Case Analysis on Vidarbha Industries Power Ltd. Vs. Axis Bank Ltd.
Adv. Nitika Rawat
LL.M., O.P. Jindal Global University
Introduction
The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘the Code’) was introduced because India did not have an efficient rescue mechanism or an exit route for businesses. This code served the purpose of saving businesses that were viable and also facilitated the exit of those that were not. This Code recognizes the National Company Law Tribunal (NCLT) as the Adjudicating Authority and under section 7, grants it the power to admit to an application for initiation of the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor if it is proven in the analysis that there exists a debt and there had been a default in payment of that debt. This legislative intent of the code has been made clear in the Banking Law Reforms Committee (BLRC) report[1] and has also been taken into cognizance in the landmark cases of Swiss Ribbons[2] and Innoventive Industries[3]. However, the Supreme Court of India contradicted this stance and, in its judgment, dated 12th July 2022, in the case of Vidarbha Industries Power Limited versus Axis Bank Limited[4] held that the legislative intent of section 7(5)(a) of the code is to grant discretionary power to the adjudicating authority. This case comment seeks to establish why this became an important and landmark judgment for insolvency and bankruptcy and analyse how it brought into the picture, the consideration and acknowledgment of the financial health of a corporate debtor before the admission of the application.
Background
Brief facts of the case
- Vidarbha Industries Power Limited (Corporate Debtor), is a power-generating company that entered into a power purchase agreement with Reliance Industries Limited for the supply of power from both its units. Subsequent to the execution of the agreement, the appellant, due to the increase in fuel cost and specifically the rise in the cost for procural of coal for power generation, submitted an application to the Maharashtra Electricity Regulation Commission (MERC) for adjusting the aggregate revenue requirement and determining the tariff based on the Multi-Year Tariff Regulation, 2011.
- MERC disposed of the application while disallowing a very substantial amount of actual fuel cost due to which the appellate filed an application before the Appellate Tribunal for Electricity (APTEL) for the same which allowed the appeal and directed MERC to allow the appellant the actual cost of coal purchase. Appellant claimed a sum of rupees 1,730 crores to be due and further filed an application before MERC for implementation of the order by APTEL.
- The appeal filed was pending and this caused a shortage of funds for the appellant resulting in its ability to clear its liabilities.
- Axis Bank Limited (Respondent/Financial Creditor) was the lead bank in a consortium of six banks filed an application before the NCLT under section 7 of the code because the appellant had defaulted in the payment of the debt of 533 crores.
- The appellant, then filed a miscellaneous application seeking the stay in the proceedings as their civil appeal before MERC was pending.
Order of NCLT and NCLAT
The Adjudicating Authority held that the objective of the code is to decide the petition in a time-bound manner and to make sure that the corporate debtor remains a going concern even when the corporate insolvency resolution process is ongoing[5] while citing the judgment of the apex court in the case of Swiss Ribbons v. Union of India[6] where emphasis was given on the object of the code to complete the CIRP in a time bound manner. Thus the application was rejected.
The NCLAT also resonated with the order of NCLT and held that the appellant cannot delay the CIRP by seeking a stay of admission of application. Hence, the Hon’ble Court found no merit in the appeal.
Issue
The issue raised in this was whether section 7 of the code grants discretionary power to the NCLT to reject or accept an application for CIRP.
Contention of the Appellant
- The appellants sought a stay on the application on the contention that the extraordinary circumstances of their inability to realize the sum of 1,730 crores that was payable to them had made them unable to pay their dues to the creditors.
- They also stated that the usage of the word ‘may’ and not ‘shall’ makes it clear that the legislative intent of section 7(5)(a) of the code is to grant discretionary power to the NLCT for the submission of application for CIRP.
- IBC’s object is to revive the company and not spell its death knell.
Contention of the Respondent
- The Respondent contended that once it has been confirmed under section 7(2) of the code that there exists a debt and a default has been committed by the corporate debtor then the Adjudicating Authority was right in its decision to decline the stay of the proceedings and supported this contention by citing para 64 of the Swiss Ribbons judgment which emphasized the determination of default for initiating the CIRP.
- They also relied on the judgment of the apex court in the case of Innoventive Industries where it was stated that resolution of insolvency must be in a time-bound and expeditious manner and thus under section 7(5)(a) it was mandatory to accept the application for CIRP.
Decision of the Hon’ble Supreme Court
- The Hon’ble Supreme Court, after analyzing the code and the arguments presented by both parties, decided that the usage of the word ‘may’ and not ‘shall’ in section 7(5)(a) of the code clearly shows that the code provides the Adjudicating Authority with the discretionary power to either accept or reject an application. The court relied on the ‘rule of literal interpretation’ by citing the judgments of the Court in Lalita Kumari v. Government of Uttar Pradesh and Ors.[7], Hiralal Rattanlal v. State of Uttar Pradesh[8], and B. Premanand v. Mohan Koikal[9] where it was resonated that the foremost rule of interpreting a statute is to interpret it literally.
- It also supported this view by further pointing out the difference between sections 7(5)(a) and 9(5). These sections, even though providing similar powers to the Adjudicating Authority for acceptance of an application for financial creditor under section 7(5) and for operational creditor under section 9(5), still differ a little because section 9(5) makes it mandatory for AA to accept the application if the requirements are met whereas under section 7(5)(a) it is on the discretion of the Adjudicating Authority. This was because 7(5)(a) uses the word ‘may’ and 9(5) uses the word ‘shall’.
- The court was of the view that the Adjudicating Authority, for rejecting or accepting the application, must examine all the circumstances relating to the case including the financial health of the corporate debtor while making a decision, and that the question regarding the time-bound completion of CIRP will only arise after the acceptance of the application and not prior to it.
- As regards the judgment of Swiss Ribbons, the court was of the view that it does not discuss whether the power granted under section 7(5)(a) is mandatory or discretionary and that the judgment of the court is merely a precedent and not a statute.
- The appeal was thus allowed and the order passed by NCLT as well as the impugned order passed by the NCLAT were set aside.
Analysis
Differentiating between the Financial Creditors and Operational Creditors
This case successfully differentiated between the Financial and Operational Creditors by stating that under the code, it is mandatory for the Adjudicating Authority to submit an application of operational creditors under section 9(5) if all the prescribed conditions are met whereas in the case of financial creditors, there exists a discretionary power under section 7(5)(a). This was probably the first time when the interests of operational creditors were placed higher than financial creditors by the courts. However, this does not sit correctly with what the BLRC report mentions. It states that Operational Creditor and Financial Creditor are different in a way that operational creditors do not contribute to the viability of a company like financial creditors and also do not care about the health of the company. Their aim is limited to the extent of recovery of the goods and services provided by them. Therefore, there needs to be ‘intelligible differentia’ as the issues regarding the goods can be several.
Financial creditors, on the other hand, are more interested in having the company as a going concern and have knowledge about the health of the company. Also, the number of Operational Creditors is comparatively much higher than the number of financial creditors.
Deviation from the Legislative Intent of the IBC
An analysis of the BLRC report and precedents such as Swiss Ribbon and Innoventive Industries gives a clear picture of what the code intended in its section 7. It provides a twin test for Adjudicating Authority to determine whether it wishes to accept or reject the application for CIRP and states under section 7 (5)(a) that “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”.[10]
Therefore, the existence of debt and default by the corporate debtor are the two sufficient and only causes required for the Adjudicating Authority to accept an application but the Vidarbha judgment widened this scope and brought into consideration the financial viability of the corporate debtor and was of the view that at times, even when the debtor was viable enough to pay back the dues but couldn’t due to extraneous circumstances such as presented in this case, they were still forced into a CIRP process. The court, thus, by stating that the usage of the word ‘may’ instead of ‘shall’ under section 7(5)(a) has granted discretionary power to the Adjudicating Authority.
This, however, was not the legislative intent of the IBC. The only purpose of the code is to rehabilitate and asset value maximisation of the corporate debtor. Therefore, after this judgment, the Ministry of Corporate Affairs, through its notice dated 18.01.2023, invited comments from the public on considering changes to the code and making it mandatory for Adjudicating Authority to admit an application filed under section 7 where the occurrence of default is established.[11]
The confusion created in the aftermath
This judgment created confusion for the NCLT regarding the acceptance and dismissal of the application. For example, in the case of Bank of Maharashtra v. Newtech Promoters and Developers Private Limited[12], the application was dismissed by the NCLT even after the existence of debt and default because it took into consideration the rights of the third parties, i.e., the homebuyers. On the other hand, in Induslnd Bank Limited v. Hacienda Projects Private Limited[13], the court rejected the claim of the corporate debtor and added that if the debtor had been financially healthy then it would not have defaulted.
Conclusion
The judgment of Vidarbha Industries has addressed the problems relating to the provision of section 7 of the act and along with this it also places the operational creditors in a better position. The judges were clear in stating that a judgment by the court must not be read as a statute. This contrasted with the views that were presented in the judgments of Swiss Ribbons, Innoventive Industries, Essar Steel, E.S. Krishnamurthy, and many more that the only role of the Adjudicating Authority while submitting an application is to check for debt and default. This case, thus, created a category of ‘temporary default’ under which numerous debtors may seek the rejection of a CIRP application.
While taking into consideration the interest of the corporate debtor and extraordinary circumstances for submitting an application, the judgment failed to recognize the primary intent of the code and the BLRC report, which was to save a company through a CIRP and protect the interest of the corporate debtor and all the creditors while keeping it a going concern.
References:
[1] Bankruptcy Law Reforms Committee Volume I: Rationale and Design
[2] Swiss Ribbons (P) Ltd. v. Union of India (2019) ibclaw.in 03 SC
[3] Innoventive Industries Ltd. v. ICICI Bank (2017) ibclaw.in 02 SC
[4] Vidarbha Industries Power Ltd. v Axis Bank Ltd (2022) ibclaw.in 118 SC
[5] Vidarbha Industries Power Ltd. v Axis Bank Ltd (2022) ibclaw.in 118 SC
[6] Swiss Ribbons (P) Ltd. v. Union of India (2019) ibclaw.in 03 SC
[7] Lalita Kumari v. Government of Uttar Pradesh and Ors. (2014) 2 SCC 1
[8] Hiralal Rattanlal v. State of Uttar Pradesh (1973) 1 SCC 216
[9] B. Premanand v. Mohan Koikal (2011) 4 SCC 266
[10] Insolvency and Bankruptcy Code, 2016
[11] File No. 30/38/2021-Insolvency, Government of India, Ministry of Corporate Affairs
[12] Bank of Maharashtra v. Newtech Promoters and Developers Private Limited (2022) C.P. (IB) No. 2465/NCLT/ND/2019
[13] Induslnd Bank Limited v. Hacienda Projects Private Limited MANU/NC/5231/2022
