1. The judgment passed by the Hon’ble Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 32 (“Vidarbha Industries”) on July 12, 2022, created quite a stir and unsettled the legal position pertaining to discretionary admission of section 7 applications under the Insolvency and Bankruptcy Code, 2016 (“Code”) by the NCLT. The Supreme Court has since sought to soften its position through subsequent judgments. However, it remains unclear as to what the dictum of law is, which would bind the NCLT in its consideration of Section 7 applications. This article attempts to analyse and bring clarity to the position.

Vidarbha Industries

2. Admission of insolvency by a financial creditor under Section 7 of the Code earlier required two-fold essential ingredients – ‘existence of debt’ and ‘default’. These were subdued by the Supreme Court by rendering the aforesaid provision discretionary. In fact, the principle enunciated in Vidarbha Industries diluted the substratum of the foundation of the Code, which promoted a party driven insolvency resolution process.
3. Vidarbha Industries Power Ltd was a company generating electricity by its thermal power plants and its tariff was regulated under the Electricity Act, and the State Electricity Regulatory Commission in Maharashtra. Vidarbha Industries Power Ltd. was expecting an amount of Rs. 1,730 crores pursuant to a favourable order of the Appellate Tribunal for Electricity (“APTEL”) in its favour. In the interim, Axis Bank, a financial creditor filed a Section 7 application in NCLT, Mumbai against Vidarbha Industries Power Ltd. for a default of Rs. 553 crores. The NCLT, Mumbai naturally admitted the Section 7 application observing the above two key ingredients of existence of debt and default. The NCLAT affirmed the NCLT’s decision of admission of insolvency.
4. However, the Supreme Court allowed the appeal preferred by Vidarbha Industries Power Ltd, and interalia held that (i)  existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of corporate insolvency resolution process (“CIRP”); (ii) The adjudicating authority (NCLT) was required to apply its mind to relevant factors including the feasibility of initiation of CIRP; (iii) The word ‘may’ in section 7(5) of the Code indicates that the NCLT has the discretion to admit or reject a Section 7 application despite existence of a default. (iv) The object of the Code is not to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP. Section 7(5)(a) of the Code, therefore, confers discretionary power on the adjudicating authority (NCLT) to admit an application of a financial creditor under Section 7 of the Code for initiation of CIRP. In view of this, the adjudicating authorities now have to consider the grounds presented by the corporate debtor against admission to the NCLT. Therefore, it’s not only about proving a default but also the circumstances that led to the default. Thus, the Supreme Court impinged upon the adjudicating authority’s absolute power to admit a Section 7 application and set a new precedent.

5. The ambiguity created by the Vidarbha Industries judgment not only slowed down admission of applications pertaining to financial debts but it also armed the defaulting corporate debtor with a fresh excuse to avoid admission of a CIRP and delay the hearings of such applications. The admission of cases itself became a matter of discretion, which encroached on the Code being an effective deterrent for errant borrowers.

 Subsequent Developments

6. The judgment of the Supreme Court prompted the Ministry of Corporate Affairs, Government of India, to invite comments from the public on proposed amendments to the Code sometime on January 18, 2023. The Government of India interalia proposed to amend Section 7 of the Code to clarify that the NCLT mustadmit an application on being satisfied that there exists a ‘default’ as defined under Section 2 of the Code. The said proposal elucidates that the Legislature never intended to provide any discretion to the adjudicating authority as held by the Supreme Court in the Vidarbha Industries

7. Separately, Axis Bank filed a Review Application (Review Petition (Civil) No. 1043 of 2022) to review the Vidarbha Industries judgment. The Supreme Court while disposing of the Review Petition, clarified that the observations in Vidarbha Industries is in the context of the facts of the case and should not be interpreted as the words of the statute itself. However, it did hold that the power of the adjudicating authority to admit an application for initiation of the CIRP by a financial creditor under Section 7(5)(a) of the Code, is discretionary and not mandatory.

8. The repercussions that followed post Vidarbha Industries judgment and the dismissal of its review, led to contrasting judgments by NCLT, NCLAT interpreting and analyzing the discretionary power of the adjudicating authority in admitting an application by a financial creditor. Armed with an additional layer of defence, the corporate debtors were successful in prolonging the admission of the application which consequently was in divergence with the object of the Code.

9. Subsequently, the Supreme Court in Suresh Kumar Reddy Vs. Canara Bank & Ors. Civil Appeal No. 7121 of 2022, (“Suresh Kumar Reddy Case”)^[1] clarified that the decision in Vidarbha Industries only applies to the specific facts of that case, and does not contradict the previously established law regarding the admission of a Section 7 application as laid out in Innoventive Industries Limited v. ICICI Bank and Another ^[2] (“Innoventive”) and E.S. Krishnamurthy & Ors. vs. Bharath Hi-Tech Builders Pvt. Ltd. (2022) 3 SCC 161. The Supreme Court reiterated the principle of the judgment in Innoventive and held that the moment the adjudicating authority is satisfied that there is a debt and a default has occurred, the Section 7 application must be admitted unless it is incomplete. There is hardly a discretion left with the adjudicating authority (NCLT) to refuse admission of the application under Section 7 of the Code.

10. The Suresh Kumar Reddy Case did attempt to give a clarification to the uncertainty surrounding the Vidarbha Industries judgment, however, the principles enunciated in Vidarbha Industries have not been set aside. It acknowledged that certain scenarios may justify application of Vidarbha Industries, thereby allowing the NCLT to exercise discretion to not admit a Section 7 application filed by a financial creditor, even when there is existence of debt and default. The mystery was not demystified but got more intense.

Conclusion

11. As things stand today, even though the precedential value of the judgment in Vidarbha Industries has been diluted, it is still good law. However, that position might change soon.
12. A noteworthy development in the Supreme Court is bound to elucidate and clarify this position. The full bench of Dr. D.Y. Chandrachud C.J., P.S. Narasimha and J.B Pardiwala J.J., have issued a notice in a civil appeal (C.A. 533 of 2023) filed by one Maganlal Daga H.U.F & Anr vs Jag Mohan aga & Ors wherein the observations made in Vidarbha Industries are up for reconsideration. The matter is currently sub judice before the Supreme Court.
13. Until such time as the question is finally laid to rest, it is essential for all prospective applicants under Section 7 of the Code, to ensure that they sufficiently include pleadings and material to reflect the actual insolvent nature of the corporate debtor, so as to pre-empt any potential arguments on admission of CIRP being rejected on discretionary grounds.

Footnotes:

[1] decided on May 11, 2023

[2] (2018) 1 SCC 407