(2022) 8 SCC 352
Civil Appeal No. 4633 of 2021
The appellant company VIPL is an electricity generating company registered under section2(28) of the Electricity Act, 2003. The company has setup a 600 MW coal fired thermal power plant in Nagpur area. VIPL was awarded the contract for the implementation of the Group Power Project which later converted into an Independent Power Project by the Standing Linkage Committee. Primarily the company established its first unit of 300MW, later expanded to another 300MW which was permitted by the Maharashtra Electricity Regulatory Commission (MERC). On 26-1-2013, the cabinet commission on economic affairs amended the New Coal Distribution Policy and directed the Coal India Ltd. to sign fuel supply agreements with power projects with capacity of 78000MW. VIPL was not on the list which was issued by Ministry of Power on the power projects with capacity of 78000MW. On 19-7-13, MERC has approved the power procure agreement between VIPL and Reliance Industries Ltd. (RIL) for the supply of power to RIL by VIPL and was commenced to supply on 1-4-14. On 9-3-15, MERC issued an order by approving the final tariff of the power pant for the FY 2014-15 and 2015-16. In January 2016, VIPL has filed an application before MERC for truing up the aggregate revenue requirement and determination of the final tariff keeping in mind the increase in the coal costs and rise in other costs for the running of the plant. MERC issued the orders regarding the application filed in which it disallowed the application and they also capped the final tariff for the FY’s 2016-2017 to 2019-2020. This order was challenged in the Appellate for Electricity (APTEL) by VIPL. Considering all the facts APTEL has issued order in the favour of VIPL and directed MERC to allow VIPL the actual costs of coal. Hence VIPL was claiming Rs. 1730 crores as a sum due from MERC as per the order. MERC has filed appeal in the Supreme Court challenging the orders of APTEL, which was pending. Since there was no implementation of the orders of APTEL and the case pending in SC, VIPL was short of funds.
On 15-1-2020, Axis Bank Ltd. (ABL) a financial creditor, filed an application for the initiation of Commencement of Insolvency Resolution Process (CIRP) against VIPL for making a default in the repayment of the debt of Rs.533cr, under section 7 of IBC in NCLT. For which VIPL filed a miscellaneous petition requesting a stay in the proceedings of CIRP against them. But NCLT has rejected the petition and refused for the stay of proceedings, stating that IBC is a special legislation and its objective is to resolve the disputed in a timebound manner. Challenging this order, VIPL appealed to NCLAT, where NCLAT dismissed the appeal and upheld the decision of NCLT, stating that VIPL has no proper justification in seeking stay in the proceedings of CIRP. Challenging the order of NCLAT, VIPL has appealed to the supreme court.
Whether section 7(5)(a) of Insolvency and Bankruptcy Code, 2016 is mandatory or a discretion provision of the Adjudicating Authority. Meaning that the expression “may” is to construed as “shall” or not.
Section 7(5)- Where the Adjudicating Authority is satisfied
- If a default has occurred, the application required by subsection (2) is complete, and the prospective resolution professional is not already the subject of disciplinary action, it may, by order, allow such an application.
Appellant (VIPL)- The appellants have argued that they wanted a stay in the proceedings of initiation of CIRP against them, as they were not able to pay the dues to ABL because of their short of funds and the appeal filed by MERC pending in the Supreme Court, and they promised that if once the orders of APTEL were implemented then they will be able to claim Rs.1730cr from MERC and repay the debts. They have relied upon section 7(5)(a) of IBC, 2016 and on rule 11 of the NCLT rules, 2016. They argued that the word “may” mentioned in section 7(5)(a) of IBC implies that the Adjudicating Authority (AA) has the discretion to decide whether to admit the application for initiation for CIRP by the financial creditor. They argued that the term “may” implies discretion and not mandatory. They relied upon the rule 11 of NCLT rules which gives NCLT the inherent powers for meeting the ends of justice.
Respondent (ABL)- The respondents have opposed the appeal, and played emphasis on the fact that VIPL has made a default in the repayment of the dues to them. They argued that section 7(5)(a) of IBC is a mandatory obligation on the AA to admit the application filed by the financial creditor for the initiation of CIRP against the corporate debtor. They argued that VIPL has attempted the delay in CIRP proceedings and the occurrence of default made by them is not disputed. They argued that the objective of IBC is to provide the resolution in a timebound manner.
The Hon’ble Supreme Court has made reference to the one of its judgements Swiss Ribbons Pvt. Ltd. v. Union of India (2019), where the court has decided that the AA has held the imperativeness of timely resolution of corporate debtor, indicated that no other extraneous matter should come in the way of expeditiously deciding a petition u declared that no other unnecessary factor should prevent a petition under section 7 or section 9 of the IBC from being decided quickly. Under section 7 or section 9 of IBC, and the financial health and viability are not extraneous matters. With this reference, the NCLT found that the disputes of VIPL with MERC was an extraneous matter, but the SC questioned, whether the order passed by APTEL in favour of VIPL can be completely disregarded by the AA on which VIPL is dependent for the claim of Rs.1730cr and for the repayment of the debt. The court said that both NCLT and NCLAT only paid attention to the financial debt and the default made by the corporate debtor, where both AA and the appellate should have taken into considering the relevant factors like the feasibility of CIRP. SC said that the existence of the financial debt and the default only gives the right to the financial creditor to file the application for the initiation of CIRP. The Court said that the petition of MERC which is pending in the SC refers to the financial health and viability of the corporate debtor which is not an extraneous matter. The supreme court also referred to its previous judgments of Lalitha Kumari v. State of UP where it was decided that the literal interpretation of the law is the first rule of interpretation. . Hiralal Rattanlal v. State of UP, where the court ruled that there is no need to use the other statute construction standards if a provision is unambiguous and the legislative intent is obvious from that provision. . B. Premanand v. Mohan Koikal, where the court held that the first and foremost principle of the interpretation of a statute in every system of interpretation is the literal rule of interpretation. With these references the court in this case said that there is no ambiguity in sec 7(5)(a) IBC and there was no cogent reason to depart from the rule of literal construction. The court compared the section 7 and 9 of IBC where it said that the legislative has made clear distinction of the expressions “may” and “shall”, where may implies discretion and wish, whereas “shall” implies mandatory.
The court held that, the objective of IBC is not to penalise the solvent companies who temporarily defaulting in repayment of its debts with the initiating CIRP. In this case The NCLT has failed to understand that the issue of the time-bound start and finish of CIRP could only come up if the enterprises were insolvent or bankrupt and not otherwise. Also, only after the date of admission of the application the initiation starts and not after the filing of the application and there is no fixed time for the admission of application. It decided that the legislation made clear provision regarding the procedure for the filing the application for initiating CIRP by financial creditor under section 7 of IBC. Hence it was held that the expression “may” under section 7(5)(a) IBC is a discretion power of the AA and not a mandatory obligation to admit the application. The court said that it was clearly in the view the NCLT and NCLAT were wrong in holding that once it was found that a debt is in default then it is their obligation to admit the application under section 7 IBC. Therefore, the supreme court allowed the appeal and directed NCLT and NCLAT orders to keep aside and NCLT must reconsider the application of VIPL for the stay in the proceedings on merits in accordance with law.
The IBC was enacted to bring a easy, smooth and a timebound manner for the resolution of the CIRP process, which benefits for the ease of doing business, this code regulates the matters with the IBBI and also by the adjudicating authorities (NCLT or DRT). Section 7 of IBC gives the procedure to file an application before AA by the financial creditor for initiating CIRP against the corporate debtor in case it makes a default in the repayment of the debts. Under this section the AA has the discretion whether to admit the application or not but under section 9 of IBC where the application is filed by the operational creditor the AA has the obligation to admit the application for the initiation of CIRP. The AA.
DHARMASHASTRA NATIONAL LAW UNIVERSITY
 INSOLVENCY AND BANKRUPTCY CODE,2016. Sec. 7(5)(a)
 Swiss Ribbons Pvt. Ltd. v. UOI, AIR (2019) 4 SCC 17
 Lalitha Kumari v. State of UP, (2014) 2 SCC 1
 Hiralal Rattanlal v. State of UP, AIR 1973 SC 1034
 B. Premanand v. Mohan Koikal, (2011) 4 SCC 266
 Vidarbha Industries Pvt. Ltd. v. Axis Bank Ltd., (2022) 8 SCC 352