Power of NCLT to admit CIRP under Section 7(5)(a) IBC discretionary and not mandatory: Supreme Court

The Supreme Court has held that the power of the National Company Law Tribunal (NCLT) to admit an application for initiation of the corporate insolvency resolution process (CIRP) by a financial creditor under Section 7(5)(a) of the Insolvency and Bankruptcy Code, is discretionary and not mandatory (Vidarbha Industries Power Limited v. Axis Bank Limited)..Even though Section 7(5)(a) confers discretionary power on NCLT, such power cannot be exercised arbitrarily or capriciously, the Court said. Clarifying further, the Bench of Justices Indira Banerjee and JK Maheshwari held,"...when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so.".The appellant is a power generation company that was in a tariff dispute with the Maharashtra Electricity Regulatory Commission (MERC). The Appellate Tribunal of Electricity (APTEL) passed an order in favour of the appellant, stating that a sum of ₹1,730 crore was payable to the appellant by the MERC. Aggrieved by the same, MERC filed an appeal before the Supreme Court which is still pending. After the appellant expressed its inability to pay off the debts, Axis Bank (the financial creditor) filed an application under Section 7 of the IBC. Both the NCLT as well the National Company Law Appellate Tribunal (NCLAT) ordered initiation of the CIRP against the appellant, prompting the appeal before the apex court..The question before the Court was whether 7(5)(a) of the IBC is a mandatory or a discretionary provision.After going through the case, the Court noted that although no extraneous matter should come in the way of speedy resolution of matters under the IBC, the facts that an appeal by MERC is pending before Supreme Court and the financial health of the corporate debtor (appellant) are not extraneous matters.Noting that 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, the Court held,“The Adjudicating Authority (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 overall financial health and viability of the Corporate Debtor under its existing management.”.The Court also delved into the use of the word "may" in Section 7(5)(a) of the Code. It was held that had it been the legislative intent that Section 7(5)(a) of the IBC should be a mandatory provision, the legislature would have used the word "shall" and not the word "may.".Comparing the initiation of CIRP on application by a financial creditor with that initiated by a corporate debtor under Section 9(5) of the IBC, the Court held,"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.".Another point noted by the Court is that the financial strength and nature of business of financial creditors and operational creditors are on a different footing. This being the case, commencement of CIRP at the behest of an operational creditor is rigid and inflexible, while there is more flexibility in the case of a financial debt."It is certainly not the object of the IBC to penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP. Section 7(5)(a) of the IBC, therefore, confers discretionary power on the Adjudicating Authority (NCLT) to admit an application of a Financial Creditor under Section 7 of the IBC for initiation of CIRP," the judgment stated..Allowing the appeal and setting aside the order of the NCLT and the NCLAT, the Court 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 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.".Senior Advocate Jaideep Gupta appeared for the appellant, while Senior Advocate Dhruv Mehta represented the respondent financial creditor..[Read the judgment]