{"id":293514,"date":"2023-06-02T09:00:16","date_gmt":"2023-06-02T03:30:16","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=293514"},"modified":"2023-06-01T18:54:29","modified_gmt":"2023-06-01T13:24:29","slug":"an-advocate-for-vidarbha","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2023\/06\/02\/an-advocate-for-vidarbha\/","title":{"rendered":"An Advocate \u201cfor\u201d Vidarbha"},"content":{"rendered":"
\n

I<\/span>t has been six years since the Insolvency and Bankruptcy Code, 2016<\/a>1<\/sup><\/a> (IBC\/Code) was implemented in December 2016 and for the entirety of this period, the law related to the adjudication of a Section 72<\/sup><\/a> petition under IBC seemed to be well-settled by the Supreme Court. In Innoventive Industries Ltd.<\/i> v. ICICI Bank<\/i>3<\/sup><\/a> the Court held that the adjudicating authority is only required to look at three factors while admitting a Section 7 petition i.e. whether there is a debt which is due and there is a default of the same. <\/p>\n

However, an altogether new interpretation was done by the Supreme Court in Vidarbha Industries Power Ltd.<\/i> v. Axis Bank Ltd. (Vidarbha judgment)<\/i>4<\/sup><\/a> wherein the Bench comprising of Indira Banerjee and J.K. Maheshwari, JJ. held that even if there is a debt and default, it is not mandatory for the National Company Law Tribunal (NCLT) to admit the petition and the financial health of the company and other factors can be considered by NCLT to decide whether to initiate the corporate insolvency resolution process (CIRP) of the company.<\/p>\n

Criticism of Vidarbha<\/i> judgment<\/h4>\n

Even though the review petition filed against the Vidarbha<\/i> judgment was dismissed,5<\/sup><\/a> there is a huge criticism of the case from both the professionals and academicians. Moreover, it is now apparent that even the Government is considering an amendment to nullify the effect of the Vidarbha<\/i> judgment.6<\/sup><\/a><\/p>\n

The critiques of the judgment, while highlighting flaws in the reasoning of the judgment, have highlighted two major arguments including inter alia concerns regarding the contours of discretion and the rationale behind distinguishing the treatment of applications filed by financial and operational creditors. The authors believe that the principle laid in Vidarbha<\/i> judgment7<\/sup><\/a> is necessary to ensure that the Code is not misused as mere recovery mechanism and consequently, discretion is required to be exercised by NCLT in some cases.<\/p>\n

Ignorance of Indus Biotech<\/i> judgment<\/h4>\n

Everyone has criticised that the dictum of Vidarbha has diluted the rigour of IBC but what has been ignored is that a three-Judge Bench of the Supreme Court had already laid down the very same principle even much prior to the Vidarbha<\/i> judgment8<\/sup><\/a>. The Supreme Court in Indus Biotech (P) Ltd.<\/i> v. Kotak India Venture (Offshore) Fund<\/i>9<\/sup><\/a> held that:<\/p>\n

21.<\/i> In such circumstance if the adjudicating authority finds from the material available on record that the situation is not yet ripe to call it a default, that too if it is satisfied that it is profit-making company and certain other factors which need consideration, appropriate orders in that regard would be made; the consequence of which could be the dismissal of the petition under Section 7<\/a> of the IB Code<\/a> on taking note of the stance of the corporate debtor.<\/i> As otherwise if in every case where there is debt, if default is also assumed and the process becomes automatic, a company which is ably running its administration and discharging its debts in a planned manner may also be pushed to the corporate insolvency resolution process and get entangled in a proceeding with no point of return. Therefore, the adjudicating authority certainly would make an objective assessment of the whole situation before coming to a conclusion as to whether the petition under Section 7<\/a> of the IB Code<\/a> is to be admitted in the factual background. (emphasis supplied)<\/p>\n

The Supreme Court in Vidarbha case<\/i>10<\/sup><\/a> almost reiterated what has been laid down in Indus Biotech case<\/i>11<\/sup><\/a> but the reasoning was based on the usage of word “may” in Section 7(5) of the Code. Surprisingly, there is no criticism of Indus Biotech<\/i>12<\/sup><\/a> perhaps because it is mostly considered that Indus Biotech<\/i>13<\/sup><\/a> deals with interplay of Section 7<\/a> of the IBC<\/a> and Section 8<\/a>14<\/sup><\/a> of the Arbitration and Conciliation Act, 1996<\/a>.<\/p>\n

Addressing the criticisms<\/h4>\n

The Vidarbha<\/i> judgment15<\/sup><\/a> held that in case of a financial creditor, the adjudicating authority “may” consider the viability and overall financial health of the company beyond the mere existence of “debt” and “default”. However, the same discretion cannot be exercised by NCLT in case of a Section 916<\/sup><\/a> application filed by an operational creditor. The Court clarified that this distinction is owing to the use of the word “may” in Section 7(5) as opposed to the word “shall” in Section 9(5), which are otherwise identical provisions, thereby indicating the absoluteness of the latter.<\/p>\n

Though the finding of the Court is based on the literal interpretation of Sections 7(5) and 9(5) of the Code but the same is also justified from another perspective. The Supreme Court in Swiss Ribbons (P) Ltd.<\/i> v. Union of India<\/i>17<\/sup><\/a> recognised that the operational creditors have smaller amount of debt in comparison to financial creditor and therefore, if a company is unable to pay an undisputed operational debt of smaller amount, it literally means that the company is insolvent as it is unable to meet even the demand of a smaller debt and therefore, CIRP shall be initiated in such cases.<\/p>\n

However, in cases of financial creditor where the exposure of creditor is huge in such cases, the company may be allowed to raise a defence such as that it is raising funds from other creditors; it has receivables more than the claimed amount or it can liquidate some of its assets and restructure the existing liability. It has to be kept in mind that ultimately even under the CIRP, the debt of the company will stand restructured only and data have shown that financial institutions have taken huge haircut under the approved resolution plans.18<\/sup><\/a> Therefore, the authors believe that the NCLT shall not initiate insolvency of a company in a mere mechanical manner and does not even give a right to the corporate debtor to raise a defence.<\/p>\n

The apprehension of critics that even raising a defence of a healthy business or financial health will derail the whole process is completely uncalled for as NCLT will apply its mind as to whether such a defence is tenable or not. Even prior to the Vidarbha<\/i> judgment19<\/sup><\/a>, the Supreme Court itself in Pioneer Urban Land and Infrastructure Ltd.<\/i> v. Union of India<\/i>20<\/sup><\/a> allowed the real estate companies to raise various defences against a real estate allottee and therefore, it is not the first time that the Supreme Court permitted the corporate debtor to raise alternate defence even in case of admitted debt and default. NCLT, Bengaluru also rejected the plea of Rabobank to initiate CIRP of Café Coffee Day (CCD)21<\/sup><\/a> on the ground that it is actively restructuring its debt22<\/sup><\/a> and later CCD successfully reduced its debt.23<\/sup><\/a><\/p>\n

Also, the implementation of IBC also indicates that the real success of IBC is not the resolution of a company rather more than 50% cases filed under IBC having an exposure of Rs 5.5 lakh crores are settled even prior to admission or withdrawn under Section 12-A24<\/sup><\/a>.25<\/sup><\/a> This clearly establishes the fact that the creditors themselves agreed to the restructuring of the debt by the debtor without taking the recourse of a resolution plan under IBC.<\/p>\n

For instance, in Sk. Mohd. Tariq<\/i> v. Aegis Forging Ltd.<\/i>26<\/sup><\/a>, the National Company Law Appellate Tribunal (NCLAT) refused to entertain a financial creditor’s petition in light of Vidarbha judgment<\/i>27<\/sup><\/a>, despite evidence of “debt” and “default” because the creditor had not only obtained an award against the debt but also put the same into execution.<\/p>\n

Therefore, if the NCLT is vested with the discretion to look into the financial health of the corporate debtor to evaluate whether it can repay or restructure the claimed default, it will only help in increasing the financial discipline in debtors rather than diluting the intent of the Code. Furthermore, inasmuch as the question of unbridled discretion of the adjudicating authority is concerned, the Court in Vidarbha case<\/i>28<\/sup><\/a>, wary of such misuse, clearly placed restrictions on the discretion which must not be exercised “unless there are good reasons not to admit the petition … by considering the grounds made by the corporate debtor against its admission, on its own merits”.<\/p>\n

Conclusion<\/h4>\n

The observations in Vidarbha<\/i> judgment29<\/sup><\/a> will surely create a floodgate of resistance against the initiation of CIRP against a corporate debtor and will have a monumental impact on the working of the IBC. However, it is the view of the authors that such discretion is essential to ensure that IBC is not misused, and the Supreme Court only permitted the NCLT to look into such defence if being raised and not necessarily agreed to such defence in each and every case. It is important to emphasise that it is not the intent of the Code to put an otherwise healthy and financially viable corporate debtor into the insolvency resolution process as a coercive mechanism.<\/p>\n<\/div>\n\n

† Advocate. Author can be reached at lavanyapathak1@gmail.com<\/a>.<\/span><\/strong><\/p>\n

†† Advocate. Author can be reached at akshay0124@gmail.com<\/a>.<\/span><\/strong><\/p>\n

1.<\/a> Insolvency and Bankruptcy Code, 2016.<\/a><\/p>\n

2.<\/a> Insolvency and Bankruptcy Code, 2016<\/a>, S. 7<\/a>.<\/p>\n

3.<\/a> (2018) 1 SCC 407.<\/a><\/p>\n

4.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n

5.<\/a> 2022 SCC OnLine SC 1339.<\/a><\/p>\n

6.<\/a> “Govt. Proposes Slew of Changes to Insolvency Law”, The Economic Times<\/i>, 18-1-2023.<\/p>\n

7.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n

8.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n

9.<\/a> (2021) 6 SCC 436, 451.<\/a><\/p>\n

10.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n

11.<\/a> (2021) 6 SCC 436.<\/a><\/p>\n

12.<\/a> (2021) 6 SCC 436<\/a>.<\/p>\n

13.<\/a> (2021) 6 SCC 436<\/a>.<\/p>\n

14.<\/a> Arbitration and Conciliation Act, 1996<\/a>, S. 8<\/a>.<\/p>\n

15.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n

16.<\/a> Insolvency and Bankruptcy Code, 2016<\/a>, S. 9<\/a>.<\/p>\n

17.<\/a> (2019) 4 SCC 17.<\/a><\/p>\n

18.<\/a> “Banks Took a Haircut of 69 Per Cent While Resolving IBC Cases: Report”, Business Standard<\/i>, 25-8-2022.<\/p>\n

19.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n

20.<\/a> (2019) 8 SCC 416.<\/a><\/p>\n

21.<\/a> Coöperatieve Rabobank UA<\/i> v. Coffee Day Global Ltd.<\/i>, 2022 SCC OnLine NCLT 42<\/a>.<\/p>\n

22.<\/a> “Rabobank’s Insolvency Petition Against Coffee Day Global Dismissed”, The Economic Times<\/i>, 31-3-2022.<\/p>\n

23.<\/a> “Significant Reduction in Debt Burden to Rs 1810 Cr till March 31: Coffee Day Enterprises”, The Economic Times<\/i>, 31-8-2023.<\/p>\n

24.<\/a> Insolvency and Bankruptcy Code, 2016<\/a>, S. 12-A<\/a>.<\/p>\n

25.<\/a> “Over 17,800 Cases Involving Rs 5.5 Lakh Cr Disposed of at Pre-admission Stage under IBC: Official”, The Economic Times<\/i>, 27-8-2021.<\/p>\n

26.<\/a> 2022 SCC OnLine NCLAT 444.<\/a><\/p>\n

27.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n

28.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n

29.<\/a> (2022) 8 SCC 352.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

by Lavanya Pathak† and Akshay Sharma††<\/p>\n","protected":false},"author":67011,"featured_media":293630,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42503,1191],"tags":[56038,22064,3539,12521,58066],"class_list":["post-293514","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-legal-analysis","category-op-ed","tag-ibc-code","tag-insolvency-and-bankruptcy-code","tag-National_Company_Law_Tribunal","tag-nclt","tag-vidarbha"],"yoast_head":"\nAn Advocate \u201cfor\u201d Vidarbha | SCC Times<\/title>\n<meta name=\"description\" content=\"It has been six years since the Insolvency and Bankruptcy Code, 20161 was implemented in December 2016 and for the entirety of this period\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link 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