The Supreme Court on July 12, 2022 in the matter of Vidarbha Industries Power Limited v. Axis Bank Limited, observed that discretionary power has been vested with the adjudicatory authority as per section 7(5) of the Insolvency and Bankruptcy Code (“IBC”) for the admission of application by a Financial Creditor for initiation of CIRP.

In the instant case, the Appellant was awarded a contract by bidding process which was conducted by Maharashtra Industrial Development Corporation (“MIDC”) for implementation of a Group Power Project (“GPP”), which was later converted into an Independent Power Project (“IPP”). However, Maharashtra Electricity Regulatory Commission (“MERC”) disallowed a substantial portion of actual fuel cost which was claimed by the Appellant for the Financial Years 2014-2015 and 2015-2016 and also capped the tariff for the Financial Years 2016-2017 to 2019-2020.The Appellant filed an appeal before the Appellate Tribunal for Electricity (“APTEL”), challenging the disallowance of the actual fuel cost for the abovementioned Financial Years, which was allowed and a sum of Rs.1,730 Crores is due to the Appellant pursuant to which the Appellant filed an application before the MERC for implementation of this order of APTEL. MERC filed a civil appeal challenging the order of APTEL which was pending. Amid these series of pending cases the Appellant was short of funds. Axis Bank Limited, as Financial Creditor of the Appellant, filed an application under Section 7 (2) of the IBC for the initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Appellant. The Appellant filed an application, seeking stay of proceedings under Section 7 of the IBC before the NCLT, placing reliance to the case of Swiss Ribbons Private Limited and Anr. v. Union of India and Ors (2019) 4 SCC 17, the NCLT 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”

The National Companies Law Appellate Tribunal (“NCLAT”) upheld the decision of the Adjudicating Authority (“NCLT”).

The Supreme Court disagreeing with the decision of lower courts held:

“There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters. The Adjudicating Authority (NCLT) found the dispute of the Corporate Debtor with the Electricity Regulator or the recipient of electricity would be extraneous to the matters involved in the petition. Disputes with the Electricity Regulator or the Recipient of Electricity may not be of much relevance. The question is whether an award of the APTEL in favour of the Corporate Debtor, can completely be disregarded by the Adjudicating Authority (NCLT), when it is claimed that, in terms of the Award, a sum of Rs.1,730 crores, that is an amount far exceeding the claim of the Financial Creditor, is realisable by the Corporate Debtor. The answer, in our view, is necessarily in the negative.”

The Supreme Court by distinguishing the section 7(5) of IBC’s admission of application by Financial Creditors and section 9(5) of IBC’s admission of application by Operational Creditors held that:

“The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC but a different word, that is, ‘shall’ in the otherwise almost identical provision of Section 9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. An application of an Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the Corporate Debtor by the Operational Creditor and no notice of dispute has been received by the Operational Creditor. The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor.”

“On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.”

The Supreme Court held that the power under Section 7(5) of the IBC should not be applied arbitrarily and capriciously. It also held that only the existence of financial debt and default would not be sufficient for the admission of application of CIRP under section 7(5) of the IBC but also additional grounds would also be needed to be taken into consideration. The Apex Court also highlighted:

“The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example, when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so. The Adjudicating Authority may, for example, admit the application of the Financial Creditor, notwithstanding any award or decree, if the Award/Decretal amount is incapable of realisation. The example is only illustrative.”