2022 (7) TMI 581 - SC - IBC

NCLT has discretionary power under Section 7(5)(a) IBC to admit financial creditor applications for insolvency proceedings

VIDARBHA INDUSTRIES POWER LIMITED Versus AXIS BANK LIMITED

The SC allowed the appeal, holding that NCLT has discretionary power under Section 7(5)(a) of IBC to admit financial creditor applications for CIRP ... Refusal to stay the proceedings initiated by the Respondent, Axis Bank Limited against the Appellant - solvent companies, temporarily defaulting in repayment of its financial debts - initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC - HELD THAT:- From a perusal of the application filed by the Respondent Financial Creditor under Section 7(2) of the IBC in the statutory form, a copy whereof is included in the Paper Book, it is apparent that the Respondent Financial Creditor filed the application in the NCLT for initiation of CIRP against the Appellant in its individual capacity and not as lead bank on behalf of the other creditors. The Respondent Financial Creditor claimed that a total amount of Rs.553,27,99,322.78 was due from the Appellant Corporate Debtor to the Respondent Financial Creditor, of which Rs.42,83,45,538.32 was on account of the interest and further Rs.11,21,68,673.81 towards penal interest. The principal outstanding amount was Rs.499,22,85,110.65. When an application is filed under Section 7(2) of the IBC, the Adjudicating Authority (NCLT) is required to ascertain the existence of a default from the records of the information utility or any other evidence furnished by the financial creditor under sub-section (3) of Section 7 of the IBC, within 14 days of the date of receipt of the application. The Appellate Authority (NCLAT) erred in holding that the Adjudicating Authority (NCLT) was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP. The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was require to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC’s appeal, pending in this Court, order of APTEL referred to above and the over all financial health and viability of the Corporate Debtor under its existing management. It is well settled that the first and foremost principle of interpretation of a statute is the rule of literal interpretation, as held by this Court in LALITA KUMARI VERSUS GOVT. OF UP. & ORS. [2013 (11) TMI 1520 - SUPREME COURT] If Section 7(5)(a) of the IBC is construed literally the provision must be held to confer a discretion on the Adjudicating Authority (NCLT). Section 9 prescribes the mode and manner by which an Operational Creditor can make an application for initiation of CIRP. After expiry of ten days from the date of delivery of the notice or invoice demanding payment, if the operational creditor does not receive payment from the Corporate Debtor or notice of dispute, the Operational Creditor may file an application before the Adjudicating Authority (NCLT) for initiation of CIRP - The Legislature has consciously differentiated between Financial Creditors and Operational Creditors, as there is an innate difference between Financial Creditors, in the business of investment and financing, and Operational Creditors in the business of supply of goods and services. Financial credit is usually secured and of much longer duration. Such credits, which are often long term credits, on which the operation of the Corporate Debtor depends, cannot be equated to operational debts which are usually unsecured, of a shorter duration and of lesser amount. The title “Insolvency and Bankruptcy Code” makes it amply clear that the statute deals with and/or tackles insolvency and bankruptcy. It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP. Section 7(5)(a) of the IBC, therefore, confers discretionary power on the Adjudicating Authority (NCLT) to admit an application of a Financial Creditor under Section 7 of the IBC for initiation of CIRP - The Adjudicating Authority (NCLT) failed to appreciate that the question of time bound initiation and completion of CIRP could only arise if the companies were bankrupt or insolvent and not otherwise. Moreover the timeline starts ticking only from the date of admission of the application for initiation of CIRP and not from the date of filing the same. The Adjudicating Authority (NCLT) as also the Appellate Tribunal (NCLAT) fell in error in holding that once it was found that a debt existed and a Corporate Debtor was in default in payment of the debt there would be no option to the Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the IBC - Appeal allowed. Issues Involved:1. Whether the NCLT and NCLAT were correct in holding that Section 7(5)(a) of the IBC mandates the admission of an application if a debt exists and the Corporate Debtor is in default.2. Whether the discretion conferred by Section 7(5)(a) of the IBC allows the NCLT to reject an application even if a debt exists.3. The impact of the pending appeal by MERC and the order of APTEL on the financial health and viability of the Corporate Debtor.Detailed Analysis:1. Mandatory or Discretionary Nature of Section 7(5)(a) of the IBC:The primary issue was whether the NCLT and NCLAT were correct in interpreting Section 7(5)(a) of the IBC as mandatory, requiring the admission of an application if a debt exists and the Corporate Debtor is in default. The Supreme Court held that the word 'may' in Section 7(5)(a) confers discretion on the Adjudicating Authority (NCLT) to admit or reject an application. The Court emphasized that legislative intent must be construed in accordance with the language used in the statute. The use of 'may' indicates that the provision is directory and not mandatory. The Court noted that if the legislature intended the provision to be mandatory, it would have used the word 'shall' instead of 'may.'2. Discretion to Reject an Application:The Court held that the discretion conferred by Section 7(5)(a) enables the NCLT to reject an application even if a debt exists, for reasons deemed fit to achieve the overall objective of the IBC, which is the revival of the company and value maximization. The Court stated that the NCLT must consider relevant factors, including the overall financial health and viability of the Corporate Debtor, before admitting an application. The Court emphasized that the viability and overall financial health of the Corporate Debtor are not extraneous matters and must be considered by the NCLT.3. Impact of Pending Appeal and APTEL Order:The Court noted that the NCLT and NCLAT failed to consider the impact of the pending appeal by MERC and the order of APTEL, which awarded a sum of Rs.1,730 Crores in favor of the Appellant. The Court held that the Adjudicating Authority must consider whether the awarded amount, which exceeds the debt claimed by the Financial Creditor, is realizable. The Court stated that the NCLT should have exercised its discretion to keep the admission of the application in abeyance unless there was a good reason not to do so.Conclusion:The Supreme Court allowed the appeal and set aside the impugned orders of the NCLT and NCLAT. The Court directed the NCLT to reconsider the application of the Appellant for stay of further proceedings on merits in accordance with law. The judgment clarifies that Section 7(5)(a) of the IBC is discretionary and not mandatory, and the NCLT must consider the overall financial health and viability of the Corporate Debtor before admitting an application for initiation of CIRP.