In a recent judgment, the apex court overturned orders of the subordinate Insolvency Courts which had refused to stay the insolvency proceedings (known as Corporate Insolvency Resolution Process or ‘CIRP’) initiated by a financial creditor (‘FC’) owing to the occurrence of a default.

To many, this may come as a surprise, given the judiciary’s consistent stance to keep off “extraneous considerations” surrounding a default and its commitment to uphold the due process enunciated by the Insolvency and Bankruptcy Code 2016 (‘the Code’) as was espoused in the celebrated Swiss Ribbons Pvt. Ltd. vs. UOI [4 SCC 17] case.

Vidharbha Power case

Here are the facts of the Vidharbha Power Industries vs. Axis Bank Ltd (CA No. 4633 of 2021) case. The Appellant was an electricity generating company, which had set up two units of a coal-fired thermal power plant. The Maharashtra Electricity Regulatory Commission (MERC) had approved the Power Purchase Agreement permitting the Appellant to commercially sell the electricity it generated.

Later, the Appellant claimed enhanced tariff owing to, among other things, increased fuel and operational costs.

However, the MERC declined to approve the enhanced tariff. So, the Appellant appealed before the Appellate Tribunal for Electricity (APTEL), which approved the enhanced tariff calculations which resulted in about ₹1,730 crore gain to the Appellant. But, MERC carried the matter into appeal before the apex court, where it was pending.

Meanwhile, Axis Bank, as FC, claimed that the Appellant had defaulted on dues amounting to ₹553 crore. As the default had occurred, it filed a petition under the Code before the National Company Law Tribunal (NCLT) for initiation of CIRP against the Appellant.

As a counter, the Appellant filed a Miscellaneous Application before the NCLT seeking a stay of the proceedings under the Code, until its matter in the MERC appeal was decided by the apex court.

The NCLT declined to stay the CIRP stating that under the Code, it had no discretion but to only see whether there has been a debt and the corporate borrower had defaulted in making the repayments. Even the National Company Law Appellate Tribunal concurred with the NCLT’s stand, which made the Appellant carry the matter to the apex court.

The apex court considered the language of Section 7(5)(a) of the Code, which provides that where the NCLT was satisfied that a default has occurred, it may by order, admit such application.

Concurring with the Appellant’s contentions, the apex court observed that a bare perusal of the aforesaid provision showed that the use of the word ‘may’ must be interpreted to say that it was not mandatory for the NCLT to admit an application in each and every case, where there was existence of a default.

Ruling in favour of the Appellant, the apex court seems to have been persuaded by the fact that there was a favourable order by the APTEL, which would have netted the Appellant ₹1,730 crore — an amount which was far in excess of the dues (₹553 crore) to the FC.

This has upturned the oft-held myth that the existence of a financial default would necessitate the unimpeded admission to CIRP (which involves displacement of the existing management).

The apex court in this ruling has categorically held that whilst the existence of a financial default only gave the FC a right to apply for initiation of CIRP, yet, the NCLT was required to apply its mind to relevant factors including, as in this case, the feasibility of initiation of CIRP against an electricity generating company that operated under statutory control.

Swiss Ribbons case

In the Swiss Ribbons case, the apex court was deciding questions relating to the constitutional validity of the Code. Effectively, in that case, the Court espoused its stance that it must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appeared to be arbitrary.

Be that as it may, the Court did not have the occasion to consider the technicalities of whether the use of the word ‘may’ in Section 7(5)(a) of the Code denoted mandatory admission by the NCLT, which it has now addressed in the Vidharbha Industries ruling.

Until now, it was understood that the moment there was a default in financial credit repayment, the CIRP process was to be admitted by the NCLT. But now, with this judgment, the NCLT will have to exercise discretionary power and judgment considering the facts and circumstances of each case.

Herein lies the problem. Facts are only as good as their completeness and the manner in which they are presented to the courts. Given the paucity of time, the NCLT could find it a stretch in going into the circumstances leading to the financial default in every case, including ascertaining merits in any pending other court matter.

Besides prolonging the decision, this could lead to ambiguity in the form of conflicting decisions from the insolvency courts, owing to differing views, thus stunting the Code’s progress.

And the question also remains as to what happens in a mixed verdict (partly in favour and partly against). Plus, there lies the argument that a corporate debtor is declared a non-performing asset only after it has defaulted for a period of time.

So, giving further time until resolution of other disputes could stifle the Code’s objectives of time-bound resolution and lead to depletion in the recovery value of assets.

The writer is a chartered accountant

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