The Supreme Court of India (“SC”), recently in the case of Vidarbha Industries Power Limited v. Axis Bank Limited, [Civil Appeal No. 4633 of 2021], has recently examined the issue whether Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is a mandatory or discretionary provision.

Brief Facts:

Axis Bank Limited (“Respondent”), as a financial creditor, had filed an application under Section 7 of the IBC against Vidarbha Industries Power Limited (“Appellant/ Corporate Debtor”) for initiation of corporate insolvency resolution process (“CIRP”) against the Appellant. A miscellaneous application was filed by the Appellant for stay of proceedings under Section 7 of the IBC, which was dismissed by the National Company Law Tribunal, Mumbai (“NCLT”) vide order dated January 29, 2021 (“NCLT Order”).  

The NCLT ruled that, in an application under Section 7 of the IBC, the NCLT is required only to see whether there is existence of a debt, and the Corporate Debtor has defaulted in making the repayments. The NCLT further held that inability of the Corporate Debtor in servicing the debts or the reason for committing a default was irrelevant under the IBC. 

The National Company Law Appellate Tribunal (“NCLAT”) vide order dated March 2, 2021 (“NCLAT Order”) affirmed the NCLT Order.

The present appeal was filed by the Appellant under Section 62 of the IBC against the NCLAT Order.

Issue before the SC:

Whether Section 7(5)(a) of the IBC is a mandatory or discretionary provision?

Submissions by the Appellant:

(i) Section 7(5)(a) of the IBC uses the word ‘may’ which must be interpreted to say that the NCLT has discretionary and not mandatory power to admit ever application where there is existence of debt. 

(ii) A conjoint reading of Section 7(5)(a) of the IBC with Rule 11 of the National Company Law Tribunal Rules, 2016 makes it clear that the NCLT, on examining the existence of debt and its default by a Corporate Debtor, has the discretion to admit or not admit an application for initiation of CIRP. 

Submissions by the Respondent: 

(i) Section 7(5)(a) of the IBC casts a mandatory obligation on the NCLT to admit an application filed by a financial creditor, where there is an existing debt and a default in repayment of the same. Reliance in this regard was placed on the SC’s decision in Swiss Ribbons Private Limited v. Union of India, [(2019) 4 SCC 17].

(ii) Object of IBC was to provide a framework for expeditious and time bound insolvency resolution, and thus Section 7(5)(a) should be construed as mandatory. Reliance in this regard was placed on the SC’s decision in Innoventive Industries Limited v. ICICI Bank, [(2018) 1 SCC 407].

Decision of the SC:

The SC vide order dated July 12, 2022 (“SC Order”), allowed the appeal, and set aside the NCLT Order and the NCLAT Order. The court held that Section 7(5)(a) gives discretionary power to the NCLT to accept or reject the application made by a financial creditor thereunder.

It was observed that the objective of IBC is to first try and revive the company and not penalize solvent companies, temporarily defaulting in repayment of its financial debts. 

The SC further observed that existence of a financial debt and a default in payment only gives a financial creditor the right to apply for initiation of CIRP, and that the NCLT is required to further apply its mind to relevant factors before deciding on the application.

It was held that there is no ambiguity in Section 7(5)(a) of the IBC and there is no reason to depart from the rule of literal interpretation. The Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) and ‘shall’ in the otherwise almost identical provision of Section 9(5)(a) of the IBC, which shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning.

This differentiation between financial creditors (Section 7(5)(a)) and operation creditors (Section 9(5)(a)) is further justified as the impact of non-payment of admitted dues on operational creditors is far more serious as compared to that of financial creditors due to the nature of debt (secured and unsecured), duration of debt (longer and shorter), variance in financial strength and nature of business.

Accordingly, the SC directed the NCLT to reconsider the application of the Appellant for stay of further proceedings on merits in accordance with law.

Please find a copy of the SC Order, here.

Contributed by Aastha (Partner) and Arth Singal (Associate).

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