Analysis of Section 7(5) of IBC in light of Vidharbha Industries Power Limited V/s Axis Bank case

Vidharbha Industries Power Limited Vs Axis Bank case

3D tests to be followed by Adjudicating authority while admitting application for initiation of Corporate Insolvency Resolution Process(CIRP) by a corporate debtor.

A financial creditor may under Section 7 of the 2016 Insolvency and Bankruptcy Code file an application before the adjudicating authority for initiation of the Corporate Insolvency Resolution Process(CIRP). Section 7(5)(a) states that the adjudicating authority may admit such application filed by the financial creditor. The section specifically says that the application may be admitted by the adjudicating authority only once the authority is convinced that the default has occurred and if no other proceedings are pending against the proposed resolution professional. In the case of M/s Innovative Industries Ltd v/s ICICI Bank & Anr, the court has addressed provisions of section 7 and determined that the adjudicating authority can admit the application if debt and default are established.

Factual Background

 Under section 7 of IBC the defendant, Axis bank filed an application for initiation of CIRP before the NCLT, Mumbai. According to the bank’s claim, Vidarbha Industries Power Limited (VIPL) has not made a payment of 553 crores to the bank. However, VIPL filed an application before NCLT to stay the proceedings as its debts could be cleared by the implementation of the order of the Appellate Tribunal for Electricity(APTEL) which was challenged by Maharashtra Electricity Regulatory Commission(MERC) before the Supreme Court. The NCLT rejected the request to stay the case, stating that once debt and default are established, then the CIRP must take place. The decision of NCLT was challenged before the Supreme Court.

Judgement

The issue before the court was that if the existence of debt and default has been established against a corporate debtor, is it mandatory for the adjudicating authority to admit the application and initiate CIRP against the corporate debtor? The Court while addressing this legal issue, held that the language of section 7(5) of IBC says that the adjudicating authority may admit the application filed by the financial creditor. The Court sought to give the literal interpretation to the provision as the statute clearly made a difference between the language of the provision related to a financial creditor(section 7) and operational creditor(section 9) as section 9 says the adjudicating authority shall admit and not may admit.

            Hence, the Court upheld the decision of NCLT and observed that the adjudicating authority must exercise its discretion while admitting the application by financial creditors under section 7 of IBC.

 Impact of Judgement

After the Vidarbha judgement, the adjudicating authorities now must follow the 3D test before admitting the application from the financial creditor under section 7(5) i.e., Debt, Default and Discretion. As per the Innovative case, the authority must examine the existence of debt and default by the corporate debtor and then according to Vidarbha case, apply its discretion by examining the facts and circumstances of the case and may admit the application. However, the case is different for an application filed by an operational creditor under section 9 as once debt and default are established on part of the corporate debtor the adjudicating authority must admit the provision and initiate CIRP against the corporate debtor as it is a mandatory provision unlike section 7(5) which is discretionary.

                 This means that it would be easier for the operational creditors to initiate CIRP as the only proof of the existence of debt and default is enough for the application to be admitted while in a financial creditor’s case the discretion of the court is needed for the admission of application.

Conclusion

The literal interpretation of section 7(5) in Vidarbha case by the Supreme Court made the provision discretionary. This might lead to further confusion in further cases as no proper grounds for discretion have been observed by the Supreme Court in its decision. Clarity on the grounds for exercising discretion by the adjudicating authority would help in resolving cases.

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