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Vidarbha Industries Power Limited v/s Axis Bank Limited

The Insolvency and Bankruptcy Code 2016 ("Code") was enacted at a time when there was no unified law dealing with insolvency and bankruptcy in India. A careful reading of the Code's purpose statement and preamble reveals that it was enacted to consolidate the law to resolve the bankruptcy of corporations, corporations, etc. limited in time to maximize assets and balance the interests of all parties involved.

Since the Code's inception in 2016, the Honourable Supreme Court of India has different provisions of the Code interpreted in different judgments. In line with the legislative intent behind the passage of the Code, the Supreme Court has held in several judgments that the aim of the Code was the timely settlement of the debtor of the entrepreneur who has defaulted.

In the case of Vidarbha Industries Power Limited v. Axis Bank Limited (2022 SCC Online SC 841) has been submitted to the Supreme Court a number of facts which require a decision on the contracting authority's discretionary powers (as set out in Section 5(1) of the Code) based on the statutory interpretation of Section 7(5)(a) of the Code. After a detailed review of the rules of interpretation of the law, a court of Division of the Hon'ble Supreme Court dismissed the opinion of the National Tribunal of Company Law, Mumbai ("NCLT Mumbai") and the National Court of Law Appeals of Companies (NCLAT) and Vide Order of July 14, 2022 held, among other things, that the contracting authority is free to accept or deny a Section 7 application, even in the presence of debt and non-compliance. the powers can be exercised by the deciding authority only when the facts and circumstances of the cases warrant it.

  1. The original complainant/corporate debtor, Vidarbha Industries Power Limited (" Corporate Debtor"), a power generation company, has been awarded a contract by the Maharashtra Industrial Development Corporation to implement a Group Power Project ("GPP"). The GPP later became an Independent Power Project in In 2016, CorporateDebtor filed an application with the Maharashtra Electricity Regulatory Commission ("MERC") to adjust the aggregate income requirement and rate in relation to MERC (Multiannual Tariff) Regulations, 2011, among other things, with regard to the increase in fuel costs as a result of the increase in the cost of purchasing coal for the plant.

    The identical turned into disallowed with the aid of using MERC. Thereafter, the Corporate Debtor appealed earlier than the Appellate Tribunal for Electricity ("APTEL"), in which the APTEL allowed the enchantment ("APTEL Order"). A sum of Rs. 1730 Crores turned into because of the Corporate Debtor in phrases of the APTEL Order. In the meanwhile, MERC filed a civil enchantment earlier than the Hon'ble Supreme Court tough the APTEL Order ("MERC Appeal") which continues to be pending.
  2. In view of the MERC Appeal, the Corporate Debtor turned into not able to implement the guidelines of APTEL because of which it suffered monetary difficulties. According to the Corporate Debtor, implementation of the APTEL Order could have enabled it to clean all its extremely good liabilities.
  3. On or approximately fifteenth January 2020, Axis Bank Limited, a Financial Creditor of the Corporate Debtor, filed an utility below Section 7(2) of the Code earlier than the NCLT Mumbai for initiation of Corporate Insolvency Resolution Process ("CIRP") towards the Corporate Debtor.

    The Corporate Debtor favored a live intending earlier than the NCLT Mumbai and the identical turned into brushed off on twenty ninth January 2021. While brushing off the utility of the Corporate Debtor for the live complaints, the NCLT Mumbai turned into of the view that the dispute among the Corporate Debtor and MERC turned into extraneous to the matters concerned withinside the gift complaints earlier than the Adjudicating Authority and will haven't any bearing and effect at the troubles concerned below the Code.

    The CIRP could be initiated towards the Corporate Debtor if maximum important necessities are glad below the Code i.e., lifestyles of a legitimate debt and default at the Corporate Debtor in making the repayments. If those aspects are glad, the Company Petition below Section 7 of the Code shall be maintainable.
  4. The Corporate Debtor filed an enchantment earlier than the NCLAT tough the order of the NCLT Mumbai which additionally got here to be brushed off.
  5. Aggrieved with the aid of using the choices of the NCLT Mumbai and the NCLAT, the Corporate Debtor approached the Supreme Court.

The key trouble that arose for dedication earlier than the Supreme Court turned into the translation Section 7(5)(a) of the Code and whether or not the identical can be construed to vest discretionary powers withinside the Adjudicating Authority even as thinking about admission of petitions filed below Section 7 of the Code.

The interpretation of Section 7(5)(a) of the Code The Supreme Court turned into of the view that the term "glad" used in Section 7(5) of the Code showcases that it's miles the discretion of the Adjudicating Authority to just accept or reject the utility. The NCLT Mumbai and the NCLAT proceeded with a view that an utility filed below Section 7(5) of the Code need to be mandatorily admitted if the Adjudicating Authority is glad that there exists a debt.

The Supreme Court rejected this interpretation of the NCLT Mumbai and the NCLAT and tested the merits of the rivalry of the Corporate Debtor. In Swiss Ribbons v. Union of India, it changed into held that "the imperativeness of well timed decision of a Corporate Debtor, who changed into withinside the red, indicated that no different extraneous depend ought to come withinside the manner of expeditiously figuring out a petition below Section 7 or below Section nine of the IBC".

Though the Supreme Court in part agreed with the above view, however, it additionally said the viability and typical economic fitness of the Corporate Debtor aren't extraneous matters. The Supreme Court determined that the Adjudicating Authority ought to have a look at the expedience of initiation of CIRP, thinking about all applicable statistics and circumstances, which includes the typical economic fitness and viability of the Corporate Debtor. In the prevailing case, the NCLT Mumbai ought to have carried out its thoughts to applicable elements which includes the feasibility of initiation of CIRP, in opposition to an power producing company operated below statutory control, the effect of the MERC Appeal, pending in this Court, the APTEL Order and typical economic fitness and viability of the Corporate Debtor.

Interpretation of Section nine(5)(i) and Section 7(5)(a) whilst deciphering the word "May" and "Shall" The courtroom docket juxtaposed the 2 provisions with the aid of using deciphering the usages of the words "can also additionally" and "shall". The Supreme Court has held that the expression "can also additionally" utilized in Section 7(5)(a) of the Code suggests that the availability isn't obligatory in nature.

Whereas the expression "shall" utilized in Section nine(5)(a) of the Code is a obligatory provision and therefore, an application of an Operational Creditor will be mandatorily customary if the conditions supplied below the stated Section are satisfied. Normally, the term "can also additionally" is indicative. In contrast, the term "shall" mean a important duty. The usage of the word "shall" mean that a provision is obligatory. However, extra factors inclusive of the scope of the statute and the effects of the development can also additionally rebut the prima facie inference that the availability is obligatory. Thus, the legislature supposed Section nine(5)(a) of the Code to be obligatory and Section 7(5)(a) of the Code to be discretionary.

It is likewise pertinent to be aware that Section 7(5)(a) of the Code is relevant to the Financial Creditors and Section nine(5)(a) is relevant to the Operational Creditors. Non-fee of admitted dues can also additionally have drastically more critical effects for an Operational Creditor than for a Financial Creditor.

The differentiation among each is a legislature-aware choice. A comparable view of the Supreme Court changed into laid down with the aid of using the National Company Law Tribunal, Kolkata withinside the case of State Bank of India v. N. S. Engineering Projects Pvt. Ltd. An vital query of regulation that changed into carved out on this case, changed into whether or not the Adjudicating Authority is sure to admit an application underneath Section 7 of the Code whilst it's miles alleged that there is contributory negligence bobbing up out of non-disbursement of the amount sanctioned via way of means of the Financial Creditor main to the alleged default via way of means of the Corporate Debtor.

While deciphering the which means of the word "may" used in Section 7(5)(a) of the Code, NCLT held that the "adjudicating authority "may" via way of means of an order admit application underneath Section 7(5)(a) of the IBC if it's miles happy that there exists a default. It can't be prolonged to a scenario wherein the Financial Creditor, via way of means of its personal acts of omission and commission, contributes to the default at the a part of the Corporate Debtor.

The gift court cases initiated via way of means of the Financial Creditor appears to be for functions apart from insolvency decision of the Corporate Debtor, and is, therefore, at risk of be rejected." The goal of the Code is to maximise the fee of the belongings of the Corporate Debtor, sell entrepreneurship, and avail credit. It isn't always the goal of the Code to penalize solvent companies, quickly defaulting in compensation in their monetary debts, via way of means of the initiation of CIRP.

Thus, regulation has given discretionary powers to the Adjudicating Authority underneath Section 7(5)(a) of the Code to confess an application of the Financial Creditor underneath Section 7 of the Code for initiation of CIRP.

ii.The want to interpret statutes. The Supreme Court become of the view that NCLT Mumbai and the NCLAT ought to have taken the literal interpretation of the statute. The maximum important and paramount precept of statutory interpretation is the guideline of thumb of literal interpretation. Intentional interpretation can handiest be used whilst the plain phrases of a statute are ambiguous or if construed literally, the availability would nullify the item of the statute or in any other case bring about an absurd result.

The Supreme Court depended on the selection of Hiralal Rattanlal v. State of Uttar Pradesh in which it become held that a statute have to be interpreted via way of means of the guideline of thumb of literal interpretation if the availability is unambiguous, and the legislative rationale is clear. The different guidelines of production of statutes are referred to as into useful resource handiest whilst the legislative rationale isn't always clear. Since there's no ambiguity in Section 7(5)(a) of the Code, it is able to be stated that the legislature in no way supposed to make Section 7(5)(a) of the Code a mandatory provision.

The motive of the Supreme Court is primarily based totally on the overall standards of interpretation of statutes. The Supreme Court has interpreted the word "may" in Section 7(5) (a) of the Code to uphold the discretionary powers vested in the Adjudicating Authority even as figuring out petitions filed via way of means of Financial Creditors underneath Section 7 of the Code.

In doing so, the Hon'ble Supreme Court has taken a liberal interpretation of the provisions of the Code to maintain that it isn't the aim of the Code to penalize solvent agencies who've briefly defaulted in compensation of economic money owed. However, these discretionary powers are in no way unfettered. The Supreme Court has additionally suggested that the stated discretionary powers have to be exercised in a particular way primarily based totally at the statistics and occasions of the case.

Whilst this flow is a welcome remedy for Corporate Debtors who've for proper grounds lapsed in payments, the opportunity of misuse to frustrate the item of the Code can surely now no longer be dominated out.

The order exceeded through the Supreme Court, is landmark in to this point because it emphasizes an detail of discretion vested within side the Adjudicating Authority even as thinking about petitions filed for default in re-charge of economic money owed below the Code. The order is in stark comparison to the set up hierarchy and choice loved through Financial Creditors within side the implementation of the Code.

Furthermore, the order additionally serves as a stark departure of the sensible implementation of the Code and the precis nature of lawsuits earlier than the Adjudicating Authority. Prior to the Judgment, it turned into settled regulation that after the life of debt and default is proved, petitions below Sections 7 and nine of the Code have to be admitted through the Adjudicating Authority. However, pursuant to the Judgment of the Supreme Court, the Adjudicating Authority is obligated to assess if the discretionary powers below Section 7(5) (a) must be exercised foundation the statistics and occasions of every case.

In the statistics of the gift case, the Corporate Debtor had arguably made out a prima facie case that it turned into in any other case a solvent company. In view thereof, as consistent with the judgment, the NCLT Mumbai and the NCLAT must have exercised discretion below Section 7(5) (a) of the Code. Apart from laying down the extensive contours of the discretionary powers, the Judgement does now no longer set out any clean parameters for the exercising of such discretionary powers.

In view thereof, it stays to be visible how the Adjudicating Authority shall exercise its discretion mainly in instances which aren't truthful and wherein evidence of solvency and brief lapse in compensation cannot be effortlessly ascertained.

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