Vidarbha Industries Power Ltd. v. Axis Bank Ltd.

The decision of the Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. marks a significant development in the interpretation of Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The judgement triggered widespread debate within insolvency jurisprudence, particularly on the extent of discretion available to the Adjudicating Authority while admitting an application filed by a financial creditor.

Prior to this decision, the position under the IBC was largely settled. Once a financial creditor established the existence of a financial debt and a default, the Adjudicating Authority was expected to admit the application, subject to limited statutory exceptions. The Vidarbha judgement altered this understanding by holding that Section 7(5)(a) of the IBC is directory and not mandatory. As a result, even when debt and default are proved, the National Company Law Tribunal (NCLT) may refuse to admit an application depending on the facts and circumstances of the case.

This judgement has had far-reaching consequences, prompting divergent views from tribunals and necessitating later clarification by the Supreme Court in M. Suresh Kumar Reddy v. Canara Bank. The present case brief examines the factual background, arguments, reasoning of the Court, and the implications of the judgement.

Background and Brief Facts of Vidarbha Industries Power Ltd. v. Axis Bank Ltd.

Vidarbha Industries Power Limited was a power generation company operating a 600 MW coal-based thermal power plant in the State of Maharashtra. The company supplied electricity to Reliance Infrastructure Limited under various power purchase agreements approved by the Maharashtra Electricity Regulatory Commission (MERC).

In 2016, Vidarbha Industries applied to MERC for “truing up” of its Aggregate Revenue Requirement and for revision of tariff due to an increase in fuel costs and the cost of procuring coal. MERC, however, disallowed a significant portion of the claimed fuel costs for the financial years 2014–15 and 2015–16. In addition, MERC capped the tariff for the period from 2016–17 to 2019–20.

Aggrieved by this decision, Vidarbha Industries filed an appeal before the Appellate Tribunal for Electricity (APTEL). APTEL allowed the appeal and held that Vidarbha Industries was entitled to recover approximately INR 1,730 crores. MERC challenged the APTEL judgement before the Supreme Court, and that appeal remained pending at the time of the insolvency proceedings.

During this period, Axis Bank, a financial creditor of Vidarbha Industries, filed an application under Section 7 of the IBC before the NCLT, Mumbai, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Vidarbha Industries on account of default in repayment.

Vidarbha Industries responded by filing a miscellaneous application before the NCLT seeking a stay on the Section 7 proceedings. It was argued that the company was financially viable and that the default had occurred solely due to financial stress caused by the pending appeal before the Supreme Court concerning the APTEL order.

The NCLT rejected the request for stay and held that once debt and default were established, admission of the application under Section 7 was mandatory. Vidarbha Industries appealed to the National Company Law Appellate Tribunal (NCLAT), which upheld the decision of the NCLT. The matter was then carried to the Supreme Court.

Central Legal Question

The principal question before the Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. was whether Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 is mandatory or directory in nature.

In other words, the Court was required to determine whether the Adjudicating Authority is bound to admit a Section 7 application upon proof of debt and default, or whether it has discretion to reject such an application based on surrounding circumstances.

Submissions Before the Supreme Court

Contentions of Vidarbha Industries

Vidarbha Industries contended that the default arose due to circumstances beyond its control. The company emphasised that a substantial sum of money had become due to it pursuant to the APTEL order, and once the pending appeal before the Supreme Court was decided, the company would be in a position to repay its debts.

It was argued that Vidarbha Industries was not insolvent in the real sense but was facing temporary liquidity issues due to regulatory delays. According to the company, initiating CIRP in such circumstances would defeat the core objective of the IBC, which is revival and value maximisation of viable businesses.

Vidarbha Industries relied heavily on the language of Section 7(5)(a), which uses the word “may” while referring to admission of a financial creditor’s application. On this basis, it was argued that the provision confers discretion on the NCLT and does not mandate admission in every case where debt and default are shown.

Contentions of Axis Bank

Axis Bank argued that the statutory scheme of the IBC makes it clear that once debt and default are established, admission of the Section 7 application must follow. The bank relied on earlier Supreme Court decisions which had held that the Adjudicating Authority’s role at the admission stage is limited.

It was contended that the IBC marked a shift from assessing insolvency or inability to pay debts to a strict “default-based” regime. The Adjudicating Authority is required only to ascertain whether a default has occurred, and factors such as financial health or future recoveries are irrelevant at the admission stage.

Axis Bank further submitted that permitting such discretion would lead to uncertainty and delay, undermining the time-bound framework of the IBC. It was also argued that more than a year had passed since the filing of the application without any improvement in the financial position of Vidarbha Industries.

Vidarbha Industries Power Ltd. v. Axis Bank Ltd. Judgement

The Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. set aside the orders of both the NCLT and the NCLAT. It held that Section 7(5)(a) of the IBC is directory and not mandatory.

The Court observed that both the NCLT and NCLAT had confined their analysis to the existence of debt and default, without considering the overall financial condition and circumstances of Vidarbha Industries. According to the Supreme Court, this mechanical approach was incorrect.

The Court placed emphasis on the word “may” in Section 7(5)(a) and stated that principles of statutory interpretation require such language to be given its ordinary meaning. The use of “may”, in the Court’s view, indicates legislative intent to vest discretion in the Adjudicating Authority.

The Supreme Court also drew a distinction between applications filed by financial creditors under Section 7 and those filed by operational creditors under Section 9. It noted that Section 9(5) uses the word “shall”, making admission mandatory for operational creditor applications upon proof of debt and default, whereas Section 7(5) uses “may”.

Further, the Court held that the existence of a substantial claim in favour of Vidarbha Industries, as recognised by APTEL, could not be ignored. The financial viability of the company and the possibility of repayment upon resolution of the regulatory dispute were relevant considerations.

On these grounds, the Supreme Court concluded that the Adjudicating Authority has the discretion to reject a Section 7 application even when debt and default are established, if the facts and circumstances justify such rejection.

Impact of the Judgement

The Vidarbha judgement unsettled a previously stable area of insolvency law. It introduced a discretionary element at the admission stage of Section 7 applications, which was earlier understood to be largely automatic upon proof of debt and default.

Following this decision, various NCLTs and NCLAT Benches adopted differing approaches. In some cases, applications were rejected despite fulfilment of the statutory requirements, based on factors such as financial health of the corporate debtor or impact on third parties. In other cases, tribunals continued to follow the earlier mandatory approach.

This inconsistency created uncertainty for creditors and corporate debtors alike and diluted the predictability of the insolvency framework.

Review Petition and Subsequent Developments

A review petition was filed against the Vidarbha judgement, contending that it overlooked binding precedent and departed from the settled interpretation of Section 7. The review petition was dismissed by the Supreme Court.

However, in M. Suresh Kumar Reddy v. Canara Bank, the Supreme Court clarified that the decision in Vidarbha was rendered on the peculiar facts of that case. The Court reaffirmed the principles laid down in earlier judgements and held that once default is established, there is hardly any discretion with the Adjudicating Authority to refuse admission of a Section 7 application.

This clarification effectively restored the pre-Vidarbha position and limited the broader application of the Vidarbha ruling.

Conclusion

The judgement in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. represents a rare deviation from the otherwise strict and creditor-driven framework of the Insolvency and Bankruptcy Code. By holding Section 7(5)(a) to be directory, the Supreme Court introduced discretion at the admission stage of financial creditor applications.

While the decision was rooted in the peculiar regulatory and financial circumstances of the case, it led to significant uncertainty within insolvency adjudication. The later clarification in M. Suresh Kumar Reddy v. Canara Bank has reasserted the importance of the default-based structure of the IBC and reaffirmed judicial restraint at the admission stage.