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Analysis Of Vidarbha Industries v/s Axis Bank: A Disconcerting Approach To Literal Interpretation

The Supreme Court of India, in the case of Vidarbha Industries Power Limited v. Axis Bank Limited, rendered a decision on July 12, 2022. The court concluded that Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 grants the National Company Law Tribunal (NCLT) the authority to exercise discretion in admitting an insolvency application once the financial creditor has established the occurrence of default.

This ruling signifies a notable deviation from prior Supreme Court judgements, which have established that the National Company Law Tribunal (NCLT) should confine its examination to two factors: (1) the presence of debt and (2) non-payment of debt. On September 22, 2022, the Supreme Court declined to review the petition pertaining to this judgement.

According to Section 7(5)(a) of the Insolvency and Bankruptcy Code (IBC), if the Adjudicating Authority determines that a default has occurred and the application submitted under sub-section (2) is comprehensive, and there are no ongoing disciplinary proceedings against the proposed resolution professional, it has the authority to admit the application through an order.

In the Vidarbha Supreme Court case, the court applied the literal interpretation test and determined that the inclusion of the word "may" grants the National Company Law Tribunal (NCLT) the authority to exercise its discretion in admitting an application once it is convinced of the presence of a debt. Moreover, it is asserted that Section 9(5) of the Insolvency and Bankruptcy Code (IBC) demonstrates a clear legislative intention to distinguish between applications submitted by financial creditors and operational creditors, as evidenced by the use of the term "shall" in relation to an application made by an operational creditor.

In the review petition, reference was made to the Supreme Court's ruling in the case of E S Krishnamurthy & Ors. v. Bharath Hi-tech Builders Pvt. Ltd.2, wherein the Supreme Court determined that, with regard to Section 7(5) of the Insolvency and Bankruptcy Code (IBC), the Adjudicating Authority is vested with the authority to solely ascertain the occurrence or absence of a default.

The Adjudicating Authority is required to make a determination and subsequently accept or decline an application based on its decision. The Adjudicating Authority has only two available courses of action as outlined in Section 7(5)..."

The Supreme Court, however, dismissed the review petition on the grounds that the question of whether the power under Section 7(5) was mandatory or directory was not raised in the judgements presented before the court.

The objectives of the International Business Corporation (IBC) are as follows:
Before the implementation of the Insolvency and Bankruptcy Code (IBC), the insolvency and bankruptcy laws in India were regulated by multiple legislations. These included the Presidency Towns Insolvency Act 1909, the Provincial Insolvency Act 1920, Companies Act 2013, the Recovery of Debt Due to Banks and Financial Institutions Act 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, and notably, the Sick Industrial Companies (Special Provisions) Act 1985 (SICA).

The Bankruptcy Law Reforms Committee (BLRC) emphasised in its report dated November 4, 2015 (the BLRC Report) that the existing legislations have complicated the insolvency process and led to a dearth of clarity and jurisdiction. Moreover, the inclusion of authorities in evaluating the merits of the dispute and the debtor's solvency has resulted in extended periods of delay and increased uncertainty regarding the final outcomes.

Prior to the implementation of the Insolvency and Bankruptcy Code (IBC), the duration required to address insolvency cases in India exceeded the average timeframe observed in numerous other nations. The Insolvency and Bankruptcy Code (IBC) was implemented with the objective of fostering a unified, transparent, reliable, and effective insolvency legislation in India.

Analysis of Section 7
The International Bankruptcy Commission (IBC) advocates for a party-driven approach to resolving insolvency. According to Section 7 of the Insolvency and Bankruptcy Code (IBC), a financial creditor has the authority to commence an insolvency resolution process against a corporate debtor upon demonstrating a default in the debt owed by the corporate debtor. In the case of Innoventive Industries Limited v. ICICI Bank3 ("Innoventive"), the Supreme Court ruled that the primary objective of the Insolvency and Bankruptcy Code (IBC) is to initiate the insolvency resolution process promptly upon the occurrence of a default.

The Supreme Court has ruled that once the National Company Law Tribunal (NCLT) is satisfied that a default has taken place, the application must be accepted for further consideration.

Moreover, in the case of Swiss Ribbons Private Limited v. Union of India4 ("Swiss Ribbons"), the Supreme Court elaborated on the ruling established in Innoventive and determined that the triggering event under the Insolvency and Bankruptcy Code (IBC) is the failure to pay outstanding debts to creditors.

It was further determined that the legislative policy in India has transitioned from the notion of "inability to pay debts" to the "determination of default". This shift allows the financial creditor to commence the insolvency resolution process as soon as there is evidence of a default.

The shift mentioned in the BLRC Report5 is emphasised, as the committee expressed opposition to the implementation of a solvency test under Section 7 of the IBC. The rationale for adopting this approach stems from the absence of a universally accepted and incontrovertible method for determining insolvency.

The International Bankruptcy Code (IBC) operates under the assumption that creditors typically resort to filing an application for insolvency only after unsuccessful attempts to resolve conflicts through negotiation. In this particular context, the Business Law Reforms Committee (BLRC) has specified that the initiation of the insolvency resolution process is contingent upon the presence of evidence indicating a default.

The Supreme Court has recently established a novel approach to the admission of claims in the Vidarbha region. The NCLT has been instructed to carefully consider relevant factors and ensure that solvent companies, who may have temporarily defaulted on their financial debts, are not unjustly penalised through the insolvency resolution process. From our perspective, we find this approach to be unsound.

There appears to be a conflict with an established rule of law.
The Supreme Court in the Vidarbha region failed to sufficiently distinguish the application of this new test from the previously established tests. The twin criteria of "debt" and "default" outlined in the Innoventive case endorse a binary methodology that solely considers the presence of a debt when evaluating an application. The Supreme Court has ruled that in Vidarbha, the National Company Law Tribunal (NCLT) is obligated to consider pertinent contextual factors related to the case.

It has been determined that in cases where the corporate debtor's realisable dues exceed the payable dues, the National Company Law Tribunal (NCLT) should exercise its discretion to refrain from admitting the petition. The Supreme Court, however, has not provided a comprehensive explanation regarding the extent of discretion that can be exercised by the National Company Law Tribunal (NCLT), other than emphasising that it should not be arbitrary.

This approach is not in alignment with the Innoventive judgement and is also inconsistent with the recommendations put forth by the BLRC. According to the interim report of the BLRC dated February 10, 2015, the committee made the following recommendations:

The guidelines pertaining to the operationalization of the National Company Law Tribunal (NCLT) should clearly state that when a company is granted the chance to submit a response prior to the admission of a petition, the NCLT should refrain from deliberating on the substantive aspects of the case during that particular stage.

According to the final BLRC Report released in November 2015, the committee emphasised that, given the unreliable nature of the solvency test in India, it is recommended that the insolvency resolution process be initiated when a default occurs. The aforementioned approach was referenced in the Swiss Ribbons case, wherein it was determined that there has been a shift in legislative policy from the notion of "inability to pay debts" to the concept of "determination of default". The aforementioned shift allows the financial creditor to establish, through substantial documentary evidence, the existence of a debt obligation and the debtor's failure to fulfil said obligation.

Contrary to the intended goals of the IBC.
The Supreme Court in the Vidarbha case determined that the primary purpose of the Insolvency and Bankruptcy Code (IBC) is not to impose penalties on financially viable companies that experience temporary defaults in repaying their debts, through the initiation of Corporate Insolvency Resolution Process (CIRP). While there is no disagreement on this matter, it is also a fact that the IBC was specifically created to facilitate the resolution of insolvency disputes in a manner that is both transparent and predictable.

One of the key factors contributing to the failure of SICA was the substantial level of court intervention in the rescue process.6 The Business Law Reform Commission (BLRC) has observed that, under previous legislations, the revival of a sick industrial company typically required a period of five to seven years. This extended timeline was primarily attributed to the routine challenges faced by appellate courts regarding the merits of insolvency in the process.

Consequently, the International Business Council (IBC) has consistently advocated for an approach that minimises judicial intervention. Based on the findings of the BLRC Report and the referenced Supreme Court rulings, it is apparent that the NCLT should refrain from examining the substantive aspects of the case and instead focus its assessment solely on the presence of default.

The "hands-off" approach extends beyond the admission stage. In the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the Supreme Court ruled that the National Company Law Tribunal (NCLT) should refrain from scrutinising the business judgement of the committee of creditors. Instead, the NCLT's role should be limited to verifying compliance with the procedural requirements outlined in the Insolvency and Bankruptcy Code (IBC).

The dilution of the authority of the committee of creditors
The committee of creditors has the authority to submit an application for withdrawal, thereby concluding the resolution process in accordance with Section 12A of the Insolvency and Bankruptcy Code (IBC). The provision mandating a 90% voting share approval can be viewed as a safeguard within the IBC, aimed at preventing potential misuse of the insolvency process. The final determination of this decision rests with the committee of creditors, based on their commercial judgement, rather than being within the purview of the NCLT.

The Union Government is expected to give significant weight to the decision of the Supreme Court, as it contemplates implementing a new series of reforms to the Insolvency and Bankruptcy Code (IBC) in 2022. Currently, this judgement is in clear opposition to the BLRC Reports and the prior judgements of the Supreme Court in Innoventive and Swiss Ribbons.

The authors argue that the Vidarbha judgement does not provide any persuasive rationale for deviating from the test established in Innoventive or for disregarding the guidance provided by the BLRC. Without prompt intervention in the form of a legislative amendment or reconsideration by the Supreme Court in a suitable case, this judgement exposes the Insolvency and Bankruptcy Code (IBC) to the potential risk of encountering the same fate as the previous insolvency regime in India.

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