VIDARBHA INDUSTRIES POWER LIMITED versus AXIS BANK LIMITED on 12 July 2022

[2022] 12 S.C.R. 139

VIDARBHA INDUSTRIES POWER LIMITED

v.

AXIS BANK LIMITED

(Civil Appeal No. 4633 of 2021)

JULY 12, 2022

[INDIRA BANERJEE AND J. K. MAHESHWARI, JJ.]

Insolvency and Bankruptcy Code 2016 – s.7(5)(a) –Interpretation of – Legislature has in its wisdom used the word ‘may’in s.7(5)(a) of the Code in respect of an application for CIRPinitiated by a financial creditor against a Corporate Debtor – Itconfers discretionary power on the Adjudicating Authority (NCLT)to admit an application of a Financial Creditor u/s.7 of the Codefor initiation of CIRP – The existence of a financial debt and defaultin payment only give the financial creditor the right to apply forinitiation of CIRP – NCLT is required to apply its mind to relevantfactors – Electricity.

Insolvency and Bankruptcy Code, 2016: s.7(5)(a) – Whetherdiscretionary or mandatory – Held: Is discretionary.

Insolvency and Bankruptcy Code, 2016: Difference betweens.7(5)(a) and s.9(5)(a) – Discussed – Legislature used ‘may’ ins.7(5)(a) of the IBC but a different word ‘shall’ in the otherwisealmost identical provision of s.9(5)(a) shows that ‘may’ and ‘shall’in the two provisions are intended to convey a different meaning –Legislature intended s.9(5)(a) of the IBC to be mandatory ands.7(5)(a) of the IBC to be discretionary – An application of anOperational Creditor for initiation of CIRP u/s.9(2) of the IBC ismandatorily required to be admitted if the application is completein all respects and in compliance of the requisites of the IBC.

Words and Phrases: May and Shall – Presumption of Factand Presumption of Law – Discussed – Ordinarily the word “may”is directory – The expression ‘may admit’ confers discretion to admit– The use of the word “shall” postulates a mandatory requirement– The use of the word “shall” raises a presumption that a provisionis imperative – The prima facie presumption about the provisionbeing imperative may be rebutted by other considerations such as

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Athe scope of the enactment and the consequences flowing from theconstruction.

Interpretation of Statutes: Rules of interpretation – First andforemost principle of interpretation of a statute is the rule of literalinterpretation – Purposive interpretation can only be resorted toBwhen the plain words of a statute are ambiguous or if construedliterally, the provision would nullify the object of the statute orotherwise lead to an absurd result.

Insolvency and Bankruptcy Code, 2016: Difference betweenFinancial Creditors and Operational Creditors – Discussed.

CAllowing the appeal, the Court

HELD : 1. The Appellate Authority (NCLAT) erred inholding that the Adjudicating Authority (NCLT) was only requiredto see whether there had been a debt and the Corporate Debtorhad defaulted in making repayment of the debt, and that theseDtwo aspects, if satisfied, would trigger the CIRP. The existenceof a financial debt and default in payment thereof only gave thefinancial creditor the right to apply for initiation of CIRP. TheAdjudicating Authority (NCLT) was require to apply its mind torelevant factors including the feasibility of initiation of CIRP,Eagainst an electricity generating company operated understatutory control, the impact of MERC’s appeal, pending in thisCourt, order of APTEL referred to above and the over all financialhealth and viability of the Corporate Debtor under its existingmanagement. [Para 61][160-D-E]

F2. Legislature has in its wisdom used the word ‘may’ inSection 7(5)(a) of the IBC in respect of an application for CIRPinitiated by a financial creditor against a Corporate Debtor buthas used the expression ‘shall’ in the otherwise almost identicalprovision of Section 9(5) of the IBC relating to the initiation ofCIRP by an Operational Creditor. The fact that Legislature usedG‘may’ in Section 7(5)(a) of the IBC but a different word, that is,‘shall’ in the otherwise almost identical provision of Section9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions areintended to convey a different meaning. It is apparent thatLegislature intended Section 9(5)(a) of the IBC to be mandatoryand Section 7(5)(a) of the IBC to be discretionary. An applicationH

of an Operational Creditor for initiation of CIRP under Section9(2) of the IBC is mandatorily required to be admitted if theapplication is complete in all respects and in compliance of therequisites of the IBC and the rules and regulations thereunder,there is no payment of the unpaid operational debt, if notices forpayment or the invoice has been delivered to the CorporateDebtor by the Operational Creditor and no notice of dispute hasbeen received by the Operational Creditor. The IBC does notcountenance dishonesty or deliberate failure to repay the duesof an operational creditor. [Paras 75 & 76][164-C-F]

3. In the present case, the Adjudicating Authority (NCLT)has simply brushed aside the case of the Appellant that an amountof Rs.1,730 Crores was realizable by the Appellant in terms ofthe order passed by APTEL in favour of the Appellant, with thecursory observation that disputes if any between the Appellantand the recipient of electricity or between the Appellant and theElectricity Regulatory Commission were inconsequential. TheCourt was of the view that the Adjudicating Authority (NCLT) asalso the Appellate Tribunal (NCLAT) fell in error in holding thatonce it was found that a debt existed and a Corporate Debtor wasin default in payment of the debt there would be no option to theAdjudicating Authority (NCLT) but to admit the petition underSection 7 of the IBC. The impugned order dated 29th January2021 passed by the Adjudicating Authority (NCLT) and theimpugned order dated 2nd March 2021 passed by the AppellateAuthority (NCLAT) dismissing the appeal of the Appellant areset aside. [Paras 89, 90, 91][167-G-H; 168-A-C]

Swiss Ribbons Private Limited and Anr. v. Union of Indiaand Ors. (2019) 4 SCC 17 : [2019] 3 SCR 535 –distinguished.

Surendra Trading Company v. Juggilal Kamlapat JuteMills Company Limited and Ors. (2017) 16 SCC 143 :[2017] 9 SCR 743; Innoventive Industries Ltd. v. ICICIBank and Another (2018) 1 SCC 407 : [2017] 8SCR 33; Lalita Kumari v. Government of Uttar Pradeshand Ors. (2014) 2 SCC 1 : [2013] 14 SCR 713; HiralalRattanlal v. State of Uttar Pradesh (1973) 1 SCC 216 :

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A[1973] 2 SCR 502; B. Premanand v. Mohan Koikal(2011) 4 SCC 266 : [2011] 3 SCR 932 – referred to CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4633of 2021.

From the Judgment and Order dated 02.03.2021 of the NationalCompany Law Appellate Tribunal, Principal Bench, New Delhi inDCompany Appeal (AT) (Insolvency) No. 117 of 2021.

Jaideep Gupta, Sr. Adv., Mahesh Agarwal, Ms. Manali Singhal,Prateek Seksaria, Sri Venkatesh, Himanshu Satija, DivyangChandiramani, Suhael Bhuttan, E. C. Agrawala, Advs. for the Appellant.

EDhruv Mehta, Sr. Adv., Syed Jafar Alam, Siddharth Ranade,Ms. Shivani Khandekar, Ms. Harneet Kaur, Arjun Agarwal, Ms. SamrudhiChotani, Advs. for the Respondent.

The Judgment of the Court was delivered by INDIRA BANERJEE, J.F

1. This appeal under Section 62 of the Insolvency and BankruptcyCode 2016, hereinafter referred to as the ‘IBC’, is against a judgmentand order dated 2[nd] March 2021 passed by the National Company LawAppellate Tribunal (NCLAT), New Delhi in Company Appeal (AT)(Insolvency) No.117 of 2021 whereby the learned Tribunal refused toGstay the proceedings initiated by the Respondent, Axis Bank Limitedagainst the Appellant for initiation of the Corporate Insolvency ResolutionProcess (CIRP) under Section 7 of the IBC.

2. The Appellant is a Generating Company within the meaning ofSection 2(28) of the Electricity Act, 2003 and has set up a 600 MWHCoal-fired Thermal Power Plant comprising of two units each of 300

MW capacity, within the Butibori Industrial Area in the Nagpur Districtin Maharashtra.

3. Under the Electricity Act, 2003, and the Rules and Regulationsframed thereunder, the business of Electricity Generating Companies isregulated and controlled by the State Electricity Regulatory Commissionconstituted under the said Act. Under Sections 61 to 63 of the ElectricityAct, the State Electricity Regulatory Commission determines the tariffchargeable by Electricity Generating Companies.

4. Through an international competitive bidding process conductedby the Maharashtra Industrial Development Corporation (MIDC), theAppellant was awarded the contract for implementation of a Group PowerProject (GPP). The GPP was later converted into an Independent PowerProject (IPP).

5. The Appellant was later permitted to expand the capacity of itspower plant by adding a second unit of 300 MW as an IPP. By an orderdated 20[th] February 2013, the Maharashtra Electricity RegulatoryCommission, hereinafter referred to as “MERC”, approved a PowerProcurement Agreement between the Appellant and Reliance IndustriesLimited (RIL) subject to No Objection Certificate (NOC) of MIDC.MIDC granted its NOC to the Power Project Agreement.

6. On 21[st] June 2013, the Cabinet Committee on Economic Affairs(CCEA) amended the New Coal Distribution Policy 2007, pursuant towhich the Ministry of Coal (MOC) issued an order on 17[th] July 2013directing Coal India Limited (CIL) to sign Fuel Supply Agreements (FSA)with Power Projects with an aggregate capacity of 78,000 MW.

7. On 17[th] July 2013, the Ministry of Power issued a list of PowerProjects with an aggregate capacity of 78,000 MW that were eligible toexecute FSAs with CIL. The Appellant was not included in the list.

8. On 19[th] July 2013, the MERC granted approval to RIL to procurepower from the Appellant’s Unit 1. Accordingly, a consolidated PowerPurchase Agreement was executed on 14[th] August 2013 between theAppellant and RIL under which the Appellant agreed to supply and RILagreed to purchase, power generated from both units of the Appellant’sPower Plant.

9. On 21[st] February 2014, the Standing Linkage Committee held ameeting wherein the Appellant’s application for conversion of Unit 1from GPP to IPP for the purpose of executing FSA was approved.

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10. On 1[st] April 2014, the Appellant commenced supply of powerto RIL pursuant to the Power Purchase Agreement approved by MERC.By an order dated 9[th] March 2015, in Case No.115 of 2014, MERCapproved the Final Tariff of the power plant of the Appellant for theFinancial Years 2014-2015 and 2015-2016.

11. In January 2016, the Appellant filed an application being CaseNo.91 of 2015 before the MERC for the purpose of truing up theAggregate Revenue Requirement and for determination of tariff in termsof MERC (Multi Year Tariff) Regulation 2011, in view of, inter alia, theincrease in fuel costs, consequential to the rise in the cost of procuringcoal for the purpose of running the power plant.

12. By an order dated 20[th] June 2016, the MERC disposed ofCase No.91 of 2015 disallowing a substantial portion of the actual fuelcosts as claimed by the Appellant for the Financial Years 2014-2015 and2015-2016 and also capped the tariff for the Financial Years 2016-2017to 2019-2020.

13. Being aggrieved, the Appellant filed an appeal being AppealNo.192 of 2016 before the Appellate Tribunal for Electricity (APTEL),challenging disallowance of the actual fuel cost for the Financial Years2014-2015 and 2015-2016.

14. By an order dated 3[rd] November 2016, the APTEL allowedthe appeal and directed MERC to allow the Appellant the actual cost ofcoal purchased for Unit-1, capped to the fuel cost for Unit 2 in terms ofthe FSA that had been executed, till such time as a FSA was executed inrespect of Unit 1. The Appellant claims that a sum of Rs.1,730 Crores isdue to the Appellant in terms of the said order of APTEL.

15. On or about 8[th] December 2016, the Appellant filed anapplication before the MERC for implementation of the directionscontained in the order dated 3[rd] November 2016 of APTEL. MERChowever filed Civil Appeal No.372 of 2017 in this Court, challenging theorder of APTEL. The Appeal is pending.

16. In view of the pending appeal of MERC in this Court, theAppellant is unable to implement the directions of APTEL. The Appellantis, for the time being, short of funds. According to the Appellant,implementation of the orders of the APTEL would enable the Appellantto clear all its outstanding liabilities.

17. Sections 6 and 7 of the IBC provide:

“6. Persons who may initiate corporate insolvency resolutionprocess.—Where any corporate debtor commits a default, afinancial creditor, an operational creditor or the corporatedebtor itself may initiate corporate insolvency resolutionprocess in respect of such corporate debtor in the manner asprovided under this Chapter.

7. Initiation of corporate insolvency resolution process byfinancial creditor.—(1) A financial creditor either by itself orjointly with other financial creditors, or any other person onbehalf of the financial creditor, as may be notified by theCentral Government, may file an application for initiatingcorporate insolvency resolution process against a corporatedebtor before the Adjudicating Authority when a default hasoccurred:

Provided that for the financial creditors, referred to in clauses(a) and (b) of sub-section (6-A) of Section 21, an applicationfor initiating corporate insolvency resolution process againstthe corporate debtor shall be filed jointly by not less thanone hundred of such creditors in the same class or not lessthan ten per cent. of the total number of such creditors in thesame class, whichever is less:

Provided further that for financial creditors who are allotteesunder a real estate project, an application for initiatingcorporate insolvency resolution process against the corporatedebtor shall be filed jointly by not less than one hundred ofsuch allottees under the same real estate project or not lessthan ten per cent. of the total number of such allottees underthe same real estate project, whichever is less:

Provided also that where an application for initiating thecorporate insolvency resolution process against a corporatedebtor has been filed by a financial creditor referred to inthe first and second provisos and has not been admitted bythe Adjudicating Authority before the commencement of theInsolvency and Bankruptcy Code (Amendment) Act, 2020,such application shall be modified to comply with therequirements of the first or second proviso within thirty days A

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of the commencement of the said Act, failing which theapplication shall be deemed to be withdrawn before itsadmission.

Explanation.—For the purposes of this sub-section, a defaultincludes a default in respect of a financial debt owed notBonly to the applicant financial creditor but to any otherfinancial creditor of the corporate debtor.

(2) The financial creditor shall make an application undersub-section (1) in such form and manner and accompaniedwith such fee as may be prescribed.

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(3) The financial creditor shall, along with the applicationfurnish—

(a) record of the default recorded with the informationutility or such other record or evidence of default asmay be specified; D

(b) the name of the resolution professional proposed toact as an interim resolution professional; and

(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days ofthe receipt of the application under sub-section (2), ascertainthe existence of a default from the records of an informationutility or on the basis of other evidence furnished by thefinancial creditor under sub-section (3):

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Provided that if the Adjudicating Authority has not ascertainedthe existence of default and passed an order under sub-section(5) within such time, it shall record its reasons in writing forthe same.

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(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinaryproceedings pending against the proposed resolutionprofessional, it may, by order, admit such application; or G

(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is H

pending against the proposed resolution professional, it may,by order, reject such application:

Provided that the Adjudicating Authority shall, beforerejecting the application under clause (b) of sub-section (5),give a notice to the applicant to rectify the defect in hisapplication within seven days of receipt of such notice fromthe Adjudicating Authority.

(6) The corporate insolvency resolution process shallcommence from the date of admission of the application undersub-section (5).

(7) The Adjudicating Authority shall communicate—

(a) the order under clause (a) of sub-section (5) to thefinancial creditor and the corporate debtor; (b) the order under clause (b) of sub-section (5) to thefinancial creditor, within seven days of admission orrejection of such application, as the case may be.”

18. On or about 15[th] January 2020, the Respondent, Axis BankLimited, as Financial Creditor of the Appellant, filed an application underSection 7 (2) of the IBC being C.P. (IB) No.264 of 2020 before theNational Company Law Tribunal (NCLT), Mumbai for initiation of CIRPagainst the Appellant.

19. The Appellant filed a Miscellaneous Application being M.A.No.570 of 2020 in C.P. (IB) No.264 of 2020, sometime in February2020, seeking stay of proceedings under Section 7 of the IBC in theNCLT, as long as Civil Appeal No.372 of 2017 was pending in this Court.

20. By an order dated 29[th] January 2021, the Adjudicating Authority(NCLT) dismissed the application being M.A. No.570 of 2020 filed bythe Appellant in C.P. No.264 of 2020 and refused to stay the CIRPinitiated against the Appellant.

21. The Adjudicating Authority held:-

“19. The Code is a special legislation. The chief object ofwhich is to decide the Petition in a time bound manner andtake adequate steps to see that the Corporate Debtor remainsa going concern even during the process of CIRP.

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20. The Hon’ble Apex Court in Swiss Ribbons v. Union ofIndian: (2019) 4 SCC 17 have set the tone for the proceedingbefore the Adjudicating Authority in order to make allendeavour to dispose of the matter in a time bound manner.

The observation of the Hon’ble Court may profitably bequoted as under:

“As is discernible, the Preamble gives an insight into whatis sought to be achieved by the Code. The Code is firstand foremost, a Code for reorganization and insolvencyresolution of corporate debtors. Unless such reorganizationis effected in a time-bound manner, the value of the assetsof such persons will deplete.

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Timely resolution of a corporate debtor who is in the red,by an effective legal framework, would go a long way tosupport the development of credit markets.

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The timelines within which the resolution process is to takeplace again protects the corporate debtor’s assets fromfurther dilution, and also protects all its creditors andworkers by seeing that the resolution process goes throughas fast as possible so that another management can,through its entrepreneurial skills, resuscitate the corporatedebtor to achieve all these ends.”

21. The observation would indicate that no other extraneousmatter should come in the way of expeditiously deciding aPetition either under Section 7 or under Section 9 of the Code.The inability of the Corporate Debtor in servicing the debtsor the reason for committing a default is alien to the schemeof the Code. The averments made in the instant Applicationwould indicate that various factors apparently hindered theCorporate Debtor from carrying on its business. There weredisputes between the Corporate Debtor and the recipient ofthe energy as well as the change in supply chain managementof the recipient of the energy may also have contributed tothe lack of confidence between the entities. Be that as it may,

the dispute of the Corporate Debtor with the Regulator orthe recipient would be extraneous to the matters involved inthe Company Petition. The decision in the matters pendingbefore the Hon’ble Apex Court and other authorities wouldhardly have any bearing and impact on the issues involved inthe present Company Petition under Section 7 of the Code.

22. This Authority is required only to see whether there hasbeen a debt and the Corporate Debtor defaulted in makingthe repayments. These two aspects when satisfied would triggerCorporate Insolvency. Therefore, the decision of theAuthorities as well as of the Hon’ble Apex Court would notaffect the proceedings before this Authority one way or theother. Therefore, we are of the considered opinion that thisAuthority need not stay its hands from considering theCompany Petition as prayed for. As it is, there has been aconsiderable delay in disposal of the Company Petition. Itwill accordingly be appropriate that the Company Petition isdisposed of as expeditiously as possible. Hence ordered.

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The Application be and the same is rejected on contest. Therewould however be no order as to costs.”

22. The Appellant filed an appeal before the NCLAT, against theaforesaid order dated 29[th] January 2021. The said appeal has beendismissed by the judgment and order dated 2[nd] March 2021 impugned inthis Appeal.

23. By the judgment and order impugned, the NCLAT held:

“On consideration of the issues raised in this Appeal we areof the considered opinion that the Appellant has nojustification in stalling the process and seeking stay of CIRP,which in essence has manifested in blocking the passing oforder of admission of Application of Respondent under Section7 of I&B Code. There is no merit in Appeal as we find nolegal infirmity in the impugned order. The AdjudicatingAuthority is conscious of the mandate of law and the courseit has to take as per I&B provisions, which practically standsstalled. This is impermissible. The flow of legal process cannot A

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Abe permitted to be thwarted on considerations which areanterior to the mandate of Section 7(4) & (5) of I&B Code.The Appeal being devoid of merit is dismissed. However, wedo not propose to impose any costs.”

24. Mr. Jaideep Gupta, Senior Advocate appearing on behalf ofBthe Appellant submitted that the Appellant had applied for stay of theproceedings before NCLT, Mumbai in extraordinary circumstances, wherethe Appellant had not been able to pay the dues of the Respondent, onlybecause an appeal filed by MERC, being Appeal No.372 of 2017, againstan order dated 3[rd] November 2016 passed by APTEL in favour of theAppellant, was pending in this Court. Since the aforesaid appeal isCpending in this Court, the Appellant is unable to realize a sum of Rs.1,730Crores, which is due and payable to the Appellant, in terms of the orderof APTEL.

25. Mr. Gupta submitted that considering the special nature of thebusiness of the Appellant of production of electricity, tariff whereof isDregulated by MERC and APTEL, the application under Section 7 of theIBC should not have been admitted against the Appellant.

26. Mr. Gupta, referred to Section 7(5)(a) of the IBC whichprovides that where the Adjudicating Authority is satisfied that a defaulthas occurred, and the application under sub-Section (2) is complete, andEthere is no disciplinary proceeding pending against the proposed ResolutionProfessional, it may by order, admit such application.

27. Mr. Gupta submitted that a bare perusal of the aforesaidprovision shows that the word used in Section 7(5)(a) of the IBC is‘may’, which must be interpreted to say that it is not mandatory for theFNCLT to admit an application in each and every case, where there isexistence of a debt.

28. Mr. Gupta argued that discretion conferred by Section 7(5)(a) of the IBC enables NCLT to reject an application, even if there isexistence of debt, for any reason that the NCLT may deem fit, for meetingGthe ends of justice and to achieve the overall objective of the IBC, whichis revival of the company and value maximization. Mr. Gupta arguedthat if legislature had intended that an application must be admitted uponexistence of a debt, then the terminology used in Section 7(5)(a) of IBCwould have been ‘shall’ and not ‘may’.

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29. Mr. Gupta has also relied on Rule 11 of the National CompanyLaw Tribunal Rules, 2016, hereinafter referred to as the “Rules”, set outhereinbelow:

“11. Inherent Powers- Nothing in these rules shall be deemedto limit or otherwise affect the inherent powers of the Tribunalto make such orders as may be necessary for meeting theends of justice or to prevent abuse of the process of theTribunal”

30. Mr. Gupta submitted that a conjoint reading of Section 7(5)(a)of the IBC with Rule 11 of the Rules makes it abundantly clear thatNCLT, on examining the existence of debt and its default, by a CorporateDebtor, has the discretion to admit or not admit an application for initiationof CIRP. It cannot be said that NCLT has no power, except to examinewhether a debt exists or not and accordingly accept or reject theapplication under Section 7 of the IBC.

31. To demonstrate that power under Section 7(5)(a) of the IBCto admit a CIRP application is discretionary and not mandatory, an analogyof that Section has been drawn to Section 10(4) of the IBC, which hasbeen held by this Court to be discretionary and not mandatory, inSurendra Trading Company v. Juggilal Kamlapat Jute MillsCompany Limited and Ors.[1], where this Court held:

“24. Further, we are of the view that the judgments citedby NCLAT and the principle contained therein applied whiledeciding that period of fourteen days within which theadjudicating authority has to pass the order is not mandatorybut directory in nature would equally apply while interpretingthe proviso to sub-section (5) of Section 7, Section 9 or sub-section (4) of Section 10 as well. After all, the applicant doesnot gain anything by not removing the objections inasmuchas till the objections are removed, such an application wouldnot be entertained. Therefore, it is in the interest of theapplicant to remove the defects as early as possible.”

32. Mr. Gupta argued, and in our view rightly, that the object ofthe IBC is to first try and revive the company and not to spell its deathknell. This objective cannot be lost sight of, when exercising powersunder Section 7 of the IBC or interpreting the said Section. Mr. Gupta 1 (2017) 16 SCC 143

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Aargued that, where there are favourable orders in favour of the CorporateDebtor, implementation of which would enable the Corporate Debtor toliquidate its debt, the NCLT is not denuded of the power to defer thehearing of the petition under Section 7 of the IBC.

33. Mr. Gupta argued that the Appellant is in its current situationBfor no fault of its own, but due to the statutory authorities as noted byAPTEL in Appeal No.192 of 2016. MERC has prevented the Appellantfrom availing the benefit of favourable orders passed by APTEL.

34. Mr. Dhruv Mehta, Senior Advocate appearing on behalf ofthe Respondent Financial Creditor, has strenuously opposed this appeal,Cemphasizing on the fact that the Appellant Corporate Debtor hadadmittedly defaulted in payment of its dues to the Respondent FinancialCreditor. He submitted that the Appellant being in admitted default, theAdjudicating Authority (NCLT) rightly declined stay of proceedingsinitiated by the Respondent Financial Creditor under Section 7(5) of theIBC.D

35. In support of his aforesaid submission, Mr. Mehta cited SwissRibbons Private Limited and Anr. v. Union of India and Ors.[2]. Therelevant portion of the judgment relied upon by Mr. Mehta in this contextis set out hereinbelow:- E“64. The trigger for a financial creditor’s application is non-payment of dues when they arise under loan agreements. It isfor this reason that Section 433(e) of the Companies Act, 1956has been repealed by the Code and a change in approachhas been brought about. Legislative policy now is to moveaway from the concept of “inability to pay debts” toF“determination of default”. The said shift enables thefinancial creditor to prove, based upon solid documentaryevidence, that there was an obligation to pay the debt andthat the debtor has failed in such obligation.”

36. Mr. Mehta argued that Section 7(5)(a) of the IBC cast aGmandatory obligation on the Adjudicating Authority to admit an applicationof the Financial Creditor, under Section 7(2), once it was found that aCorporate Debtor had committed default in repayment of its dues to theFinancial Creditor. This is what the Adjudicating Authority (NCLT) hasdone.H2 (2019) 4 SCC 17 (Para 64)

37. Mr. Mehta argued that the application under Section 7 of theIBC was filed by the Respondent Financial Creditor before the NCLT,Mumbai on 15[th] January 2020. The debt due from the Appellant to theRespondent Financial Creditor was approximately Rs.553 Crores. Thetotal debt owed by the Appellant to the consortium of lenders of whichthe Respondent Financial Creditor is the lead bank was approximatelyRs.2727 Crores.

38. Mr. Mehta argued that the Appellant Corporate Debtor has,on one pretext or the other, attempted to delay the insolvency proceedings,notwithstanding the concurrent findings of NCLT and NCLAT thatoccurrence of default is not disputed. Mr. Mehta submits that since theapplication under Section 7 of the IBC had been filed in the NCLT, it hasbeen listed on innumerable occasions, without any effective hearing.

39. Mr. Mehta submitted that the application for stay filed by theAppellant was heard on 14[th] July 2020 and later re-heard on 29[th] January2021, on which date the application was rejected. Even after the orderdated 29[th] January 2021, rejecting the Appellant’s application for stay,proceedings under Section 7 of the IBC have not progressed at all.

40. Mr. Mehta emphatically argued that the object of the IBCwas to set up an effective legal framework for resolution of insolvencyand bankruptcy in a time bound manner, to encourage entrepreneurshipand facilitate investment for higher economic growth and development.

41. Referring to sub-section (4) of Section 7 of the IBC,Mr. Mehta argued that the Adjudicating Authority (NCLT) is mandatorilyrequired to ascertain existence of the default from the records of aninformation utility or on the basis of other evidence furnished by theFinancial Creditor under sub-section (3) of Section 7, within 14 days ofreceipt of an application under sub-section (2) of Section 7 of the IBC.If the Adjudicating Authority does not ascertain the existence of default,it is bound to record its reasons in writing for not doing so.

42. Mr. Mehta argued that in this case, there was no dispute thatthe Appellant had defaulted in payment of its dues to the RespondentFinancial Creditor. The Adjudicating Authority was obliged to admit theapplication under Section 7 of the IBC in terms of Section 7(5)(a) of theIBC. There are no grounds to interfere with the concurrent findings ofthe NCLT and the NCLAT.

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A43. Mr. Mehta also relied on the judgment of this Court inInnoventive Industries Ltd. v. ICICI Bank and Another[3] to arguethat the object of the IBC was to provide a framework for expeditiousand time bound insolvency resolution. Section 7(5)(a) of the IBC had,therefore, necessarily to be construed as mandatory in the light of theobjects of the IBC.B

44. The IBC has been enacted for reasonably expeditious, timebound insolvency resolution of, inter alia, corporate bodies as observedby this Court in Swiss Ribbons (supra). As observed by this Court inSwiss Ribbons (supra) timely resolution of a Corporate Debtor, who isin the red, by an effective legal framework and process, would go aClong way to support the development of the credit market.

45. As per the Statement of Objects and Reasons of the IBC, andits preamble, the objective of the IBC is to consolidate and amend thelaws relating to reorganization and insolvency resolution of corporatepersons, partnership firms and individuals, in a time bound manner, interDalia, for maximization of the value of the assets of such persons, promotingentrepreneurship and availability of credit, balancing the interest of allthe stakeholders and matters connected therewith or incidental thereto.

46. Prior to enactment of the IBC, there was no single law inIndia that dealt with insolvency and bankruptcy. Provisions relating toEinsolvency and bankruptcy for companies could be found in the SickIndustrial Companies (Special Provisions) Act, 1985, the Recovery ofDebts Due to Banks and Financial Institutions Act, 1993, the Securitisationand Reconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002, and the Companies Act, 2013. These statutes providedFfor creation of multiple fora such as Board of Industrial and FinancialReconstruction (BIFR), Debts Recovery Tribunal (DRT) and NationalCompany Law Tribunal (NCLT) and their respective Appellate Tribunals.Liquidation of companies was handled by the High Courts.

47. The framework that had existed for insolvency and bankruptcyGwas inadequate, ineffective and resulted in undue delay. After a lot ofdeliberation and discussion and pursuant to reports of various committeesincluding, in particular, the Bankruptcy Law Reforms Committee (BLRC),the IBC has been enacted to provide an effective legal framework fortimely resolution of insolvency and bankruptcy.

48. In Innoventive Industries Ltd. v. ICICI Bank (supra), thisCourt speaking through Nariman J., referred to the Report of the BLRCand observed:

“16. At this stage, it is important to set out the importantparagraphs contained in the Report of the Bankruptcy LawReforms Committee of November 2015, as these excerpts giveus a good insight into why the Code was enacted and thepurpose for which it was enacted:

“...India is one of the youngest republics in the world, witha high concentration of the most dynamic entrepreneurs. Yetthese game changers and growth drivers are crippled by anenvironment that takes some of the longest times and highestcosts by world standards to resolve any problems that arisewhile repaying dues on debt.

….the recovery rates obtained in India are among the lowestin the world. When default takes place, broadly speaking,lenders seem to recover 20% of the value of debt, on an NPVbasis.

When creditors know that they have weak rights resulting ina low recovery rate, they are averse to lend....

The key economic question in the bankruptcy process When a firm (referred to as the corporate debtor in the draftlaw) defaults, the question arises about what is to be done.Many possibilities can be envisioned. One possibility is totake the firm into liquidation. Another possibility is to negotiatea debt restructuring, where the creditors accept a reductionof debt on an NPV basis, and hope that the negotiated valueexceeds the liquidation value. Another possibility is to sellthe firm as a going concern and use the proceeds to paycreditors. Many hybrid structures of these broad categoriescan be envisioned...

Speed is of essence

Speed is of essence for the working of the bankruptcy code,for two reasons. First, while the “calm period” can help keepan organisation afloat, without the full clarity of ownership A

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and control, significant decisions cannot be made. Withouteffective leadership, the firm will tend to atrophy and fail.The longer the delay, the more likely it is that liquidation willbe the only answer. Second, the liquidation value tends to godown with time as many assets suffer from a high economicrate of depreciation.

From the viewpoint of creditors, a good realisation cangenerally be obtained if the firm is sold as a going concern.Hence, when delays induce liquidation, there is valuedestruction. Further, even in liquidation, the realisation islower when there are delays. Hence, delays cause valuedestruction. Thus, achieving a high recovery rate is primarilyabout identifying and combating the sources of delay....

The Committee set the following as objectives desiredfrom implementing a new Code to resolve insolvency andbankruptcy:

(1) Low time to resolution.

(2) Low loss in recovery.

(3) Higher levels of debt financing across a wide variety ofdebt instruments.

The performance of the new Code in implementation will bebased on measures of the above outcomes.

Principles driving the design

The Committee chose the following principles to designthe new insolvency and bankruptcy resolution framework:

I. The Code will facilitate the assessment of viability ofthe enterprise at a very early stage.

(1) The law must explicitly state that the viability of theenterprise is a matter of business, and that matters of businesscan only be negotiated between creditors and debtor. Whileviability is assessed as a negotiation between creditors anddebtor, the final decision has to be an agreement amongcreditors who are the financiers willing to bear the loss in theinsolvency....

II. The Code will enable symmetry of informationbetween creditors and debtors.

(5) The law must ensure that information that is essentialfor the insolvency and the bankruptcy resolution process iscreated and available when it is required.

(6) The law must ensure that access to this informationis made available to all creditors to the enterprise, eitherdirectly or through the regulated professional.

(7) The law must enable access to this information tothird parties who can participate in the resolution process,through the regulated professional.

III. The Code will ensure a time-bound process to betterpreserve economic value.

(8) The law must ensure that time value of money ispreserved, and that delaying tactics in these negotiations willnot extend the time set for negotiations at the start.

IV. The Code will ensure a collective process.

(9) The law must ensure that all key stakeholders willparticipate to collectively assess viability. The law must ensurethat all creditors who have the capability and the willingnessto restructure their liabilities must be part of the negotiationprocess. The liabilities of all creditors who are not part of thenegotiation process must also be met in any negotiatedsolution.

V. The Code will respect the rights of all creditorsequally.

(10) The law must be impartial to the type of creditor incounting their weight in the vote on the final solution inresolving insolvency.

VI. The Code must ensure that, when the negotiationsfail to establish viability, the outcome of bankruptcy must bebinding.

(11) The law must order the liquidation of an enterprisewhich has been found unviable. This outcome of thenegotiations should be protected against all appeals otherthan for very exceptional cases....”

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A49. The new Insolvency and Bankruptcy framework has beendesigned, inter alia, to facilitate the assessment of viability of anenterprise at a very early stage, and to ensure a time bound InsolvencyResolution Process to preserve the economic value of the enterprise.

50. Section 6 of the IBC provides that where any Corporate DebtorBcommits a default, a Financial Creditor, an Operational Creditor or theCorporate Debtor itself may initiate the CIRP in respect of such CorporateDebtor.

51. Under Section 7(1) of the IBC, a Financial Creditor may, eitherby itself, or jointly with other financial creditors, file an application forCinitiating CIRP against a Corporate Debtor, before the AdjudicatingAuthority (NCLT) when a default has occurred. Default includes a defaultin respect of a financial debt owed not only by the applicant FinancialCreditor but to any other Financial Creditor of the Corporate Debtor.

52. Under Section 7(2) of the IBC, a financial creditor is requiredDto make an application in the prescribed form and manner, along withthe prescribed fee. Along with an application, the financial creditor isrequired to furnish record of the defaults recorded with the informationutility or such other record or evidence of default as may be specified,the name of the Resolution Professional proposed to act as an InterimResolution Professional and any other information as may be specifiedEby the Board.

53. From a perusal of the application filed by the RespondentFinancial Creditor under Section 7(2) of the IBC in the statutory form, acopy whereof is included in the Paper Book, it is apparent that theRespondent Financial Creditor filed the application in the NCLT forFinitiation of CIRP against the Appellant in its individual capacity and notas lead bank on behalf of the other creditors. The Respondent FinancialCreditor claimed that a total amount of Rs.553,27,99,322.78 was duefrom the Appellant Corporate Debtor to the Respondent Financial Creditor,of which Rs.42,83,45,538.32 was on account of the interest and furtherGRs.11,21,68,673.81 towards penal interest. The principal outstandingamount was Rs.499,22,85,110.65.

54. When an application is filed under Section 7(2) of the IBC,the Adjudicating Authority (NCLT) is required to ascertain the existenceof a default from the records of the information utility or any otherevidence furnished by the financial creditor under sub-section (3) ofH

Section 7 of the IBC, within 14 days of the date of receipt of theapplication,

55. Section 7(5)(a) of the IBC, on which much emphasis hasbeen placed both by Mr. Gupta and Mr. Mehta, provides that where theAdjudicating Authority (NCLT) is satisfied that a default has occurredand the application under sub-Section (2) of the IBC is complete andthere is no disciplinary proceeding against the proposed ResolutionProfessional, it may by order, admit such application. If default has notoccurred, or the application is incomplete, or any disciplinary proceedingis pending against the proposed Resolution Professional, the AdjudicatingAuthority (NCLT) may reject such application in terms of Section 7(5)(a)of the IBC, but after giving the applicant opportunity to rectify the defect.

56. Both, the Adjudicating Authority (NCLT) and the AppellateTribunal (NCLAT) proceeded on the premises that an application mustnecessarily be entertained under Section 7(5)(a) of the IBC, if a debtexisted and the Corporate Debtor was in default of payment of debt. Inother words, the Adjudicating Authority (NCLT) found Section 7(5)(a)of the IBC to be mandatory. The Adjudicating Authority (NCLT) was ofthe view that Section 7(5)(a) did not admit any other interpretation, withwhich the Appellate Tribunal (NCLAT) agreed.

57. The Appellate Tribunal (NCLAT) affirmed the finding of theAdjudicating Authority (NCLT) that the Adjudicating Authority was onlyrequired to see whether there had been a debt, and the Corporate Debtorhad defaulted in making the repayments. These two aspects, whensatisfied, would trigger Corporate Insolvency. Since the AdjudicatingAuthority (NCLT) did not consider the merits of the contention of theRespondent Corporate Debtor, the only question in this appeal is, whetherSection 7(5)(a) is a mandatory or a discretionary provision. In otherwords, is the expression ‘may’ to be construed as ‘shall’, having regardto the facts and circumstances of the case.

58. Referring to the judgment of this Court in Swiss Ribbons(supra), the Adjudicating Authority (NCLT) held that the imperativenessof timely resolution of a Corporate Debtor, who was in the red, indicatedthat no other extraneous matter should come in the way of expeditiouslydeciding a petition under Section 7 or under Section 9 of the IBC.

59. There can be no doubt that a Corporate Debtor who is in thered should be resolved expeditiously, following the timelines in the IBC.

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ANo extraneous matter should come in the way. However, the viabilityand overall financial health of the Corporate Debtor are not extraneousmatters.

60. The Adjudicating Authority (NCLT) found the dispute of theCorporate Debtor with the Electricity Regulator or the recipient ofBelectricity would be extraneous to the matters involved in the petition.Disputes with the Electricity Regulator or the Recipient of Electricitymay not be of much relevance. The question is whether an award of theAPTEL in favour of the Corporate Debtor, can completely be disregardedby the Adjudicating Authority (NCLT), when it is claimed that, in termsof the Award, a sum of Rs.1,730 crores, that is, an amount far exceedingCthe claim of the Financial Creditor, is realisable by the Corporate Debtor.The answer, in our view, is necessarily in the negative.

61. In our view, the Appellate Authority (NCLAT) erred in holdingthat the Adjudicating Authority (NCLT) was only required to see whetherthere had been a debt and the Corporate Debtor had defaulted in makingDrepayment of the debt, and that these two aspects, if satisfied, wouldtrigger the CIRP. The existence of a financial debt and default in paymentthereof only gave the financial creditor the right to apply for initiation ofCIRP. The Adjudicating Authority (NCLT) was require to apply its mindto relevant factors including the feasibility of initiation of CIRP, againstEan electricity generating company operated under statutory control, theimpact of MERC’s appeal, pending in this Court, order of APTEL referredto above and the over all financial health and viability of the CorporateDebtor under its existing management.

62. As pointed out by Mr. Gupta, Legislature has, in its wisdom,Fchosen to use the expression “may” in Section 7(5)(a) of the IBC. Whenan Adjudicating Authority (NCLT) is satisfied that a default has occurredand the application of a Financial Creditor is complete and there are nodisciplinary proceedings against proposed resolution professional, it mayby order admit the application. Legislative intent is construed in accordancewith the language used in the statute.G

63. The meaning and intention of Section 7(5)(a) of the IBC is tobe ascertained from the phraseology of the provision in the context ofthe nature and design of the IBC. This Court would have to consider theeffect of the provision being construed as directory or discretionary.

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64. Ordinarily the word “may” is directory. The expression ‘mayadmit’ confers discretion to admit. In contrast, the use of the word “shall”postulates a mandatory requirement. The use of the word “shall” raisesa presumption that a provision is imperative. However, it is well settledthat the prima facie presumption about the provision being imperativemay be rebutted by other considerations such as the scope of theenactment and the consequences flowing from the construction.

65. It is well settled that the first and foremost principle ofinterpretation of a statute is the rule of literal interpretation, as held bythis Court in Lalita Kumari v. Government of Uttar Pradesh andOrs.[4]If Section 7(5)(a) of the IBC is construed literally the provisionmust be held to confer a discretion on the Adjudicating Authority (NCLT).

66. In Hiralal Rattanlal v. State of Uttar Pradesh[5], this Courtheld:- “22. … In construing a statutory provision, the first and theforemost rule of construction is the literary construction. Allthat we have to see at the very outset is what does thatprovision say? If the provision is unambiguous and if fromthat provision, the legislative intent is clear, we need not callinto aid the other rules of construction of statutes. The otherrules of construction of statutes are called into aid only whenthe legislative intention is not clear.”

67. In B. Premanand v. Mohan Koikal[6], this Court held:- “9. It may be mentioned in this connection that the first andforemost principle of interpretation of a statute in every systemof interpretation is the literal rule of interpretation. The otherrules of interpretation e.g. the mischief rule, purposiveinterpretation, etc. can only be resorted to when the plainwords of a statute are ambiguous or lead to no intelligibleresults or if read literally would nullify the very object of thestatute. Where the words of a statute are absolutely clear andunambiguous, recourse cannot be had to the principles ofinterpretation other than the literal rule, vide Swedish MatchAB v. SEBI [(2004) 11 SCC 641] .”

4 (2014) 2 SCC 1 (para 14)

5 (1973) 1 SCC 216

6 (2011) 4 SCC 266

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A68. In Lalita Kumari v. Government of Uttar Pradesh (supra),this Court construed the use of the word “shall” in section 154 (1) of theCode of Criminal Procedure 1973 and held that Section 154(1) postulatesthe mandatory registration of an FIR on receipt of information of acognizable offence. If, however, the information given does not disclosea cognizance offence, a preliminary enquiry may be ordered, and if theBenquiry discloses the commission of a cognizable offence, the FIR mustbe registered.

69. As argued by Mr. Gupta, had it been the legislative intent thatSection 7(5)(a) of the IBC should be a mandatory provision, Legislaturewould have used the word ‘shall’ and not the word ‘may’. There is noCambiguity in Section 7(5)(a) of the IBC. Purposive interpretation canonly be resorted to when the plain words of a statute are ambiguous orif construed literally, the provision would nullify the object of the statuteor otherwise lead to an absurd result. In this case, there is no cogentreason to depart from the rule of literal construction.

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70. Section 8 of the IBC relates to the initiation of CIRP by anOperational Creditor. There are noticeable differences between theprocedure by which a Financial Creditor may initiate CIRP and theprocedure by which an Operational Creditor may apply for CIRP.

71. The Operational Creditor is, on occurrence of a default,Erequired to serve on the Corporate Debtor, a demand notice of the unpaidOperational Debt, or a copy of an invoice demanding payment of theamount involved in the default of the Corporate Debtor. Within ten daysof receipt of the demand notice or copy of the invoice, the CorporateDebtor may respond by drawing the notice of the Operational CreditorFto the existence of a dispute, in relation to the claim or to the payment ofthe unpaid operational debt.

72. Section 9 prescribes the mode and manner by which anOperational Creditor can make an application for initiation of CIRP. Afterexpiry of ten days from the date of delivery of the notice or invoiceGdemanding payment, if the operational creditor does not receive paymentfrom the Corporate Debtor or notice of dispute, the Operational Creditormay file an application before the Adjudicating Authority (NCLT) forinitiation of CIRP.

73. Sub-Section (5) of Section 9 of the IBC reads:- H

“9(5) The Adjudicating Authority shall, within fourteen daysof the receipt of the application under sub-section (2), by anorder

(i) admit the application and communicate such decision tothe operational creditor and the corporate debtor if,—

(a) the application made under sub-section (2) is complete; (b) there is no payment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtorhas been delivered by the operational creditor; (d) no notice of dispute has been received by the operationalcreditor or there is no record of dispute in the informationutility; and (e) there is no disciplinary proceeding pending against anyresolution professional proposed under sub-section (4), ifany.

ii) reject the application and communicate such decision tothe operational creditor and the corporate debtor, if—

(a) the application made under sub-section (2) isincomplete; (b) there has been payment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice forpayment to the corporate debtor; (d) notice of dispute has been received by the operationalcreditor or there is a record of dispute in the informationutility; or (e) any disciplinary proceeding is pending against anyproposed resolution professional:

Provided that Adjudicating Authority, shall before rejectingan application under sub-clause (a) of clause (ii) give a noticeto the applicant to rectify the defect in his application withinseven days of the date of receipt of such notice from theAdjudicating Authority.”

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A74. Sub-section (5) of Section 9 of the IBC provides that theAdjudicating Authority (NCLT) shall, within 14 days of the receipt of anapplication of an operational creditor under sub-section (2) of Section 9,admit the application and communicate the decision to the OperationalCreditor and the Corporate Debtor, provided, the conditions stipulated inclauses (a) to (e) of Section 9(5)(i) of the IBC are satisfied. TheBAdjudicating Authority (NCLT) must reject the application of theOperational Creditor in the circumstances specified in clauses (a) to (e)of Section 9(5)(ii) of the IBC.

75. 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 initiatedCby a financial creditor against a Corporate Debtor but has used theexpression ‘shall’ in the otherwise almost identical provision of Section9(5) of the IBC relating to the initiation of CIRP by an OperationalCreditor.

76. The fact that Legislature used ‘may’ in Section 7(5)(a) of theDIBC but a different word, that is, ‘shall’ in the otherwise almost identicalprovision of Section 9(5)(a) shows that ‘may’ and ‘shall’ in the twoprovisions are intended to convey a different meaning. It is apparentthat Legislature intended Section 9(5)(a) of the IBC to be mandatoryand Section 7(5)(a) of the IBC to be discretionary. An application of anEOperational Creditor for initiation of CIRP under Section 9(2) of theIBC is mandatorily required to be admitted if the application is completein all respects and in compliance of the requisites of the IBC and therules and regulations thereunder, there is no payment of the unpaidoperational debt, if notices for payment or the invoice has been deliveredto the Corporate Debtor by the Operational Creditor and no notice ofFdispute has been received by the Operational Creditor. The IBC doesnot countenance dishonesty or deliberate failure to repay the dues of anoperational creditor.

77. On the other hand, in the case of an application by a FinancialCreditor who might even initiate proceedings in a representative capacityGon behalf of all financial creditors, the Adjudicating Authority mightexamine the expedience of initiation of CIRP, taking into account allrelevant facts and circumstances, including the overall financial healthand viability of the Corporate Debtor. The Adjudicating Authority may inits discretion not admit the application of a Financial Creditor.

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78. The Legislature has consciously differentiated betweenFinancial Creditors and Operational Creditors, as there is an innatedifference between Financial Creditors, in the business of investmentand financing, and Operational Creditors in the business of supply ofgoods and services. Financial credit is usually secured and of much longerduration. Such credits, which are often long term credits, on which theoperation of the Corporate Debtor depends, cannot be equated tooperational debts which are usually unsecured, of a shorter duration andof lesser amount. The financial strength and nature of business of aFinancial Creditor cannot be compared with that of an OperationalCreditor, engaged in supply of goods and services. The impact of thenon-payment of admitted dues could be far more serious on anOperational Creditor than on a financial creditor.

79. As observed above, the financial strength and nature of businessof Financial Creditors and Operational Creditors being different, as alsothe tenor and terms of agreements/contracts with financial creditorsand operational creditors, the provisions in the IBC relating tocommencement of CIRP at the behest of an Operational Creditor, whosedues are undisputed, are rigid and inflexible. If dues are admitted asagainst the Operational Creditor, the Corporate Debtor must pay thesame. If it does not, CIRP must be commenced. In the case of a financialdebt, there is a little more flexibility. The Adjudicating Authority (NCLT)has been conferred the discretion to admit the application of the FinancialCreditor. If facts and circumstances so warrant, the AdjudicatingAuthority can keep the admission in abeyance or even reject theapplication. Of course, in case of rejection of an application, the FinancialCreditor is not denuded of the right to apply afresh for initiation of CIRP,if its dues continue to remain unpaid.

80. The IBC, as observed above, is intended to consolidate andamend the laws with a view to reorganize Corporate Debtors and resolveinsolvency in a time bound manner for maximization of the value of theassets of the Corporate Debtor.

81. The title “Insolvency and Bankruptcy Code” makes it amplyclear that the statute deals with and/or tackles insolvency and bankruptcy.It is certainly not the object of the IBC to penalize solvent companies,temporarily defaulting in repayment of its financial debts, by initiation ofCIRP. Section 7(5)(a) of the IBC, therefore, confers discretionary power A

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Aon the Adjudicating Authority (NCLT) to admit an application of aFinancial Creditor under Section 7 of the IBC for initiation of CIRP.

82. The Adjudicating Authority (NCLT) failed to appreciate thatthe question of time bound initiation and completion of CIRP could onlyarise if the companies were bankrupt or insolvent and not otherwise.BMoreover the timeline starts ticking only from the date of admission ofthe application for initiation of CIRP and not from the date of filing thesame.

83. In Swiss Ribbons (supra) this Court considering the vires ofthe IBC observed as follows:- C

“43. A financial creditor may trigger the Code either by itselfor jointly with other financial creditors or such persons asmay be notified by the Central Government when a “default”occurs. The Explanation to Section 7(1) also makes it clearthat the Code may be triggered by such persons in respect ofDa default made to any other financial creditor of the corporatedebtor, making it clear that once triggered, the resolutionprocess under the Code is a collective proceeding in remwhich seeks, in the first instance, to rehabilitate the corporatedebtor. Under Section 7(4), the adjudicating authority shall,within the prescribed period, ascertain the existence of aEdefault on the basis of evidence furnished by the financialcreditor; and under Section 7(5), the adjudicating authorityhas to be satisfied that a default has occurred, when it may,by order, admit the application, or dismiss the application ifsuch default has not occurred. On the other hand, underFSections 8 and 9, an operational creditor may, on theoccurrence of a default, deliver a demand notice which mustthen be replied to within the specified period. What isimportant is that at this stage, if an application is filed beforethe adjudicating authority for initiating the corporateinsolvency resolution process, the corporate debtor can proveGthat the debt is disputed. When the debt is so disputed, suchapplication would be rejected.”

84. The judgment of this Court Swiss Ribbons (supra), whichwas rendered in the context of a challenge to the vires of the IBC, doesnot consider the question of whether Section 7(5)(a) of the IBC is H

mandatory or discretionary. It is well settled that a judgment is a precedentfor the question of law that is raised and decided. The language used ina judgment cannot be read like a statute. In any case, words and phrasesin the judgment cannot be construed in a truncated manner out of context.

85. Legislature has, in its wisdom made a distinction between thedate of filing an application under Section 7 of the IBC and, the date ofadmission of such application for the purpose of computation of timelines.CIRP commences on the date of admission of the application for initiationof CIRP and not the date of filing thereof. There is no fixed time limitwithin which an application under Section 7 of the IBC has to be admitted.

86. Even though Section 7 (5)(a) of the IBC may conferdiscretionary power on the Adjudicating Authority, such discretionarypower cannot be exercised arbitrarily or capriciously. If the facts andcircumstances warrant exercise of discretion in a particular manner,discretion would have to be exercised in that manner.

87. Ordinarily, the Adjudicating Authority (NCLT) would have toexercise its discretion to admit an application under Section 7 of the IBCof the IBC and initiate CIRP on satisfaction of the existence of a financialdebt and default on the part of the Corporate Debtor in payment of thedebt, unless there are good reasons not to admit the petition.

88. The Adjudicating Authority (NCLT) has to consider the groundsmade out by the Corporate Debtor against admission, on its own merits.For example when admission is opposed on the ground of existence ofan award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the AdjudicatingAuthority would have to exercise its discretion under Section 7(5)(a) ofthe IBC to keep the admission of the application of the Financial Creditorin abeyance, unless there is good reason not to do so. The AdjudicatingAuthority may, for example, admit the application of the Financial Creditor,notwithstanding any award or decree, if the Award/Decretal amount isincapable of realisation. The example is only illustrative.

89. In this case, the Adjudicating Authority (NCLT) has simplybrushed aside the case of the Appellant that an amount of Rs.1,730Crores was realizable by the Appellant in terms of the order passed byAPTEL in favour of the Appellant, with the cursory observation thatdisputes if any between the Appellant and the recipient of electricity orbetween the Appellant and the Electricity Regulatory Commission wereinconsequential.

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A90. We are clearly of the view that the Adjudicating Authority(NCLT) as also the Appellate Tribunal (NCLAT) fell in error in holdingthat once it was found that a debt existed and a Corporate Debtor wasin default in payment of the debt there would be no option to theAdjudicating Authority (NCLT) but to admit the petition under Section 7of the IBC.

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91. For the reasons discussed above, the appeal is allowed. Theimpugned order dated 29[th] January 2021 passed by the AdjudicatingAuthority (NCLT) and the impugned order dated 2[nd] March 2021 passedby the Appellate Authority (NCLAT) dismissing the appeal of theAppellant are set aside. The NCLT shall re-consider the application ofCthe Appellant for stay of further proceedings on merits in accordancewith law.

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Devika Gujral(Assisted by : Neha Sharma, LCRA)

Appeal allowed.

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