Summary
A thermal power generator defaulted on about Rs 553 crore owed to Axis Bank while an APTEL order in its favour, said to make Rs 1,730 crore realisable, lay unimplemented because MERC's appeal was pending in the Supreme Court. The NCLT refused to stay the bank's Section 7 IBC application, holding that it need only see whether a debt existed and had been defaulted; the NCLAT affirmed. The Supreme Court allowed the appeal. Section 7(5)(a) uses 'may' where Section 9(5) uses 'shall', so admission of a financial creditor's application is discretionary, though not to be refused arbitrarily and ordinarily to follow unless there are good reasons. Where the corporate debtor shows an award or decree exceeding the debt, the Adjudicating Authority must consider keeping admission in abeyance. The IBC does not penalise solvent companies in temporary default. The stay application was remitted.
Issues
- Whether Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 is mandatory or discretionary, i.e. whether the Adjudicating Authority must admit a financial creditor's application once a financial debt and default are established.
- Whether the viability and overall financial health of the corporate debtor, including an APTEL order in its favour for an amount exceeding the debt, are extraneous to an application under Section 7.
- Whether Swiss Ribbons v. Union of India decided that admission under Section 7(5)(a) is mandatory.
Provisions considered
- Section 7(5)(a), Insolvency and Bankruptcy Code, 2016On a literal construction, 'may by order admit' confers a discretion to admit; the Legislature's use of 'may' here and 'shall' in the almost identical Section 9(5) shows a deliberate distinction. The Adjudicating Authority may examine the expedience of initiating CIRP, taking into account all relevant facts including the corporate debtor's overall financial health and viability, and may keep admission in abeyance or reject the application; the financial creditor may apply afresh if dues remain unpaid. (¶¶ 55, 62, 64, 65, 69, 75, 76, 77, 79, 81)
- Section 9(5), Insolvency and Bankruptcy Code, 2016An operational creditor's application must be admitted if the conditions in clauses (a) to (e) are met and must be rejected in the circumstances specified; the provision is mandatory, reflecting the innate difference between financial and operational creditors. (¶¶ 73, 74, 76, 78, 79)
- Sections 6, 7(1), 7(2), 7(3), 7(4) and 7(6), Insolvency and Bankruptcy Code, 2016Existence of a financial debt and default gives the financial creditor the right to apply; the Adjudicating Authority is to ascertain default within fourteen days. CIRP commences on admission, not on filing, and there is no fixed time within which a Section 7 application must be admitted, so the timelines of the Code do not compel immediate admission. (¶¶ 50, 51, 52, 54, 61, 82, 85)
- Rule 11, National Company Law Tribunal Rules, 2016Relied on by the appellant for the Tribunal's inherent power to make orders necessary for meeting the ends of justice, read with Section 7(5)(a), to support the existence of a discretion not to admit. (¶¶ 29, 30)
Held
- The NCLAT erred in holding that the Adjudicating Authority was only required to see whether a debt existed and had been defaulted. Those facts only gave the financial creditor the right to apply. The NCLT was required to apply its mind to relevant factors including the feasibility of CIRP against an electricity generating company under statutory control, the impact of MERC's pending appeal, the APTEL order under which Rs 1,730 crore far exceeding the claim was said to be realisable, and the overall financial health and viability of the corporate debtor under its existing management. Such matters are not extraneous. (¶¶ 59, 60, 61, 89, 90)
- The first principle of interpretation is the literal rule; purposive interpretation is resorted to only where the plain words are ambiguous or would nullify the object of the statute. Ordinarily 'may' is directory and 'shall' mandatory. Section 7(5)(a) is unambiguous and confers a discretion, and the contrast with 'shall' in Section 9(5) confirms that the Legislature intended Section 9(5) to be mandatory and Section 7(5)(a) discretionary. (¶¶ 62, 64, 65, 69, 75, 76)
- The Code tackles insolvency and bankruptcy; it is not its object to penalise solvent companies temporarily defaulting on financial debts by initiating CIRP. Time-bound resolution arises only if the company is insolvent, and the timeline runs from admission, not filing. (¶¶ 81, 82, 85)
- Swiss Ribbons, decided on a challenge to the vires of the Code, did not consider whether Section 7(5)(a) is mandatory or discretionary. A judgment is a precedent for the question of law raised and decided; its language cannot be read like a statute or construed out of context. (¶¶ 83, 84)
- The discretion under Section 7(5)(a) cannot be exercised arbitrarily or capriciously. Ordinarily admission would follow on satisfaction of debt and default unless there are good reasons not to admit. Where admission is opposed on the ground of an award or decree in the corporate debtor's favour exceeding the debt, the Adjudicating Authority would have to keep admission in abeyance unless there is good reason not to, for instance where the awarded amount is incapable of realisation. (¶¶ 86, 87, 88)
Result
Appeal allowed; the NCLT order of 29.01.2021 and the NCLAT order of 02.03.2021 set aside. The NCLT to reconsider the appellant's application for stay of further proceedings on merits in accordance with law.