In this recent judgement, the Apex Court has provided a very concerning precedent in Insolvency law for the nation. The Apex court held that an application made by a Financial Creditor Section under 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 (“IBC/ Code”) the Adjudicating Authority has been allowed discretion in the admission of the application for the process of CIRP. This judgement comes as shock to many as it also overturns the long-standing principle of admission of the Section 7 application as soon as the Adjudicating Authority is satisfied that a default has occurred on the debt of the corporate debtor. This principle was formulated in the case of Innoventive Industries Ltd. V ICICI Bank. Additionally, the judgement also made a difference in the procedure of application for admission to CIRP by a financial creditor and an operational creditor under Section 7 and 9 respectively.
The application was made by the Axis Bank (“Financial Creditor”) before the NCLT, Mumbai on January 15, 2020, for the initiation of CIRP and instantly a stay application was made by Vidharba Industries (“Corporate Debtor”) stating that they have a pending case in the Apex Court with the regulatory authority Maharashtra Electricity Regulatory Commission (“MERC”) in which dues amounting INR 1730 Crore were to be realised by the Corporate Debtor. The NCLT believed that such a stay order cannot be allowed as it would directly go against the objects and principles for which the Code stands for and was legislated for. The Court cited the Preamble of the IBC stating,“The Code is a special legislation. The chief object of which is to decide the Petition in a time bound manner and take adequate steps to see that the Corporate Debtor remains a going concern even during the process of CIRP.”The NCLT also stated the Swiss Ribbons v Union of India judgement of the Apex Court itself to substantiate its position on the importance of time in IBC matters. The NCLT also mention in their judgement that the Adjudicating Authority in the case of application for admission to CIRP, they shall be required to only see if there is a debt and subsequently if there is a default on part of the Corporate Debtor. As soon as the two requirements as mentioned are fulfilled the Adjudicating Authority has to admit their application. Only for reasons as mentioned under Section 7(5)(b) of the Code can the Adjudicating Authority reject an application.
After being aggrieved by the order of the NCLT the Corporate Debtor approached the NCLAT in Delhi and the NCLAT agreed to the NCLT judgement and cited the same reasons for not allowing a stay on the application as filed by the Financial Creditor. The Corporate Debtor again being aggrieved by the order of the NCLAT, it approached the Apex Court for a favourable order and the Apex Court ruled in their favour.
In their judgement, the Apex Court mention that it is important to stand by the principles and objects as have been laid down in Swiss Ribbons&(Supra) but there is also a duty of the Adjudicating Authority to assess the viability and financial health of any Corporate Debtor which the lower courts deemed to be extraneous matters in case of Section 7 petitions. Additionally, the judgement mentions that, “the lower courts were required to apply their 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, pendency of suit in this Court, order of APTEL referred to above and the overall financial health and viability of the Corporate Debtor under its existing management” which is important in deciding admission of an application to a CIRP. More importantly, a difference was made by the judgement in the application to CIRP by the financial creditor and operational creditor under Section 7 and Section 9 of the IBC. The court opinionated that the use of the word ‘may’ in Section 7(5)(a) and the use of the word ‘shall’ in Section 9 talks about the difference of legislative intent of the IBC while drafting these two provisions. The word ‘may’ confers the discretion of the adjudicating forum to take into consideration not just debt and subsequent default on such debt but the additional requirements as have been mentioned above by way of this judgement. In the case of the Operational Creditor or Section 9, this is not the case as the word ‘shall’ has been used by the legislators and ordinarily the word ‘shall’ is constructed to be a mandatory requirement under law as seen under the principle of Interpretation of Statutes. The judgment refers to the ‘Rule of Literal Interpretation’ by way of multiple judgements to substantiate its reasoning.
In the above-mentioned points, we first have to mention and understand that the court has failed to properly address the point of objective and principles of the Code which is maintaining the company under such a procedure to be a going-concern and the petition is to be fulfilled in a time-bound manner. In the publications made by the Insolvency Bankruptcy Board of India (“IBBI”)we have noticed that these principles have been repeated and given importance. In the Report of the Insolvency Law Committee, the Committee has made suggestions for particular changes to the IBC for speedy justice. The amendment so proposed by this Committee is proposed on the premise that the delay in the application is to be reduced. The Committee states,“Delays in the admission of CIRP applications are value destructive and impede the chances of a successful resolution of the corporate debtor.” Therefore, any interpretation made to allow for the delay is cannot be accepted.
The main legislative intent has to be given precedence over the judicial interpretation from a single section. The word ‘may’ is constructed to allow discretion to the adjudicating form, which shall lead to delay in the application for admission of CIRP, then the same shall always be against the objects and principles of the IBC itself. In the cases that the Apex Court has relied on for the principle for the interpretation of statutes, ‘literal interpretation’ is not applicable in the present scenario. The application of principles of interpretation of statutes cannot apply in a vacuum to just a single statute. The interpretation should align with the objective of the complete statute and cannot be interpreted against the objectives and principles of Code itself.
The second issue that we believe that the judgement raises is the issue of Section 7 application for admission to CIRP. Previously, by way of Innoventive Industries (Supra), the NCLT was given powers only to check if there is a debt and if there is a default in such debt. But, this judgement lays down additional duty on the NCLT/ Adjudicating Authority to only admit such application after due consideration of additional factors which may apply to the case. The application of this part as a precedent doesn’t seem to set the tone right as this would allow for the delay in process of recovery of dues and will alter the recovery rights of the financial creditor, as the delay will lead to depreciation of assets of the Corporate Debtor. Additionally, the Adjudicating Authority in case of any application under Section 7 can reject the application as per Section 7(5)(b), which in itself is exhaustive in nature and doesn’t allow for rejection of application based on additional requirements as mentioned by the present judgement.
As mentioned earlier, the Insolvency Committee Report has made suggestions for speeding up the whole procedure under IBC. One of their suggestions is to include the use of Information Utilities (“IUs”) for the application procedure under Corporate Insolvency Procedure; these IUs will store information only regarding the debts of the financial creditors and subsequently, the evidence relating to default on such debt. The Report makes no mention of any additional information as has been mentioned in this Apex Court’s judgement, which will be scrutinised by the Adjudicating Authority to admit an application to CIRP.
In the matters relating to application to admission to CIRP, the legislative intent has always prioritised the importance of time and the present judgement will lead to creation of precedent for further delay and slowing the process of the application. The application procedure has been envisioned to be fulfilled within 14 days from the date such application is made and this should always be given precedence over all other matters. With regards to the point of the corporate debtor remaining a going-concern, the court had the opportunity to argue their issues in regards to this principle as the CIRP would have led to further liabilities for the corporate debtor and such would then ensure liquidation which the Code is set out to avoid as best possible under the law.
END-NOTES
[1] Innoventive Industries Ltd. V ICICI Bank (2018) 1 SCC 407
[2] Swiss Ribbons v Union of India (2019) 4 SCC 17
[3] Ministry of Corporate Affairs, Report of The Insolvency Committee (May 2022), https://ibbi.gov.in/uploads/resources/f841a45902d901ef311fe6d76127d094.pdf, accessed on August 18, 2022
[4] Ravi Mital, Information Utilities: Mitigating Asymmetries, IBBI Quarterly Newsletter January-March 2022, https://ibbi.gov.in/uploads/resources/8084a3aa50f5e6ef050d1d434d8003d8.pdf, accessed on August 18, 2022.
Author: Akarsh Deep, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at akarsh@samistilegal.in.
