the energy.

However, the Adjudicating Authority indicated that the inability of the Corporate Debtor in servicing the debts or the reason for committing a default was of no consequence as the dispute of the Corporate Debtor with the Regulator or the recipient would be extraneous to the matters involved in the Company Petition and rejected the contention of the Corporate Debtor. The NCLAT had also supported the decision of the Adjudicating Authority and the matte was carried in appeal before the Supreme Court.

The appellant argued before the Supreme Court that Section 7(5)(a) of the IBC provides that it was not mandatory for the NCLT to admit an application in each and every case, where there is existence and default of a debt. Supreme Court had supported the argument of the appellant and held as under :

“In our view, the Appellate Authority (NCLAT) erred in holding that the Adjudicating Authority (NCLT) was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP. The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was required 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 being pending, order of APTEL referred to above and the overall financial health and viability of the Corporate Debtor under its existing management.

62. As pointed out by Mr. Gupta, Legislature has, in its wisdom, chosen to use the expression “may” in Section 7(5)(a) of the IBC. When an Adjudicating Authority (NCLT) is satisfied that a default has occurred and the application of a Financial Creditor is complete and there are no disciplinary proceedings against proposed resolution professional, it may by order admit the application. Legislative intent is construed in accordance with the language used in the statute.

75. Significantly, Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor.”

Therefore, Supreme Court held that the Adjudicating Authority had been conferred the discretion whether to admit the application of the Financial Creditor or not and if facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application.

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