IBC – Section 7(5)(a) | NCLT “may” reject Financial Creditor’s CIRP application even in case of Corporate Debtor’s default in payment of debt

Supreme Court: The bench of Indira Banerjee* and JK Maheshwari, JJ has rejected the view of NCLT and NCLAT that once it is found that a debt existed, and a Corporate Debtor is 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 Insolvency and Bankruptcy Code, 2016 (IBC).

Going by the scheme of IBC and the legislative intent, the Court observed that the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition.

However, even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner.

“The object of the IBC is to first try and revive the company and not to spell its death knell. This objective cannot be lost sight of, when exercising powers under Section 7 of the IBC or interpreting the said Section.”

Stating that the Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits, the Court explained by way of the following illustration,

“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.”

Facts of the case

In the case at hand, the Appellant, a Power Generating Company, was awarded the contract for implementation of a Group Power Project (GPP) by the Maharashtra Industrial Development Corporation (MIDC). The GPP was later converted into an Independent Power Project (IPP). When the appellant was disallowed the actual fuel cost for the Financial Years 2014-2015 and 2015-2016 by the Maharashtra Electricity Regulatory Commission (MERC), it approached the Appellate Tribunal for Electricity (APTEL), challenging the same.

APTEL allowed the appeal and directed MERC to allow the Appellant the actual cost of coal purchased for Unit-1, capped to the fuel cost for Unit 2 in terms of the FSA that had been executed, till such time as a FSA was executed in respect of Unit 1. The Appellant claims that a sum of Rs.1,730 Crores is due to the Appellant in terms of the said order of APTEL.

NCLT 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.

Referring to the judgment in Swiss Ribbons v. Union of Indian, (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. NCLAT affirmed the NCLT’s finding while observing that 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.

Ruling

The Court observed 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.

On NCLT’s finding that 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, the Court observed that while the disputes with the Electricity Regulator or the Recipient of Electricity may not be of much relevance, an award of the APTEL in favour of the Corporate Debtor, cannot be completely be disregarded by the 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.

Further, the Court was of the opinion that NCLAT erred in holding that 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.”

The Court, hence, set aside the NCLAT and NCLT orders and directed NCLT to re-consider the application of the Appellant for stay of further proceedings on merits in accordance with law.

[Vidarbha Industries Power Ltd v. Axis Bank Ltd.,2022 SCC OnLine SC 841, decided on 12.07.2022]


*Judgment by: Justice Indira Banerjee


Counsels

For Financial Creditor: Senior Advocate Dhruv Mehta

For Appellant: Senior Advocate Jaideep Gupta

Join the discussion

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.