Settling an incertitude conundrum: Whether the Adjudicating Authority is mandated to admit the application under Section 7 of the IBC without considering the extraneous matters involved?

Introduction

In order to begin the process of initiating a Corporate Insolvency Resolution (CIRP) against the Corporate Debtor, the Financial Creditor is required to submit an application to the Adjudicating Authority in accordance with Section 7 of the Insolvency and Bankruptcy Code (IBC).

The most important part of this rule is that the Adjudicating Authority must give an order to the Corporate Debtor and Financial Creditor no later than seven days after accepting or rejecting such an application.

The most important question that arises in connection with Section 7 of the IBC is whether or not the Adjudicating Authority is needed to conduct an independent evaluation of the Corporate Debtor’s debt and default of payment prior to accepting an application under S.7.

We are going to go into this matter further by analyzing the decision that the court made in the case of Vidarbha Industries Power Limited v. Axis Bank Limited.

The judgment was handed down by the Supreme Court in the case involving Vidarbha Industries.
The respondent in the case of Vidarbha Industries Power Limited v. Axis Bank Limited attempted to initiate CIRP proceedings under Section 7(2) of the Indian Business Corporation Act against the petitioners.

The appellants made a subsequent request for a stay of the proceedings before the CIRP to both the NCLT and the NCLAT, but in the end, both bodies decided against them. As a result of the reasons presented in the case Swiss Ribbons v. Union of India, the hold was lifted. This case highlights the importance of deferring to the primary purpose of the Code, which is to make a timely judgment on petitions.

Since the Appellate Tribunal for Electricity (APTEL) had already ruled in favour of the appellants, and since that ruling would result in the appellants realizing Rs. 1730 crores—a sum that far exceeds the claim of the Financial Creditor in the IBC proceedings—the appellants filed an application to stay the proceedings for defaulting in payment.

This was done because the Appellate Tribunal for Electricity (APTEL) had already ruled in favour of the appellants. The appellants claimed in their affidavits that the only reason they had been unable to pay the debts owed by the respondents was that an appeal that had been filed by MERC was still being heard in court, which delayed their realization of the amount of money necessary to satisfy their obligations with the corporate debtor. This was the sole reason that they had not been able to pay the debts.

The Supreme Court of the United States made its judgment after taking into consideration the potential impact that an appeal to the highest level of government may have on the issues that were brought up in the Section 7 case.

The bench further came to the conclusion that the decision made by the Adjudicating Authority under Section 7(5) is of an advisory nature. As a consequence of this, the Supreme Court made a request that the stay of proceedings before the IBC be reviewed again. The court went on to remark that while determining whether or not to begin CIRP, the corporate debtor’s financial health and viability are not unimportant variables to take into consideration.
If it so chooses, the Adjudicating Authority also possesses the authority to reject the application submitted by the Financial Creditor.

The authorities outlined in Section 7 of the IBC, regardless of whether they are obligatory or advisory?
In the majority of instances, the Adjudicating Authority would have to make use of the discretion that is at their disposal in order to allow an application under Section 7 of the IBC on satisfaction of the existence of financial debt and default of payment of an obligation by the Corporate Debtor.

However, as a result of the interpretation of Section 7 that occurred in the case of Vidarbha Industries, it has been established that the Adjudicating Authority is required to evaluate the arguments that were presented by the Corporate Debtor against admission on the basis of the merits of each specific instance.

The Adjudicating Authority may admit an application for a proposed resolution professional under Section 7(5) of the Code if it is satisfied that a default has occurred, the application described in Subsection (2) is complete, and there are no pending disciplinary proceedings against the proposed resolution professional.

To put it another way, the Adjudicating Authority has to be persuaded that a default has occurred. All of these conditions must be met before the application may be accepted. It’s important to remember that the legislation probably meant to use “may” instead of “must,” giving the Adjudicating Authority discretion over whether or not to grant the Financial Creditor’s application.

The legislative intent was to provide the Adjudicating Authority with the authority to determine whether or not to grant the Financial Creditor’s application. The word “must” would have been used instead of the term “may” in the relevant section if the legislative body had intended to make it necessary to approve the application.

In contrast, it is essential to take notice that Section 9 addresses the question of the admission of application by an operational creditor against the corporate debtor. In the context of CIRP, an initiative for CIRP brought forth by a Financial Creditor against a Corporate Debtor is referred to with the term “may.”

You may find this clause in the IBC, which is located in Section 7(5)(a). However, the word “must” be used in the otherwise very identical Section 9(5) of the IBC, which discusses the beginning of CIRP for an operational creditor. In this part of the document, the word “must” denote a demand that absolutely must be fulfilled.

It is plainly clear that the legislature intended for Section 7(5)(a) of the IBC to be a provision that is subject to discretion, but Section 9(5)(a) of the IBC was meant to be subject to the obligation. This difference in intent can be seen in both of these sections of the code.

In the event that a financial creditor is involved, the Adjudicating Authority has the discretion to either postpone or entirely refuse the admission of the applicant. This decision is based on the particulars of the case as well as the evidence that is now at their disposal.

Comment

The Insolvency Code is widely regarded as one of the most dynamic Codes in the Indian legal system because of the rapid pace at which it is changing. The major emphasis is on protecting the rights of the Corporate Debtor’s creditors and preventing the further diluting of the Corporate Debtor’s assets, as shown by the preamble of the Code and a number of other judicial judgments.

Since “the goal of this Code is to allow for the orderly liquidation of the assets of the corporate debtor,” it is obvious that this is the case. The authorities in charge of adjudicating cases, however, often ignore the apparent challenges connected with Corporate Debtors.

Following the ruling in Vidarbha Industries, it was determined that a Corporate Debtor’s incapacity to service its commitments or the cause for committing the default of paying back to its financial creditor did not go beyond the boundaries of what the Code was seeking to achieve.

The incapacity of a Corporate Debtor to meet its commitments led to this conclusion since this circumstance does not constitute a breach of the Code. Therefore, it has been demonstrated beyond a reasonable doubt that, before initiating proceedings for corporate insolvency, the Authority is required to consider not only the debt and the default in making repayments by the Corporate Debtor, but also to investigate the ancillary matters involved with the Corporate Debtor.

Specifically, the Authority must consider the default in repayment when deciding whether or not to commence procedures for corporate bankruptcy. The IBC isn’t meant to be the last chapter in the company’s history, but rather a lifeline that gives it a chance to reorganize and thrive.

Even while the Vidarbha Industries case set an important new norm, it can give the appearance that it is attempting to con the Financial Creditors out of their money. The authorities in charge of adjudication are required to make what is generally regarded as extraneous matters subject to each and every fact and circumstance of the case while they are in the process of evaluating an application.

This is despite the fact that such matters are generally disregarded. This is done to avoid inequitable results in the future as well as a misunderstanding that is not justified in an effort to clear things up. Waiting for some time to pass is the one and only method to find out whether or not this example will be beneficial in the long run.

This article has been authored by Ananta Kashyap, a law graduate from Lloyd Law College.