The Supreme Court (SC) on Thursday dismissed a review petition filed by Axis Bank Ltd against a recent order passed by the apex court in the corporate insolvency resolution process (CIRP) for Vidarbha Industries Power Ltd, says a report from Bar & Bench
While dismissing the review petition, the bench of justice Indira Banerjee and justice MM Sundresh upheld the July 2022 ruling that the national company law tribunal (NCLT) has the discretion to admit or reject a valid initiation of the insolvency process by a financial creditor (FC) under Section 7 of the Insolvency and Bankruptcy Code (IBC).
Changing the rules of the game, the July judgement by a bench of justice Banerjee and justice JK Maheshwari also held that loan defaults would have to be assessed to check if it was due to genuine business reasons or contingencies such as pending litigation.
On 22nd July, Moneylife
columnist V Ranganathan had called the order 'a 440-Volt shock' to IBC. For one, he argued that the SC ruling put the operational creditor on a better footing than the financial creditor. But worse, he says, the order struck at the very core of the bankruptcy process by giving NCLT the discretion to admit or reject the initiation of the insolvency process even when there was a real default! (Read: SC Order on Vidarbha Industries Gives a 440 Volt Shock to Bankruptcy Code-IBC!
Vidarbha Industries, a power generation company, had set up a 600MW (megawatt) coal-fired thermal power plant comprising two units of 300MW each in the Butibori industrial area of Nagpur district in Maharashtra.
The company, a corporate debtor (CD), resisted admission to the bankruptcy process on the ground that it had a valid claim against the distribution company for additional pass-through charges under its power purchase agreement (PPA). Hence, it argued that it had defaulted on its loans because it had not received payments from the power distribution company because of litigation pending before the SC.
Citing the past precedents of the SC, Vidarbha Industries' contention had been rejected by NCLT as well as the appellate authority (AA). They had held the AA could, at best, verify if a valid debt existed and there was a default in loan repayment and the application filed by the creditor under the insolvency process was complete. Both authorities had agreed that there was no room for assessment of whether the loan default was due to genuine business reasons or contingencies like pending litigation, as in the Vidarbha case.
A plethora of SC precedents have held that CIRP is entirely driven by the committee of creditors (COC), entities with the maximum financial stake. It is assumed that they would opt for a recovery process that would extract the best possible value through the recovery process.
On 2 March 2021, the national company law appellate tribunal (NCLAT) refused to stay the proceedings initiated by Axis Bank against Vidarbha Industries Power for starting the CIRP under Section 7 of the IBC. The power company had challenged the order before the Supreme Court.
In its judgement on 12 July 2022, the bench of justice Indira Banerjee and justice V Ramasubramanian set aside orders passed by the adjudicating authority of NCLT and the appellate authority of NCLAT. It stated, "We are clearly of the view that the adjudicating authority (NCLT) as also the appellate tribunal (NCLAT) fell in error in holding that once it was found that a debt existed and a corporate debtor (Vidarbha Industries) was in default in payment of the debt there would be no option to the adjudicating authority (NCLT) but to admit the petition under Section 7 of the IBC."
"The adjudicating authority (NCLT) has to consider the grounds made out by the corporate debtor (Vidarbha Industries) against admission, on its own merits...In this case, the adjudicating authority (NCLT) has simply brushed aside the case of the appellant (Vidarbha Industries) that an amount of Rs1,730 crore was realisable by the appellant in terms of the order passed by the appellate tribunal for electricity (APTEL) in favour of the appellant, with the cursory observation that disputes if any between the appellant and the recipient of electricity or between the appellant and the electricity regulatory commission were inconsequential," the apex court had stated in its July order.
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