Settling an incertitude conundrum: Whether the Adjudicating Authority is mandated to admit the application under Section 7 of the IBC without considering the extraneous matters involved?

26th October, 2022 - 5:48 am Categories: Legal Issues 0 Comments

Introduction

To start a Corporate Insolvency Resolution (CIRP) against a Corporate Debtor, the Financial Debtor must file an application before the Adjudicating Authority under Section 7 of the Insolvency & Bankruptcy Code (IBC). The highlight of this section is that the Adjudicating Authority, after admitting the application, shall give an order within seven days of admitting or rejecting such application to the Financial Creditor and Corporate Debtor for speedy disposal of cases.

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The real concern revolving around Section 7 of the IBC is whether the Adjudicating Authority, before admitting an application under S.7, is required only to consider the debt and default of payment of the Corporate Debtor. To dig this deeper, we will look into the observations in the case of Vidarbha Industries Power Limited v. Axis Bank Limited^[1]

The Supreme Court ruling in the Vidarbha Industries case

The respondent in the case, Vidarbha Industries Power Limited v. Axis Bank Limited, filed an application to initiate CIRP against the petitioners under Section 7(2) of the IBC. Subsequently, the appellants filed an application seeking a stay of CIRP proceedings for which, later, both NCLT and NCLAT dismissed the said application. The stay was dismissed primarily relying on the ratio of Swiss Ribbons v. Union of Indian^[2] where it focuses on giving reliance on the chief object of the Code which is to decide the petition in a time bound manner.

The appellants filed the stay application for defaulting in payment since there was an order already passed by the Appellate Tribunal for Electricity (APTEL) in favour of the appellants where they will realize a sum of Rs. 1730 crores, which is far exceeding the claim of the Financial Creditor in the IBC proceedings. The appellants, in their averments, argued that they had not been able to pay the debts of the respondents only because an appeal filed by MERC was still pending in Court and it delayed their realization of the sum of money to settle the debts with the corporate debtor.

The Supreme Court, while adjudicating the appeal, considered that the appeal in the apex court would have bearing  and impact on the issues involved in the Section 7 application. Moreover, The bench held that the order passed by the Adjudicating Authority under S.7(5) is directory in nature. Hence, the stay of the IBC proceedings was asked to reconsider by the Apex Court. Moreover, the bench observed that, the viability and overall financial health of the Corporate Debtor cannot be extraneous matter and it is considered to be relevant facts and circumstances while examining the expedience of initiation of CIRP. Besides, it is the Adjudicating Authority’s discretion to not admit the application of the Financial Creditor.

The powers delved under S.7 of IBC; whether mandatory or discretionary?

Generally, the Adjudicating Authority would have to exercise its discretion to admit an application under Section 7 of the IBC on satisfaction of the existence of financial debt and default of payment of debt by the Corporate Debtor. But after the interpretation of S.7 in Vidarbha Industries case, it is observed that the Adjudicating Authority has to consider the grounds made out by the Corporate Debtor against admission on its own merits.

According to Section 7(5) of the Code, Where the Adjudicating Authority is satisfied that a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application. It is important to note that the legislative intent to insert “may” instead of “shall” confers the discretion to the Adjudicating Authority to may or may not admit the application of the Financial Creditor. If at all the intention was to make it mandatory to admit the application, then the legislature would have used the word “shall” instead of “may”.

In contrast, it is pertinent to note that Section 9 deals with the admission of application by an Operational Creditor against the Corporate Debtor. In Section 7(5)(a) of the IBC, the word “may” refers to an initiation  for CIRP made by a Financial Creditor against a Corporate Debtor. However, the word “shall” is used in the otherwise nearly identical Section 9(5) of the IBC, which deals with an operational creditor’s initiation of CIRP. It is clear that the legislature intended Section 7(5)(a) of the IBC to be a discretionary provision while Section 9(5)(a) of the IBC to be mandatory. If the facts and circumstances allow it, the Adjudicating Authority may hold off on admitting the admission in the case of a financial creditor or even reject the application.

Comment

The Insolvency Code is one of the fastest evolving Code in the Indian legal framework. When we look into the preamble of the Code and various judicial precedents, the primary focus is on protecting the creditors and the Corporate Debtor’s assets from further dilution. But the apparent issues revolving around Corporate Debtors are widely not considered by the adjudicating authorities.

After Vidarbha industries case, the inability of the Corporate Debtor in servicing the debts or the reason for committing the default of paying back to the financial creditor was not considered to be alien to the objective of the Code. So it is clearly established that, to trigger Corporate Insolvency proceedings, the Authority is not only required to consider the debt and the default in making repayments by the Corporate Debtor but also must examine the extraneous matters involved with the Corporate Debtor. The object of the IBC is to first try and revive the company and not to spell its death knell.

Even Though Vidarbha Industries case set a great precedent, it may seem to outmanoeuvre the Financial Creditors . The Adjudicating authorities, while examining an application, must constitute what are considered to be extraneous matters subject to each and every fact and circumstance of the case to avoid inequitable outcomes in the future and to avoid unwarranted confusion. Nevertheless, the effectiveness of this precedent will be known only through the course of time.

Author: Ukkash F, BBA; LLB (Hons.), Sastra School of Law, Thanjavur, Tamil Nadu, in case of any queries please contact/write back to us via email chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney

^[1] MANU/SC/0874/2022

^[2] (2019) 4 SCC 17