Supreme Court to review whether NCLT has discretion to admit CIRP under Section 7 of IBC

Supreme Court to review whether NCLT has discretion to admit CIRP under Section 7 of IBC

The Supreme Court is set to reconsider the correctness of the ruling that whether the National Company Law Tribunal (in short NCLT) has the discretion to admit or reject Corporate Insolvency Resolution Process (in short CIRP) applications filed by Financial Creditors under Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 (in short IBC) which was held in the case of Vidarbha Industries Power Limited vs. Axis Bank Limited.

The three judges bench comprising of Chief Justice DY Chandrachud, Justices PS Narasimha and JB Pardiwala allowed the civil appeal filed in the matter of Maganlal Daga HUF vs. Jag Mohan Daga.

The appeal was filed by the financial creditors which challenged an order of the National Company Law Appellate Tribunal (NCLAT) which brought a corporate debtor out of the CIRP. It was contended that the decision in Vidarbha Industries Power Limited v. Axis Bank Limited, which was relied on by the NCLAT, ran contrary to settled law.

In the Vidarbha Industries case, the Supreme Court had ruled:

"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."

However, a review petition challenging this verdict was dismissed by the Supreme Court in September 2022.

The appellants claimed that they were creditors of the debtor and an outstanding of Rs. 1,65,29,500 were precisely in default. The NCLAT had allowed the debtor's plea on the ground that the debtor offered to pay the entire money owed to one of the financial creditors. However, an adverse inference was made since this offer was refused by them.

The NCLAT had observed "...we find it a fit case where CIRP should not be allowed to continue when Financial Creditor proceeded for 'CIRP' not for purposes of Resolution of Insolvency of the Corporate Debtor but for other purposes with some other agenda."

The creditors reasoned this was a "serious error" as it failed to appreciate that the debtor had huge amounts outstanding to other creditors as well. Thus, there was no basis to bring the debtor out of the CIRP.

"The appropriate course was to allow the Committee of Creditors ("CoC") to be constituted and direct the Corporate Debtor to place its offer for settlement before the CoC, for consideration, in accordance with provisions of the IBC," said the plea.

The creditors vehemently asserted that this ruling stood contrary to the letter and spirit of the IBC and possess a dangerous precedent. The creditors added, "the IBC does not envisage piece meal settlements at the instance of the Corporate Debtor, rather the same are discouraged."

Further it was submitted that the decision in Vidarbha Industries Power Limited runs contrary to the settled position in law laid down in Innoventive Industries Ltd vs. ICICI Bank and subsequently followed in several decisions of this Court including E S Krishnamurthy vs. Bharath Hi-Tech Builders Pvt Ltd.

"The IBC does not envisage piece meal settlements at the instance of the Corporate Debtor, rather the same are discouraged," the creditors argued.

Mr Tushar Mehta, Solicitor General of India submitted that the principle which had been enunciated in Vidarbha Industries Power Limited is liable to dilute the substratum of the Insolvency and Bankruptcy Code 2016.

The Apex Court issued notice returnable by February 6 in the matter.