16 July 2022

NCLT has discretion to reject financial creditor’s CIRP application even when corporate debtor is in default

The Supreme Court has held that Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 confers discretionary power on the NCLT with respect to admission of application under said provision.

The Court was however of the view that such discretionary power cannot be exercised arbitrarily or capriciously and that NCLT must consider the grounds made out by the corporate debtor against admission, on its own merits.

Observing the fact that the Legislature used ‘may’ in Section 7(5)(a) but, ‘shall’ in the otherwise almost identical provision of Section 9(5)(a), it held that ‘may’ and ‘shall’ in the two provisions were intended to convey a different meaning. It is apparent that the Legislature intended Section 9(5)(a) to be mandatory and Section 7(5)(a) to be discretionary.

Citing an example, the Court said that when admission is opposed on the ground of the existence of an award or a decree in favour of the corporate debtor and the awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) to keep the admission of the application of the financial creditor in abeyance, unless there is a good reason not to do so.

The Apex Court in this regard answered in negative the question as to whether an award of the Appellate Tribunal for Electricity in favour of the corporate debtor can completely be disregarded by the NCLT when it was claimed that in terms of the Award, an amount far exceeding the claim of the financial creditor, was realisable by the corporate debtor.

In this case - Vidarbha Industries Power Ltd. v. Axis Bank Ltd., [Judgement dated 12 July 2022]  both, NCLT and NCLAT had proceeded on the premises that an application must necessarily be entertained under Section 7(5)(a) if a debt existed, and the corporate debtor was in default of payment of debt.

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