Vidarbha v. Axis Bank: A Case of Reinventing the Wheel?

[ By Paridhi Gaur]

The author is a student at the University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University.

Introduction

The enactment of the Insolvency and Bankruptcy Code (hereinafter, “IBC”) was a paradigm shift in resolving debt-ridden companies expediently and without compromising on the value maximization of assets. Remarkably, it put the creditors on a pedestal by giving them decision-making powers in the Corporate Insolvency Resolution Process (hereinafter, “CIRP”). Financial creditors and operational creditors are empowered to initiate CIRP against corporate debtors under Sections 7 and 9 of the IBC, respectively. In Innoventive Industries Ltd. vs. ICICI Bank (hereinafter, “Innoventive”), the apex court had laid down that the NCLT must admit these applications if they are defect-free and upon satisfying itself on the following two grounds: whether there is an existing debt which is due, and whether the corporate debtor has defaulted in making a payment towards such debt.

However, through its recent ruling in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. (hereinafter, “Vidarbha”), the Court has diluted this twin test. The NCLT now has the discretion to reject an application by a financial creditor to initiate CIRP, despite the existence of debt, by accounting for certain factors like the financial health and viability of a company. Contrastingly, an application of the operational creditor in a similar situation is mandatorily to be accepted, unless there is a pre-existing dispute between the parties about the debt.

In this article, the author seeks to analyse if the apex court was right in unsettling a settled law or if the same is an attempt to reinvent the wheel.

Factual Matrix

Vidarbha Industries Power Limited (hereinafter, “VIPL”) is a power generating company and its business is under the regulatory control of the Maharashtra Electricity Regulatory Commission (hereinafter, “MERC”). MERC determines the tariff chargeable by electricity generating companies. As a result of certain developments between 2003-2013, a dispute arose between VIPL and MERC on the amount of the final tariff. The Appellate Tribunal for Electricity (APTEL) decided in favor of VIPL, who claims that a sum of Rs. 1,730 crores is realizable by it in terms of this order. However, MERC appealed this decision before the Supreme Court and the same is pending. As of date, the apex court has not granted a stay on the APTEL order.

In 2021, Axis Bank Private Limited, a financial creditor of Vidarbha, filed an application for commencing insolvency against VIPL and claimed that Rs. 553 crores are owed to it. VIPL sought a stay on these proceedings on the ground that the appeal by MERC is pending before the SC. They argued that since the receivable due to them exceeds the claim amount, initiating CIRP is not necessary. The NCLT found no merit in this submission and reasoned that pending decisions are extraneous matters and therefore, cannot have any bearing on an application under Sections 7 or 9 of the IBC. The NCLAT, in appeal, upheld the decision of the NCLT. Aggrieved, Vidarbha approached the SC.

Decision of the Supreme Court

VIPL roped in the rule of literal interpretation to assert that Section 7(5)(a) of the IBC is discretionary because the legislature has used the word “may” instead of “shall” while giving the NCLT the power to admit an application. It was pointed out that if the legislature meant to impose a compulsion, the word “shall” would have been used, like in the parallel provision of Section 9(5)(a).  Therefore, the NCLT may reject an application, despite there being a debt, to meet the ends of justice.

VIPL’s fleshed-out submissions before the apex court compelled a judicial interpretation of the legislative intent through the terminologies used. The Court agreed that the legislature, by making the active choice of using “may” in Section 7(5)(a) and “shall” in Section 9(5)(a), sought to provide different levels of discretion to the NCLT under the two otherwise similar provisions. As such, an application by the operational creditor under Section 9 is mandatorily required to be admitted, if-

  1. The application is complete in all respects;
  2. The application complies with the requisites of the IBC;
  3. there is no payment of unpaid operational debt;
  4. notices of payment or invoices have been delivered to the corporate debtor;
  5. no notice of dispute has been received by the operational creditor.

On the other hand, the existence of debt (and default in payment thereof) only gives financial creditors the right to file an application. Under Section 7(5)(a), it is up to the NCLT to decide whether to admit it or not. To crystallize the contours of this discretion, a test of expediency has been stipulated. It requires the NCLT to adjudge the feasibility of initiating a CIRP by accounting for the overall financial health and viability of a company and applying its mind to other relevant circumstances. While the Court refrained from chalking out what these “relevant circumstances” entail, it justified the need for this change in status quo on the premise that the question of insolvency only arises if the corporate debtor is under financial duress.

Analysis

The twin test used as a touchstone for initiating insolvency was, in a way, the creditors’ paradise since it provided them a hassle-free path to recover their dues. However, the test was extremely rigid in its ambit and side-lined the corporate debtors’ interests. Even in a situation wherein the corporate debtor is solvent, but unable to meet its liabilities for the time being due to genuine extraneous factors (for example, a favorable arbitral award being under challenge), it would be compelled to sound its death knell by undergoing CIRP. In this regard, the ruling in Vidarbha will prove to be a game-changer if properly implemented. It can help prevent futile insolvency proceedings by providing the corporate debtors with a fair say in the process. Besides, the financial creditors are not prevented from filing a subsequent application under Section 7 if their dues remain unpaid. This way, the IBC’s objectives of reviving the corporate debtor and protecting the interests of the financial creditors, remain balanced.

The judgment also provides a breather to operational creditors, who have been subjected to unfavorable treatment under the IBC. Financial creditors have enjoyed a front seat in the CIRP process- right from forming the Committee of Creditors (“COC”) to being prioritised for payments under the resolution plan. The road to filing an application for initiating CIRP is also easier for them when compared to operational creditors, who are required to first serve demand notices to the corporate debtor. Moreover, the Supreme Court has even approved resolution plans giving NIL amount to operational creditors by reasoning that the commercial wisdom of the COC is not subject to judicial review.

Through Vidarbha, the Court has turned the tables for operational creditors. At least to the extent of initiating the CIRP, they have been put on the erstwhile front seat, making it easier for them to recover their dues. The same is a welcome respite because the scale of the businesses of the two types of creditors cannot be compared. Operational debt is usually unsecured, of a smaller amount, and for a shorter amount of time. Unlike financial creditors, who have the flexibility and financial capacity to restructure their debt, the repercussions of unpaid dues for operational creditors are more radical and cannot be risked. The applicability of the rigid twin-test for admitting an application under Section 9 would enable the operational creditors to expeditiously retrieve their dues and protect their businesses.

Nevertheless, stakeholders and industry experts have varying views on whether the decision is a worthy step towards meeting the objectives of the IBC or a misguided attempt by the Court that births more symptoms than it cures. The firm gamut of the twin test had made defaulters more prudent and vigilant with their debt, given that initiation of insolvency, once default was established, was ensured. The new position set forth by Vidarbha has a broader ambit. There are no guidelines as to how the NCLT should exercise its discretion to accept or reject an application under Section 7. Furthermore, the Court fell short of crystallizing the “relevant factors” which should be considered for the same. This can attract protracted litigation by the defaulters to stretch the contours of these “relevant factors” with the aim to evade insolvency.

Conclusion and Way Forward

At this juncture, it is imperative to highlight that the Supreme Court in Swiss Ribbons vs. Union of India had rendered its decision on the vires of the IBC, and in Innoventive it delved into the intricacies of the concept of default as incorporated in Sections 7 and 9. In neither of these cases did the Court interpret the power of the NCLT under Sections 7(5)(a) and 9(5)(a). The question of discretion came up for the first time in Vidarbha; wherein the Court has, by applying its judicial mind, interpreted the legislative intent in these sections that had previously gone unaddressed. Viewed from this perspective, Vidarbha has not reinvented the wheel. It simply clarifies what the legislature duly enacted the position of law to be.

The fact of the matter is that the lawmakers purposely set out the differential treatment of the applications under Sections 7 and 9. The disparity between the financial creditors and operational creditors was sought to be neutralized by enabling the latter to avail priority in lodging their claims and initiating CIRP. When viewed from an overarching perspective, the new criteria are better suited to serve the objectives of the IBC and balance the interests of all three stakeholders involved.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in