Harshita Sharma
Published on: July 14, 2022, 18:25 IST
The Supreme Court ascertained the power of National Company Law Tribunal (NCLT) is ‘discretionary and non-mandatory’ by nature under Section 7(5)(a) of the Insolvency and Bankruptcy Code.
In the present matter, NCLT is admitting an application for the commencement of the Corporate Insolvency Resolution Process (CIRP) by the financial creditor in the case of Vidharba Industries Power Limited v. Axis Bank Limited.
The Bench comprising Justices Indira Banerjee and JK Maheshwari held that even though Section 7(5)(a) of the IBC bestows discretionary power on the NCLT, this power cannot be used in a whimsical manner.
The dispute arose between a power generation company and Maharashtra Electricity Regulatory Commission over tariffs. An order was passed by the Appellate Tribunal of Electricity (APTEL) which was in the favour of the appellant. It directed the MERC to pay a sum of ₹1,730 crores. Discontented with the same, the MERC moved to the SC to file an appeal.
The appellant expressed its incapacity to cope with the financial burden of paying debts. Consequently, Axis Bank, the Financial Creditor, initiated proceedings under Section 7 of the IBC. An order for the initiation of CIRP was passed by the NCLT as well as the National Company Law Appellate Tribunal (NCLAT) which gave rise to the appeal before the Supreme Court.
The question posed before the court was whether Section 7(5)(a) of the IBC confers mandatory or discretionary powers.
While comparing the initiation of CIRP on application by a financial creditor to that initiated by a corporate debtor under Section 9(5) of the IBC, the court remarked that, “Significantly, Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor.“
The Court also observed that the objective of the IBC is not to further jeopardize the otherwise solvent companies that are fleetingly unable to repay their financial debts by the means of proceedings under CRIP.
Hence, the Court allowed the appeal and set aside the previous orders as it opined that, “Section 7(5)(a) of the IBC, therefore, confers discretionary power on the Adjudicating Authority (NCLT) to admit an application of a Financial Creditor under Section 7 of the IBC for initiation of CIRP.”