In a recent case by the name of Vidarbha Industries Pvt. Ltd. vs. Axis Bank
the Hon'ble Supreme Court has held that the language of the Section 7(5)(a) of
the Insolvency and Bankruptcy Code, 2016 (hereinafter IBC) is not mandatory
but discretionary. And the Adjudicating Authority (NCLT) is not bereft of its
power to dismiss an application by a Financial Creditor seeking Insolvency
Proceedings against a Corporate debtor even if the debtor has defaulted to pay
back the Financial Creditor. The present Article is an attempt to give its
readers an insight into the above-mentioned judgement of the Apex Judiciary.
Facts of the case:
Issues raised before the supreme court for adjudication:
- The present Appeal was made under Section 60 of the IBC against an order
of National Company Law Appellate Tribunal (hereinafter 'NCLAT') dated
02.03.2022. whereby the tribunal had dismissed the application to stay the
proceedings initiated by Respondent against Appellant for initiation of
Corporate Insolvency Resolution Process (hereinafter CIRP) under Section 7 of IBC.
- The Applicant had filed an appeal in 2016 before Appellate Tribunal for
Electricity (hereinafter APTEL). The APTEL decided the matter in favor of the
Appellant and directed the Maharashtra Electricity Regulatory Commission
(hereinafter MERC) to pay Appellant a sum of Rs. 1730 Crores.
- MERC however, challenged this order of APTEL before the Supreme Court in
- The Appellant was running short of funds, and according to Appellant
implementation of the above mentioned APTEL order will allow the Appellant to
clear all dues and liabilities.
- However, in 2020 Axis Bank being one of the Financial Creditor to the
Appellant filed an application under Section 7(2) of IBC before NCLT, Mumbai to
initiate CIRP against the Appellant Company.
- The Appellant however, filed a miscellaneous application before NCLT the
same year, seeking stay of the CIRP proceedings as long as the matter between
Appellant and MERC was pending before the Supreme Court.
- By an order in year 2021 the NCLT dismissed the application of the
Appellant seeking stay of CIRP proceedings. The Appellant later filed an appeal
against the order of NCLT before the NCLAT, however, the same was also dismissed
by the Tribunal.
- The reasoning of NCLT and NCLAT was based upon the judgment of Supreme
Court in the matter of Swiss Ribbons v. Union of India [ii] where the hon'ble
court has held that in such matters time is of the essence and thus the
Adjudicating Authorities shall endeavor to dispose of the matter in a time bound
matter.ญญญ And therefore the NCLT rejected the application to stay the
proceedings on the basis that it would unnecessarily derail the CIRP
- NCLT has further held that the Adjudicating Authority is only required to
see two things: a) whether there has been a debt; and b) the corporate debtor
defaulted in making repayments. These, two aspects when satisfied would trigger
Corporate Insolvency. And thus, the fact that another relevant case pending
before the Apex Court will not disturb the CIRP proceedings here. And the reason
of NCLT was upheld by NCLAT too. Aggrieved by it the Appellant has appealed
before the Supreme Court under the present Petition.
Arguments raised by-the appellant
- Whether Section 7(5)(a) of IBC is a mandatory or a discretionary
provision. In other words, is the expression 'may' to be construed as
'shall', having regard to the facts and circumstances of the case.
Arguments raised by the respondent
- The Appellant argued that it has filed applied for a stay of
proceedings before NCLT only because of extraordinary circumstances, where the Appellant had
not been able to pay the dues of the Respondent, only because an appeal filed by
MERC. Had it not been the case the Appellant would have already paid the
- The Appellant argued that on a bare reading of section 7(5)(a)
of the IBC the use of word 'may' indicate that it is not mandatory
for NCLT to admit all
the application, wherever there is a debt and a default by Corporate Debtor. The
Appellant further argued that the section 7(5)(a) of the IBC enables NCLT to
reject an application, even if there is a debt, for any reason that it may deem
fit, for meeting the end of justice.
- The Appellant had made a parallel between the section 7(5)(a) of
the IBC and the section 10(4) of the IBC, which has already been
declared by the Supreme Court itself to be discretionary and not
mandatory, in the matter of Surendra
Trading Company vs. Juggilal Kamlapat Jute Mills Company and Ors.[iii]
- The Appellant also argued that the object of the IBC is to first
try and revive the company and not to nail its coffin. This
objective of the IBC cannot be kept aside while dealing with an
application under the section 7 of the IBC or while interpreting the
same. Further the Appellant argued that where there is a favourable order in favour of the corporate debtor, implementation of which
would enable the corporate Debtor to pay its debt, the NCLT is not emancipated
of its power to reject an application made under the section 7 of the IBC, for
sake of justice.
Judgment of the hon'ble supreme court
- The Respondent argued that the Appellant being in admitted
default, the NCLT had rightly refused to stay the CIRP proceedings. The Respondent for this
relied on Swiss Ribbons (supra).
- Respondent further argued that the section 7(5)(a) of the
IBC is mandatory in nature and the Adjudicating Authority under
this section is under obligation to admit application of a
Financial Creditor under section 7 of the IBC, when the
Authority has found that a Corporate Debtor has defaulted.
- Respondent argued that since there was no dispute that the
Appellant had defaulted to repay the Respondent, thus the
Adjudicating Authority was obliged to admit the application
under Section 7 of IBC.
- Respondent relied on the judgment of the Supreme Court in Innoventive
Industries Ltd. vs. ICICI Bank and Anr.[iv] to argue that the objective of IBC
was to provide a fast-track insolvency resolution process, and thus the Section
7(5)(a) shall be read as a mandatory provision to fulfil the objective of the
Reasoning of the Hon'ble Apex Court
- The hon'ble Supreme Court held that the legislature had must applied its
wisdom in choosing the word 'may' in Section 7(5)(a) of the IBC. The meaning and
intention of Section 7(5)(a) of the IBC shall be ascertained from the language
of the provision. In the light of it, the Apex Court held that the effect of the
provision is as directory or discretionary and not mandatory.
- The NCLT in the present case failed to appreciate that the question
initiation of CIRP could only arise if the companies were bankrupt or insolvent
and not otherwise.
- The hon'ble Supreme Court allowed the appeal, and quashed the impugned
awards made by the NCLT and NCLAT in favour of the Appellant, and further
directed the NCLT to re-consider the application of stay moved by the Appellant
- The hon'ble Supreme Court has held that NCLAT eared in holding that NCLT
was only required to see whether there had been a debt and the Corporate Debtor
defaulted in paying back such debt, to allow an application for initiation of
CIRP under Section 7 of IBC.
- According to the hon'ble Court the existence of a debt and a default by
Corporate Debtor in relation to such debt only gives a right to the Financial
Creditor to apply for initiation of CIRP. However, the Adjudicating Authority
must apply its mind to relevant factors including the feasibility of CIRP.
- To further elaborate, the hon'ble Justice Indira Banerjee has compared the
Section 7(5)(a) of the IBC with Section 9(5) of the IBC, this Section 9 provides
that the NCLT 'shall' within 14 days of the receipt of an application made by an
Operational Creditor, admit the application. According to Justice Banerjee the
Legislature has on a purpose used the word 'may' in Section 7(5)(a) of the IBC
with relation to initiation of CIRP by a Financial Creditor but has used the
word 'shall' in another almost parallel and cyclostyle provision of Section 9(5)
of the IBC with relation to initiation of CIRP by an Operation Creditor. This
choice of different words in almost similar provisions clearly shows that the
two provisions are intended to convey different meaning. And thus, it is
apparent that it was the intent of the Legislature to give a discretionary
nature to the Section 7(5)(a) of the IBC and a mandatory nature to Section 9(5)
of the IBC.
- This Difference of nature is a natural and logical
corollary of the differences between a Financial
Creditor, which is usually a secured creditor and is for
a much longer duration, and an Operational Creditor
which is neither secured nor for a long term.
- The NCLT has been conferred with discretion to admit an application of the
Financial Creditor as it is a much-secured creditor and has strong financial
backing, while the power to admits an application made by an Operational
Creditor is mandatory keeping in mind its week status.
- The Court further held that the objective of the IBC
is not to penalize solvent companies, temporarily making
default in making of financial debt, because of
extraordinary situations by initiation of CIRP. Section 7(5)(a) of
the IBC, therefore, confers discretionary power to the NCLT to admit an
application of a Financial Creditor under Section 7 of the IBC for initiation of
- The NCLT must consider the grounds made by the Corporate Debtor against
admission of CIRP, on its own merit and special nature, as was the case in
present Appeal. 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.
- It is well settled that the objective of the IBC
was to provide a legal machinery to resolve
insolvency and debt recovery in a time barred, for
maximization of the value of the assets of such
company or person and thus, balancing the interest
of all the stakeholders and matters connected
therewith. However, it is also the objective of the
IBC to first try and revive the company and not to
spell its death knell. This objective cannot be lost
sight of, while exercising the power under Section 7
- This judgment sets a good precedent for upcoming
case dealing with initiation of CIRP proceedings by a Financial Creditor against a Corporate
Debtor, as it asks the Adjudicating Authorities to apply its mind while hearing
such application and not to start the CIRP proceedings against a solvent company
or against a company which is because of some extraordinary conditions has
defaulted temporarily without hearing the matter of the Corporate Debtor on
- 2022 SCC OnLine 841
- (2019) 4 SCC 17
- (2017) 16 SCC 143
- (2018) 1 SCC 407
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