Supreme Court holds that section 7(5) Of IBC is discretionary


Status as on- 23/08/2022

The Hon`ble Apex court allowed the appeal under section 62 of IBC in VIDARBHA INDUSTRIES POWER LIMITED Versus AXIS BANK LIMITED (CIVIL APPEAL NO. 4633 OF 2021).


Vidarbha Industries Power Limited (“VIPL”) is a company engaged in the business of production of electricity for which tariff is regulated by the Maharashtra Electricity Regulatory Commission (“MERC”) and the Appellate Tribunal for Electricity (“APTEL”). VIPL was expecting an amount of Rs. 1,730 crores pursuant to a favorable order of APTEL, which was challenged by MERC and is now pending before the Supreme Court. In the meanwhile, Axis Bank, a financial creditor of VIPL, filed a Section 7 application against VIPL before NCLT, Mumbai for default of Rs. 533 crores. VIPL sought for a stay on the proceedings before the NCLT on the pretext of pendency of proceeding before the Supreme Court and resultantly, VIPL was unable to realize a substantial sum of Rs. 1730 crores which would enable the Appellant to clear the debt towards Axis Bank.


  • Whether admission under Section 7(5)(a) of the Code was mandatory.
  • Whether the NCLT and the NCLAT were right in ignoring the Applicant’s matter pending before the Supreme Court for realizing the amount due and initiating the CIRP process owing to the existence of debt and default.


  • The Adjudicating Authority (NCLT) failed to appreciate that the question of time-bound initiation and completion of CIRP could only arise if the companies were bankrupt or insolvent and not otherwise.
  • The judgment of this Court Swiss Ribbons (supra), which was rendered in the context of a challenge to the vires of the IBC, does not consider the question of whether Section 7(5)(a) of the IBC is mandatory or discretionary. It is well settled that a judgment is a precedent for the question of law that is raised and decided. The language used in a judgment cannot be read like a statute. In any case, words and phrases in the judgment cannot be construed in a truncated manner out of context.
  • Applying the literal rule of interpretation, the Court observed that the meaning and intention of the provision have to be ascertained from the phraseology of the provision keeping in mind the nature, scope, and design of the IBC. It has been held that the use of the word ‘may’ instead of ‘shall’ in Section 7(5)(a) of the IBC expressly showed the intent of the legislature to make the provision discretionary and not mandatory, whereby the NCLT can reject an application even post the existence of debt and/or admission of default. Further, the use of the word ‘shall’ in the otherwise almost identical provision of Section 9(5) pertaining to the initiation of CIRP by an operational creditor aided the intent to consciously differentiate and supply two distinct meanings to the two cited provisions.


Thus Hon`ble Apex Court held that the NCLT would have to exercise its discretion to admit an application under Section 7 of the code and initiate the Corporate insolvency resolution process (CIRP) on the satisfaction of the existence of financial debt and default on the part of the Corporate Debtor in payment of the debt unless there are good reasons not to admit the petition and directed to re-consider the application of the Appellant for a stay of further proceedings on merits in accordance with the law.


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