Status as on- 16/03/2023
To start a Corporate Insolvency Resolution (CIRP) against a Corporate Debtor, the Financial Debtor must file an application before the Adjudicating Authority under Section 7 of the Insolvency & Bankruptcy Code (IBC). Further, the Adjudicating Authority, after admitting the application, shall give an order within seven days of admitting or rejecting a such application to the Financial Creditor and Corporate Debtor for speedy disposal of cases.
The real concern revolving around Section 7 of the IBC is whether the Adjudicating Authority, before admitting an application under S.7, is required only to consider the debt and default of payment of the Corporate Debtor. To understand these parameters better, one must delve into the observations in the case of Vidarbha Industries Power Limited v. Axis Bank Limited.
The Supreme Court ruling in the Vidarbha Industries case
The respondent in the case, Vidarbha Industries Power Limited v. Axis Bank Limited, filed an application to initiate CIRP against the petitioners under Section 7(2) of the IBC. Subsequently, the appellants filed an application seeking a stay of CIRP proceedings for which, later, both NCLT and NCLAT dismissed the said application. The stay was dismissed primarily relying on the ratio of Swiss Ribbons v. Union of India which focuses on giving reliance on the chief object of the Code which is to decide the petition in a time-bound manner.
The appellants filed the stay application for defaulting in payment since there was an order already passed by the Appellate Tribunal for Electricity (APTEL) in favor of the appellants where they will realize a sum of Rs. 1730 crores, which is far exceeding the claim of the Financial Creditor in the IBC proceedings. The appellants, in their averments, argued that they had not been able to pay the debts of the respondents only because an appeal filed by MERC was still pending in Court and it delayed their realization of the sum of money to settle the debts with the corporate debtor.
The Supreme Court, while adjudicating the appeal, considered that the appeal in the apex court would have bearing and impact on the issues involved in the Section 7 application. Moreover, The bench held that the order passed by the Adjudicating Authority under S.7(5) is a directory in nature. Hence, the stay of the IBC proceedings was asked to reconsider by the Apex Court. Moreover, the bench observed that the viability and overall financial health of the Corporate Debtor could not be extraneous; it is considered to be relevant facts and circumstances while examining the experience of initiation of CIRP. Besides, it is the Adjudicating Authority’s discretion to not admit the application of the Financial Creditor.
The powers delved under S.7 of IBC – mandatory or discretionary?
Generally, the Adjudicating Authority would have to exercise its discretion to admit an application under Section 7 of the IBC on the satisfaction of the existence of financial debt and default of payment of the debt by the Corporate Debtor. But after the interpretation of S.7 in the Vidarbha Industries case, it is observed that the Adjudicating Authority has to consider the grounds made out by the Corporate Debtor against admission on its own merits.
According to Section 7(5) of the Code, Where the Adjudicating Authority is satisfied that a default has occurred and the application under sub-section (2) is complete, and there are no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application. It is important to note that the legislative intent to insert “may” instead of “shall” confers the discretion to the Adjudicating Authority to may or may not admit the application of the Financial Creditor. If at all the intention was to make it mandatory to admit the application, then the legislature would have used the word “shall” instead of “may”.
Though the Vidarbha Industries case set a great precedent, it may seem to outmaneuver the Financial Creditors. The Adjudicating authorities, while examining an application, must constitute what are considered to be extraneous matters subject to each and every fact and circumstance of the case to avoid inequitable outcomes in the future and to avoid unwarranted confusion. Nevertheless, the effectiveness of this precedent will be known only over the course of time.
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