The Insolvency and Bankruptcy Code, 2016 ("Code") was enacted at a time when there was no singular law which dealt with insolvency and bankruptcy in India. A perusal of the statement of objects and preamble of the Code reveal that it was enacted to consolidate the law of insolvency resolution of companies, partnerships etc in a time bound manner, for maximisation of assets and for balancing of interests of all stakeholders.

Since the inception of the Code, the Hon'ble Supreme Court of India ("Supreme Court") has in several judgments interpreted various provisions of the Code. Keeping with the legislative intent behind the enactment of the Code, the Supreme Court has in several judgments upheld that the objective of the Code has been timely resolution of the Corporate Debtor who is in the red.

In the case of Vidarbha Industries Power Limited v. Axis Bank Limited (2022 SCC Online SC 841) ("case"), the Supreme Court was presented with a set of facts which necessitated adjudication on the discretionary powers of the Adjudicating Authority (as defined as "National Company Law Tribunal" under Section 5(1) of the Code) basis the statutory interpretation of Section 7(5) (a) of the Code. Upon a detailed consideration of the rules of statutory interpretation, a division bench of the Hon'ble Supreme Court rejected the view of National Company Law Tribunal, Mumbai ("NCLT Mumbai") and National Company Law Appellate Tribunal ("NCLAT") and vide order dated 14th July 2022 inter alia held that the Adjudicating Authority has the discretion powers to admit or dismiss a petition under Section 7 even in the existence of debt and default. Pertinently, the Supreme Court has also held that these discretionary powers cannot be wielded arbitrarily, and the discretionary powers can be exercised by the Adjudicating Authority only when the facts and circumstances of the cases warrant this exercise.

The present news-alert discusses the observations made by the Supreme Court in the said judgment and its implications.

II. Summary of the Order dated 14th July 2022 ("Judgment")

A. Facts of the case:

  1. The Appellant/original Corporate Debtor, Vidarbha Industries Power Limited ("Corporate Debtor"), a power generating company, was awarded the contract for implementation of a group power project ("GPP") by the Maharashtra Industrial Development Corporation. The GPP was later converted into an Independent Power Project.
  2. In 2016, the Corporate Debtor filed an application with the Maharashtra Electricity Regulatory Commission ("MERC") for the purpose of truing up the aggregate revenue requirement and for determination of tariff in terms of MERC (Multi Year Tariff) Regulations, 2011, in view of, inter alia, the increase in fuel costs, consequential to the rise in the cost of procuring coal for the purpose of running the power plant. The same was disallowed by MERC. Thereafter, the Corporate Debtor appealed before the Appellate Tribunal for Electricity ("APTEL"), wherein the APTEL allowed the appeal ("APTEL Order"). A sum of Rs. 1730 Crores was due to the Corporate Debtor in terms of the APTEL Order. In the meanwhile, MERC filed a civil appeal before the Hon'ble Supreme Court challenging the APTEL Order ("MERC Appeal") which is still pending.
  3. In view of the MERC Appeal, the Corporate Debtor was unable to implement the directions of APTEL due to which it suffered financial difficulties. According to the Corporate Debtor, implementation of the APTEL Order would have enabled it to clear all its outstanding liabilities.
  4. On or about 15th January 2020, Axis Bank Limited, a Financial Creditor of the Corporate Debtor, filed an application under Section 7(2) of the Code before the NCLT Mumbai for initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor. The Corporate Debtor preferred a stay proceeding before the NCLT Mumbai and the same was dismissed on 29th January 2021. While dismissing the application of the Corporate Debtor for the stay proceedings, the NCLT Mumbai was of the view that the dispute between the Corporate Debtor and MERC was extraneous to the matters involved in the present proceedings before the Adjudicating Authority and will have no bearing and impact on the issues involved under the Code. The CIRP would be initiated against the Corporate Debtor if two most important requirements are satisfied under the Code i.e., existence of a valid debt and default on the Corporate Debtor in making the repayments. If these two aspects are satisfied, the Company Petition under Section 7 of the Code shall be maintainable.
  5. The Corporate Debtor filed an appeal before the NCLAT challenging the order of the NCLT Mumbai which also came to be dismissed.
  6. Aggrieved by the decisions of the NCLT Mumbai and the NCLAT, the Corporate Debtor approached the Supreme Court.

B. Outcome

The key issue that arose for determination before the Supreme Court was the interpretation Section 7(5)(a) of the Code and whether the same could be construed to vest discretionary powers in the Adjudicating Authority whilst considering admission of petitions filed under Section 7 of the Code.

  1. The interpretation of Section 7(5)(a) of the Code

    The Supreme Court was of the view that the term "satisfied" used in Section 7(5) of the Code showcases that it is the discretion of the Adjudicating Authority to accept or reject the application. The NCLT Mumbai and the NCLAT proceeded with a view that an application filed under Section 7(5) of the Code must be mandatorily admitted if the Adjudicating Authority is satisfied that there exists a debt. The Supreme Court rejected this interpretation of the NCLT Mumbai and the NCLAT and examined the merits of the contention of the Corporate Debtor.

    In Swiss Ribbons v. Union of India, it was held that "the imperativeness of timely resolution of a Corporate Debtor, who was in the red, indicated that no other extraneous matter should come in the way of expeditiously deciding a petition under Section 7 or under Section 9 of the IBC". Though the Supreme Court partially agreed with the above view, however, it also stated the viability and overall financial health of the Corporate Debtor are not extraneous matters. The Supreme Court observed that the Adjudicating Authority must examine the expedience of initiation of CIRP, considering all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. In the present case, the NCLT Mumbai must have applied its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of the MERC Appeal, pending in this Court, the APTEL Order and overall financial health and viability of the Corporate Debtor.
  2. Interpretation of Section 9(5)(i) and Section 7(5)(a) while interpreting the word "May" and "Shall"

    The court juxtaposed the two provisions by interpreting the usages of the words "may" and "shall". The Supreme Court has held that the expression "may" used in Section 7(5)(a) of the Code shows that the provision is not mandatory in nature. Whereas the expression "shall" used in Section 9(5)(a) of the Code is a mandatory provision and therefore, an application of an Operational Creditor shall be mandatorily accepted if the conditions provided under the said Section are satisfied.

    Normally, the term "may" is indicative. In contrast, the term "shall" imply a necessary duty. The usage of the word "shall" imply that a provision is mandatory. However, additional elements such as the scope of the statute and the consequences of the construction may rebut the prima facie inference that the provision is mandatory. Thus, the legislature intended Section 9(5)(a) of the Code to be mandatory and Section 7(5)(a) of the Code to be discretionary. It is also pertinent to note that Section 7(5)(a) of the Code is applicable to the Financial Creditors and Section 9(5)(a) is applicable to the Operational Creditors. Non-payment of admitted dues may have significantly more serious consequences for an Operational Creditor than for a Financial Creditor. The differentiation between both is a legislature-conscious choice.

    A similar view of the Supreme Court was laid down by the National Company Law Tribunal, Kolkata in the case of State Bank of India v. N. S. Engineering Projects Pvt. Ltd. An important question of law that was carved out in this case, was whether the Adjudicating Authority is bound to admit an application under Section 7 of the Code when it is alleged that there is contributory negligence arising out of non-disbursement of the amount sanctioned by the Financial Creditor leading to the alleged default by the Corporate Debtor. While interpreting the meaning of the word "may" used in Section 7(5)(a) of the Code, NCLT held that the "adjudicating authority "may" by an order admit application under Section 7(5)(a) of the IBC if it is satisfied that there exists a default. It cannot be extended to a situation where the Financial Creditor, by its own acts of omission and commission, contributes to the default on the part of the Corporate Debtor. The present proceedings initiated by the Financial Creditor seems to be for purposes other than insolvency resolution of the Corporate Debtor, and is, therefore, liable to be rejected."

    The objective of the Code is to maximize the value of the assets of the Corporate Debtor, promote entrepreneurship, and avail credit. It is not the objective of the Code to penalize solvent companies, temporarily defaulting in repayment of their financial debts, by the initiation of CIRP. Thus, legislation has given discretionary powers to the Adjudicating Authority under Section 7(5)(a) of the Code to admit an application of the Financial Creditor under Section 7 of the Code for initiation of CIRP.
  3. The need to interpret statutes.

    The Supreme Court was of the view that NCLT Mumbai and the NCLAT should have taken the literal interpretation of the statute. The most predominant and paramount principle of statutory interpretation is the rule of literal interpretation. Intentional interpretation can only be used when the plain words of a statute are ambiguous or if construed literally, the provision would nullify the object of the statute or otherwise result in an absurd result. The Supreme Court relied on the decision of Hiralal Rattanlal v. State of Uttar Pradesh wherein it was held that a statute must be interpreted by the rule of literal interpretation if the provision is unambiguous, and the legislative intent is clear. The other rules of construction of statutes are called into aid only when the legislative intent is not clear.

    Since there is no ambiguity in Section 7(5)(a) of the Code, it can be said that the legislature never intended to make Section 7(5)(a) of the Code a mandatory provision.

III. Conclusion

The rationale of the Supreme Court is based on the general principles of interpretation of statutes. The Supreme Court has interpreted the word "may" in Section 7(5) (a) of the Code to uphold the discretionary powers vested in the Adjudicating Authority whilst deciding petitions filed by Financial Creditors under Section 7 of the Code. In doing so, the Hon'ble Supreme Court has taken a liberal interpretation of the provisions of the Code to hold that it is not the intention of the Code to penalize solvent companies who have temporarily defaulted in repayment of financial debts. However, these discretionary powers are in no manner unfettered. The Supreme Court has also cautioned that the said discretionary powers must be exercised in a particular manner based on the facts and circumstances of the case. Whilst this move is a welcome relief for Corporate Debtors who have for genuine grounds lapsed in payments, the possibility of misuse to frustrate the object of the Code can certainly not be ruled out.

The order passed by the Supreme Court, is landmark in so far as it emphasises an element of discretion vested in the Adjudicating Authority whilst considering petitions filed for default in re-payment of financial debts under the Code. The order is in stark contrast to the established hierarchy and preference enjoyed by Financial Creditors in the implementation of the Code. Furthermore, the order also serves as a stark departure of the practical implementation of the Code and the summary nature of proceedings before the Adjudicating Authority. Prior to the Judgment, it was settled law that once the existence of debt and default is proved, petitions under Sections 7 and 9 of the Code must be admitted by the Adjudicating Authority. However, pursuant to the Judgment of the Supreme Court, the Adjudicating Authority is obligated to evaluate if the discretionary powers under Section 7(5) (a) ought to be exercised basis the facts and circumstances of each case.

In the facts of the present case, the Corporate Debtor had arguably made out a prima facie case that it was otherwise a solvent company. In view thereof, as per the judgment, the NCLT Mumbai and the NCLAT ought to have exercised discretion under Section 7(5) (a) of the Code. Apart from laying down the broad contours of the discretionary powers, the Judgement does not set out any clear parameters for the exercise of such discretionary powers. In view thereof, it remains to be seen how the Adjudicating Authority will exercise its discretion specially in cases which are not straightforward and in which proof of solvency and temporary lapse in repayment cannot be easily ascertained.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.