Insolvency Law: Supreme Court Does A 180-Degree Turn On Admission
Supreme Court’s ruling changes the well-established test that NCLTs need to apply while considering insolvency applications.
So far, evidence of debt and default were enough to admit a company into insolvency. Now, the Supreme Court has thrown in another 'D' in the mix. Discretion, which the company law tribunals can apply as per the apex court.
It has premised this conclusion saying the Insolvency and Bankruptcy Code does not aim to penalise solvent companies which have temporarily defaulted on payment of its financial debts.
This is a major departure from the current understanding on powers of the NCLTs while considering an insolvency petition, legal experts said.
The apex court was hearing an appeal seeking a stay on insolvency proceedings initiated against Vidarbha Industries Power Ltd. Both the tribunal and the appellate tribunal had dismissed the company's arguments saying once a default has been established, the insolvency application must necessarily be accepted.
Vidarbha Industries had argued that there was an award of Rs 1,730 crore in favour of the company, which, once realised, would clear all its outstanding dues. The company had won this award against Maharashtra Electricity Regulatory Commission.
This argument found favour with the top court. If a corporate debtor opposes initiation of insolvency proceedings on the ground that it has a money award in its favour and the awarded amount exceeds the debt, then the NCLT “would have to exercise its discretion", it said.
Tribunal Can Exercise Discretion In Admission: Supreme Court
The top court examined Section 7 that allows for admission of an insolvency petition moved by a financial creditor. Once the tribunal is satisfied that a debt exists and default has occurred, as per Section 7(5), “it may, by order, admit such application”.
The Supreme Court judgment said the use of the phrase “may admit” indicated that the legislature intended to give the NCLT discretion in admitting the application. The bench also pointed to Section 9, which deals with admission of a petition by an operational creditor and uses the word “shall”.
The existence of a financial debt and default in payment only gave the financial creditor the right to apply for initiation of insolvency proceedings, the judgment said.
Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a corporate debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an operational creditor.Supreme Court of India
If facts and circumstances so warrant, the adjudicating authority can keep the admission in abeyance or even reject the application, the bench said.
Beginning Of The End?
This interpretation by the top court has practitioners concerned.
The issue of admission of an insolvency petition is already settled by an earlier top court judgment in the case of Innoventive Industries, Senior Advocate Ramji Srinivasan said.
"The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority." – Supreme Court in Innoventive's case
The Vidarbha judgment, Srinivasan said, disturbs the settled law without taking note of the above paragraph in Innoventive's case and that makes this ruling infirm. The law laid down by the top court in Innoventive was designed to ensure strict and purposive application of the IBC provisions, he said.
Vidarbha turns all this on its head, and may well sound the “beginning of the end for IBC”, with vast discretion now being vested in the NCLT, including inquiring into the myriad reasons for default and excusing the borrower from repayment of public monies, defeating the rights of financial creditors and their attempt to bring monies back into the system.Ramji Srinivasan, Senior Advocate.
The ruling is also an aberration from the established legal position of Arun Kumar Jagatramka vs Jindal Steel & Power Ltd. where the court talked about minimal intervention by the NCLT and NCLAT during admission of an insolvency petition, said Bishwajit Dubey, partner at Cyril Amarchand Mangaldas.
This judgment calls for an authoritative pronouncement from the Supreme Court or a timely amendment to the Insolvency and Bankruptcy Code, 2016….In the meanwhile, we would expect that the NCLTs and NCLAT continue to follow the principle laid down by the apex court in established judgments, including Innoventive Industries.Bishwajit Dubey, Partner, Cyril Amarchand Mangaldas
As the saying goes, bad facts make bad law. The apex court's ruling in Vidarbha Industries is perhaps the classic example of it.