The Initiation Of CIRP Should Be Only In Case Of Insolvent And Bankrupt Companies

The Supreme Court has ruled that the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) should only be initiated against companies that are genuinely insolvent or bankrupt. The court clarified that the IBC is not intended to penalise solvent companies that may have temporarily defaulted on financial debts. The Adjudicating Authority (NCLT) must consider the merits of a company's defence, such as a substantial favourable award or decree, before admitting a CIRP application.

VIDARBHA INDUSTRIES POWER LTD v. AXIS BANK LTD [SC]
Civil Appeal No. 4633 of 2021

BRIEF FACTS

This appeal is against a judgment and order passed by the National Company Law Appellate Tribunal (NCLAT),whereby the learned Tribunal refused to stay the proceedings initiated by the Respondent, Axis Bank Limited against the Appellant for initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC.

Decision: Allowed.

Reason

1. The title “Insolvency and Bankruptcy Code” makes it amply clear that the statute deals with and/or tackles insolvency and bankruptcy. It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP. Section 7(5)(a) of the IBC, therefore, confers discretionary power on the Adjudicating Authority (NCLT) to admit an application of a Financial Creditor under Section 7 of the IBC for initiation of CIRP.

2. 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. Moreover the timeline starts ticking only from the date of admission of the application for initiation of CIRP and not from the date of filing the same.

3. The judgment of this Court in Swiss Ribbons Private Limited and Anr. v. Union of India and Ors. (2019) 4 SCC 17 , 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.

4. Legislature has, in its wisdom made a distinction between the date of filing an application under Section 7 of the IBC and, the date of admission of such application for the purpose of computation of timelines.

5. CIRP commences on the date of admission of the application for initiation of CIRP and not the date of filing thereof. There is no fixed time limit within which an application under Section 7 of the IBC has to be admitted.

6. Even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner.

7. Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC and initiate CIRP on satisfaction of the existence of a 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.

8. The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so. The Adjudicating Authority may, for example, admit the application of the Financial Creditor, notwithstanding any award or decree, if the Award/Decretal amount is incapable of realisation. The example is only illustrative.

9. In this case, the Adjudicating Authority (NCLT) has simply brushed aside the case of the Appellant that an amount of Rs.1,730 Crores was realizable by the Appellant in terms of the order passed by APTEL in favour of the Appellant, with the cursory observation that disputes if any between the Appellant and the recipient of electricity or between the Appellant and the Electricity Regulatory Commission were inconsequential.

10. We are clearly of the view that the Adjudicating Authority (NCLT) as also the Appellate Tribunal (NCLAT) fell in error in holding that once it was found that a debt existed and a Corporate Debtor was in default in payment of the debt there would be no option to the Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the IBC.

11. For the reasons discussed above, the appeal is allowed.

12. The impugned order passed by the Adjudicating Authority (NCLT) and the impugned order passed by the Appellate Authority (NCLAT) dismissing the appeal of the Appellant are set aside. The NCLT shall re-consider the application of the Appellant for stay of further proceedings on merits in accordance with law.

DISCLAIMER: The case law presented here is only for sharing information with readers. In case of necessity do consult with professionals.