[Opinion] IBC – Unsettling Settled Position of Law or March of Law?

[2022] 140 taxmann.com 428 (Article)

Introduction

The Supreme Court in its recent decision in the case of Vidarbha Industries Power Ltd. v. Axis Bank Ltd. [2022] 140 taxmann.com 252 (SC) has in effect held that it is not mandatory for the Adjudicating Authority (‘NCLT’) to initiate CIRP of a Corporate Debtor even on satisfaction of existence of a Financial Debt and default of such debt by the Corporate Debtor. The NCLT can exercise its discretion, in deciding whether or not to initiate CIRP, after taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor.

Facts

Vidarbha Industries Power Limited (the ‘Corporate Debtor’) is a power generating company having set up coal fired thermal power plants with aggregate capacity of 600 MW.

In terms of the Electricity Act, 2003 and the rules and regulations made there under a power generating company is regulated by the State Electricity Regulatory Commission. The tariff chargeable by the power generating companies is determined by the State Electricity Regulatory Commission.

The Corporate Debtor filed an application before Maharashtra Electricity Regulatory Commission (‘MERC’) for determination of the tariff chargeable. MERC disposed the case by disallowing substantial portion of the fuel costs claimed by the Corporate Debtor and capped the tariff.

Being aggrieved by the order of MERC the Corporate Debtor filed an appeal before the Appellate Tribunal for Electricity (‘APTEL’). The APTEL allowed the appeal of the Corporate Debtor. The Corporate Debtor claimed that a sum of Rs. 1,730 Crores is due to it in term of the order of APTEL. However, the MERC filed an appeal before the Supreme Court challenging the order of APTEL which is pending.

In the meanwhile, Axis Bank Ltd, as a Financial Creditor of the Corporate Debtor, filed an application under Section 7 of IBC for initiation of CIRP against the Corporate Debtor for a default of Rs. 553 Crores.

The Corporate Debtor filed an application before the NCLT seeking to stay the proceedings under Section 7 of IBC as long as appeal against the order of APTEL is pending before the Supreme Court. The Corporate Debtor contended that it is temporarily short of funds and will be able to clear all the outstanding liabilities if the order of APTEL is implemented.

NCLT and NCLAT

The NCLT held that an application filed under Section 7 of the IBC must necessarily be admitted if a debt existed and the Corporate Debtor was in default of payment of the debt. When these two aspects are satisfied it would be mandatory for the Adjudicating Authority. i.e., the NCLT, to initiate CIRP of the Corporate Debtor. The dispute between the Corporate Debtor and MERC were viewed by the NCLT to be matters extraneous to the insolvency petition. On appeal the NCLAT upheld the decision of the NCLT.

Supreme Court

The question framed by the Supreme Court was, whether Section 7(5)(a) is a mandatory or a discretionary provision. In other words, whether the expression ‘may’ is to be construed as ‘shall’, having regard to the facts and circumstances of the case. Answering this question the Supreme Court held as under:

“59. There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters.
(…)
61. 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, pending in this Court, order of APTEL referred to above and the overall financial health and viability of the Corporate Debtor under its existing management.”

The Supreme Court adopted the literal interpretation of the expression ‘may’ instead of resorting to a purposive interpretation of construing ‘may’ as ‘shall’. The Court reiterated the well settled principle that purposive interpretation can only be resorted to when the plain words of a statute are ambiguous or if construed literally, the provision would nullify the object of the statute or otherwise lead to an absurd result. The Court observed that there is no cogent reason to depart from the rule of literal construction.

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