Adjudicating Authority not bound to mechanically admit application under Section 7 in cases of default

Citation : Vidarbha Industries Power Limited vs Axis Bank Limited, Civil Appeal No. 4633 Of 2021

Date of Judgment/Order : 12/7/2022

Court/Tribunal : Supreme Court Of India

Corum : Indira Banerjee; J., J. K. Maheshwari, J.

Background

The Appellant is a Power Generating Company in the Nagpur District in Maharashtra.

On 1st April 2014, the Appellant commenced supply of power  pursuant to the Power Purchase Agreement approved by MERC. In January 2016, the Appellant filed an application before the MERC for the purpose of truing up the Aggregate Revenue Requirement and for determination of tariff in terms of MERC (Multi Year Tariff) Regulation 2011, in view of, inter alia, the increase in fuel costs, consequential to the rise in the cost of procuring coal for the purpose of running the power plant.

The MERC disallowed a substantial portion of the actual fuel costs as claimed by the Appellant for the Financial Years 2014-2015 and 2015-2016 and also capped the tariff for the Financial Years 2016-2017 to 2019-2020. Being aggrieved, the Appellant filed an appeal being Appeal No.192 of 2016 before the Appellate Tribunal for Electricity (APTEL), challenging disallowance of the actual fuel cost for the Financial Years 2014-2015 and 2015-2016.

By an order dated 3rd November 2016, the APTEL allowed the appeal and gave some directions to MERC. The Appellant claims that a sum of Rs.1,730 Crores is due to the Appellant in terms of the said order of APTEL.

On or about 8th December 2016, the Appellant filed an application before the MERC for implementation of the directions contained in the order dated 3rd November 2016 of APTEL. MERC however filed Civil Appeal No.372 of 2017 in Supreme Court, challenging the order of APTEL. The Appeal is pending.

According to the Appellant, in view of the pending appeal of MERC in this Court, the Appellant is unable to implement the directions of APTEL and is short of funds. According to the Appellant, implementation of the orders of the APTEL would enable the Appellant to clear all its outstanding liabilities.

On or about 15th January 2020, the Respondent, Axis Bank Limited, as Financial Creditor of the Appellant, filed an application under Section 7 (2) of the IBC before the National Company Law Tribunal (NCLT), Mumbai for initiation of CIRP against the Appellant.

The Appellant filed a Miscellaneous Application seeking stay of proceedings under Section 7 of the IBC in the NCLT, as long as Civil Appeal No.372 of 2017 was pending in the SC. The NCLT dismissed the appeal and refused to stay the CIRP initiated against the Appellant. The Appellant filed an appeal before the NCLAT, against the aforesaid order which also dismissed by the judgment and order dated 2nd March 2021 impugned in this Appeal.

Respondent Financial Creditor, opposing the appeal argued that  the Appellant being in admitted default, the Adjudicating Authority (NCLT) rightly declined stay of proceedings initiated by the Respondent Financial Creditor under Section 7(5) of the IBC.

Judgment

The SC observed that both, the NCLT and the NCLAT had laid emphasis on the judgment in  Swiss Ribbons v. Union of Indian: (2019) 4 SCC 17 and proceeded on the premises that an application must necessarily be entertained under Section 7(5)(a) of the IBC, if a debt existed and the Corporate Debtor was in default of payment of debt and the NCLT is to make all endeavour to dispose of the matter in a time bound manner. In other words, the NCLT found Section 7(5) (a) of the IBC to be mandatory. 

The Appellate Tribunal NCLAT affirmed the finding of the Adjudicating Authority NCLT that the Adjudicating Authority was only required to see whether there had been a debt, and the Corporate Debtor had defaulted in making the repayments. These two aspects, when satisfied, would trigger Corporate Insolvency. Since the Adjudicating Authority NCLT did not consider the merits of the contention of the Respondent Corporate Debtor, the only question in this appeal is, whether Section 7(5)(a) is a mandatory or a discretionary provision. In other words, is the expression ‘may’ to be construed as ‘shall’, having regard to the facts and circumstances of the case.

There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters.

The SC held that the NCLT found the dispute of the Corporate Debtor with the Electricity Regulator or the recipient of electricity would be extraneous to the matters involved in the petition. Disputes with the Electricity Regulator or the Recipient of Electricity may not be of much relevance. The question is whether an award of the APTEL in favour of the Corporate Debtor, can completely be disregarded by the NCLT, when it is claimed that, in terms of the Award, a sum of Rs.1,730 crores, that is, an amount far exceeding the claim of the Financial Creditor, is realisable by the Corporate Debtor. The answer, in our view, is necessarily in the negative.

In our view, the NCLAT erred in holding that the NCLT was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP. The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The NCLT was require to apply its 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, pending in this Court, order of APTEL referred to above and the over all financial health and viability of the Corporate Debtor under its existing management.

The meaning and intention of Section 7(5)(a) of the IBC is to be ascertained from the phraseology of the provision in the context of the nature and design of the IBC. 

Ordinarily the word “may” is directory. The expression ‘may admit’ confers discretion to admit. In contrast, the use of the word “shall” postulates a mandatory requirement. The use of the word “shall” raises a presumption that a provision is imperative. However, it is well settled that the prima facie presumption about the provision being imperative may be rebutted by other considerations such as the scope of the enactment and the consequences flowing from the construction.

65. It is well settled that the first and foremost principle of interpretation of a statute is the rule of literal interpretation, as held by this Court in Lalita Kumari v. Government of Uttar Pradesh and Ors.4 If Section 7(5)(a) of the IBC is construed literally the provision must be held to confer a discretion on the NCLT.

Significantly, Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor.

The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC but a different word, that is, ‘shall’ in the otherwise almost identical provision of Section 9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. An application of an Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the Corporate Debtor by the Operational Creditor and no notice of dispute has been received by the Operational Creditor. The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor.

On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.

The Legislature has consciously differentiated between Financial Creditors and Operational Creditors, as there is an innate difference between Financial Creditors, in the business of investment and financing, and Operational Creditors in the business of supply of goods and services. Financial credit is usually secured and of much longer duration. Such credits, which are often long term credits, on which the operation of the Corporate Debtor depends, cannot be equated to operational debts which are usually unsecured, of a shorter duration and of lesser amount. The financial strength and nature of business of a Financial Creditor cannot be compared with that of an Operational Creditor, engaged in supply of goods and services. The impact of the non-payment of admitted dues could be far more serious on an Operational Creditor than on a financial creditor.

As observed above, the financial strength and nature of business of Financial Creditors and Operational Creditors being different, as also the tenor and terms of agreements/contracts with financial creditors and operational creditors, the provisions in the IBC relating to commencement of CIRP at the behest of an Operational Creditor, whose dues are undisputed, are rigid and inflexible. If dues are admitted as against the Operational Creditor, the Corporate Debtor must pay the same. If it does not, CIRP must be commenced. In the case of a financial debt, there is a little more flexibility. The Adjudicating Authority (NCLT) has been conferred the discretion to admit the application of the Financial Creditor. If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application. Of course, in case of rejection of an application, the Financial Creditor is not denuded of the right to apply afresh for initiation of CIRP, if its dues continue to remain unpaid.

The judgment of this Court Swiss Ribbons (supra), which was rendered in the context of a challenge to the vires of the IBC, does not consider the question of whether Section 7(5)(a) of the IBC is mandatory or discretionary. It is well settled that a judgment is a precedent for the question of law that is raised and decided. The language used in a judgment cannot be read like a statute. In any case, words and phrases in the judgment cannot be construed in a truncated manner out of context.

Even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner.

Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition.