Author: Avik Sarkar

Designation: Legal Associate

Introduction

It’s been more than half a decade since the inception of the Insolvency and Bankruptcy Code (‘IBC’) and the results produced by it so far have been lopsided. Though it has proved to be better than the earlier enactments dealing with recovery but it’s far from its desired results that it was supposed to yield. The IBC aims to resolve matters expeditiously in a time-bound manner with the least amount of judicial intervention. However, in reality, the timelines mentioned in the Code are repeatedly being flouted and the dictums given by the courts are somehow contradictory to the spirit of the code.

In a recent judgement of Vidharbha Industries Vs Axis Bank given by the apex court it has been stated that the rule of acceptance of Section 7 application under the Code within 14 days is not mandatory but directory. Further, the tribunal will have the discretion to reject admission of application even if it fulfils the essentials of the section.

Factual Matrix

Maharashtra Industrial Development Corporation (‘MIDC’) had called for bids for setting up of Group Power Projects (‘GPP’). Vidharbha Industries Power Limited (‘Appelant’) which is a power generating company had placed their bid and was awarded the contract. However, later on, the GPP was converted into Independent Power Project (‘IPP’).

Further, with an intention to expand its operations, the appellant had entered into a Power Procurement Agreement with Reliance Industries Limited (‘RIL’) with the approval of the Maharashtra Electricity Regulatory Commission (‘MERC’). It is pertinent to note that MERC determines the amount of tariff that is charged by power generating-companies.

Furthermore, the MERC in 2015 approved the final tariff that would be chargeable by the appellant for the financial year 2014-2015 and 2015-2016. In 2016 the appellant filed an application before MERC for truing up the aggregate revenue requirement and crystallization of tariff rates in terms of MERC (Multi Year Tariff) Regulation, 2011, fuel costs were skyrocketing thereby causing an increase in the price of the supply of power. However, the application was disposed off by MERC.

An appeal was preferred by the appellant against the decision given by MERC before the Appellant Tribunal for Electricity (‘APTEL’). The decision of MERC was overturned and an award worth 1730 crores was awarded to the appellant. Now, to enforce the order given by the APTEL, the appellant had filed to MERC. However, MERC was contesting the order given by the APTEL before the apex court and therefore the appellants were unable to implement the award.  If the appellants were able to implement APTEL’s order then they would have been in a position to pay off their pending dues as they were running short of funds.

On 15th January, 2020 Axis Bank (‘Financial Creditor’) filed a Section 7 application for initiation of a Corporate Insolvency Resolution Process (CIRP) against the appellant in the National Company Law Tribunal (‘NCLT’). The appellant contended to stay the proceedings, however, the NCLT dismissed its plea by stating that time is of essential essence in this Code and the same needs to be complied with.

The Appellant further filed an appeal against the decision of the NCLT at the National Company Law Appellate Tribunal (‘NCLAT’). NCLAT dismissed its appeal and affirmed the decision of NCLT to admit the appellant into CIRP.

Issue

Whether Section 7(5) of the Code is mandatory or discretionary in nature? To be precise whether the word ‘may’ in the section 7 of the Code be construed as ‘shall’?

Dictum given by Apex Court

The apex court succinctly stated that it is imperative to delve into the overall financial health of the Corporate Debtor and the same cannot be considered extraneous. The tribunals need to use their discretion to decide whether a particular fact is extraneous or not.

For instance, in the present matter, the dispute of the Corporate Debtor with the electricity regulator can be considered extraneous. However, the pending award amounting to Rs 1730 crores in favour of the corporate debtor which exceeds the claim amount of the Financial Creditor cannot be considered extraneous.

Further, the hon’ble court stated that the existence of a debt and default by the corporate debtor to honour the same only gives a right to the Financial Creditor to file a Section 7 application for initiation of CIRP. However, the Adjudicating Authority needs to apply its mind and consider various factors before admitting the application against the Corporate Debtor.

The hon’ble court stated that the use of the word ‘may’ in Section 7 of the Code confers clear discretionary powers upon the Adjudicating Authority. Here, the court uses the literal rule of interpretation to decipher the intention of the Legislature. The court further states that the literal rule of interpretation is the primary rule for interpreting any provision. And, it is only when the primary rule of interpretation fails then other rules of interpretation shall be resorted to.

In order to crystallize its opinion, the apex court delves into Section 9 of the code which has a similar functioning as the Section 7 of the Code. The court finds that the word ‘shall’ has been used in Section 9 of the Code instead of the word ‘may’ which is a clear reflection of the legislature’s mind to make the section a mandatory one.

The court stated that if the legislature had any intention of making Section 7 a mandatory one then the word ‘shall’ would have been used and it would not have used different words in two sections which are similar in their functioning.

Based on the above statements, the apex court concluded that the Adjudicating Authority and the Appellate Tribunal had erred in admitting section 7 application without gauging other relevant factors. Therefore, as per the hon’ble court, the existence of debt and default in honouring the same will not mandatorily lead to the  admission of the section 7 application.

Analysis

Firstly, this dictum by the apex court has created a lot of clamours in and around the legal fraternity. The author believes that though the literal rule of interpretation has been efficiently used to interpret the provision (Section 7 of the Code) however the decision of the court is not in tandem with the spirit of the code. Earlier, this Hon’ble court in the matter of Innovative industries Vs ICICI Bank had held that the moment a default takes place CIRP may be initiated against a Corporate Debtor and the same was affirmed in the Swiss Ribbon matter. Though the above dictum puts the operational creditor in a better position for initiation of CIRP but subverts the position of Financial Creditors. Now, lenders will be averse to invest as with the above dictum, dwindles the chances for recovery than ever before.

Secondly, while the government is already looking to amend the Code in order to increase its efficiency by reducing the time taken for the resolution process, the above dictum by the court has the capability to stifle its efficiency. Time is considered to be of essential essence for the Insolvency and Bankruptcy Code and the same has been enshrined under the Bankruptcy Law Reforms Committee Report (‘BLRC’). Bad loans, abysmal recoveries, and delays portraing that the insolvency Code is bankrupt itself. Delays have been a key factor behind the diminished recoveries as it causes value erosion of the assets of the Corporate Debtor. Also, with admission for initiation of CIRP within 14 days (Section 7 of IBC) becoming discretionary, it gives a chance to the promoters of the Corporate Debtor to transfer assets for the prevention of recovery.

Thirdly, long-drawn litigations have been another hindrance towards the efficiency of the code as it obliquely contributes towards the delay of the CIRP. Earlier, the Adjudicating Authorities were unable to admit Section 7 applications within 14 days due to a lack of the requisite man-power of the authorities. Further, with the judgement given in the present matter by the Hon’ble court, the dream of timely resolution seems to be into muddy waters. However, it would be interesting to witness how the code evolves from hereon.