TMI Blog2022 (7) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 7(2) of the IBC, the Adjudicating Authority (NCLT) is required to ascertain the existence of a default from the records of the information utility or any other evidence furnished by the financial creditor under sub-section (3) of Section 7 of the IBC, within 14 days of the date of receipt of the application. The Appellate Authority (NCLAT) erred in holding that the Adjudicating Authority (NCLT) was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP. The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was require to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC s appeal, pending in this Court, order of APTEL referred to above and the over all financial health and viability of the Corporate Debtor under its existing management. It is well settled that the first and foremost principle of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the IBC - Appeal allowed. - CIVIL APPEAL NO. 4633 OF 2021 - - - Dated:- 12-7-2022 - INDIRA BANERJEE And J. K. MAHESHWARI, JJ. For the Appellant : Mr. Mahesh Agarwal, Adv. Mr. Prateek Seksaria, Adv. Mr. Ankur Saigal, Adv. Mr. Himanshu Satija, Adv. Mr. Shri Venkatesh, Adv. Mr. Suhael Buttan, Adv. Ms. Divyanshu Garg, Adv. Mr. Kamakshi Saigal, Adv. Mr. E. C. Agrawala, AOR For the Respondent : Mr. Syed Jafar Alam, AOR Mr. siddharth Ranade, Adv. Ms.Samrudhi Chothani, Adv. Ms. Harneet Kaur, Adv. JUDGMENT Indira Banerjee, J. This appeal under Section 62 of the Insolvency and Bankruptcy Code 2016, hereinafter referred to as the IBC , is against a judgment and order dated 2nd March 2021 passed by the National Company Law Appellate Tribunal (NCLAT), New Delhi in Company Appeal (AT) (Insolvency) No.117 of 2021 whereby the learned Tribunal refused to stay the proceedings initiated by the Respondent, Axis Bank Limited against the Appellant for initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC. 2. The Appellant is a Generating Company within the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Unit 1 from GPP to IPP for the purpose of executing FSA was approved. 10. On 1st April 2014, the Appellant commenced supply of power to RIL pursuant to the Power Purchase Agreement approved by MERC. By an order dated 9th March 2015, in Case No.115 of 2014, MERC approved the Final Tariff of the power plant of the Appellant for the Financial Years 2014-2015 and 2015-2016. 11. In January 2016, the Appellant filed an application being Case No.91 of 2015 before the MERC for the purpose of truing up the Aggregate Revenue Requirement and for determination of tariff in terms of MERC (Multi Year Tariff) Regulation 2011, in view of, inter alia, the increase in fuel costs, consequential to the rise in the cost of procuring coal for the purpose of running the power plant. 12. By an order dated 20th June 2016, the MERC disposed of Case No.91 of 2015 disallowing a substantial portion of the actual fuel costs as claimed by the Appellant for the Financial Years 2014-2015 and 2015-2016 and also capped the tariff for the Financial Years 2016-2017 to 2019-2020. 13. Being aggrieved, the Appellant filed an appeal being Appeal No.192 of 2016 before the Appellate Tribunal for Electrici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less: Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission. Explanation.-For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Creditor of the Appellant, filed an application under Section 7 (2) of the IBC being C.P. (IB) No.264 of 2020 before the National Company Law Tribunal (NCLT), Mumbai for initiation of CIRP against 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 February 2020, seeking stay of proceedings under Section 7 of the IBC in the NCLT, as long as Civil Appeal No.372 of 2017 was pending in this Court. 20. By an order dated 29th January 2021, the Adjudicating Authority (NCLT) dismissed the application being M.A. No.570 of 2020 filed by the Appellant in C.P. No.264 of 2020 and refused to stay the CIRP initiated against the Appellant. 21. The Adjudicating Authority held:- 19. The Code is a special legislation. The chief object of which is to decide the Petition in a time bound manner and take adequate steps to see that the Corporate Debtor remains a going concern even during the process of CIRP. 20. The Hon ble Apex Court in Swiss Ribbons v. Union of Indian: (2019) 4 SCC 17 have set the tone for the proceeding before the Adjudicating Authority in order to make all endeavour to dispose of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt would not affect the proceedings before this Authority one way or the other. Therefore, we are of the considered opinion that this Authority need not stay its hands from considering the Company Petition as prayed for. As it is, there has been a considerable delay in disposal of the Company Petition. It will accordingly be appropriate that the Company Petition is disposed of as expeditiously as possible. Hence ordered. ORDER The Application be and the same is rejected on contest. There would however be no order as to costs. 22. The Appellant filed an appeal before the NCLAT, against the aforesaid order dated 29th January 2021. The said appeal has been dismissed by the judgment and order dated 2nd March 2021 impugned in this Appeal. 23. By the judgment and order impugned, the NCLAT held: On consideration of the issues raised in this Appeal we are of the considered opinion that the Appellant has no justification in stalling the process and seeking stay of CIRP, which in essence has manifested in blocking the passing of order of admission of Application of Respondent under Section 7 of I B Code. There is no merit in Appeal as we find no legal infirmity in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted upon existence of a debt, then the terminology used in Section 7(5)(a) of IBC would have been shall and not may . 29. Mr. Gupta has also relied on Rule 11 of the National Company Law Tribunal Rules, 2016, hereinafter referred to as the Rules , set out hereinbelow: 11. Inherent Powers- Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal 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 that NCLT, on examining the existence of debt and its default, by a Corporate Debtor, has the discretion to admit or not admit an application for initiation of CIRP. It cannot be said that NCLT has no power, except to examine whether a debt exists or not and accordingly accept or reject the application under Section 7 of the IBC. 31. To demonstrate that power under Section 7(5)(a) of the IBC to admit a CIRP application is discretionary and not mandatory, an analogy of that Section has been drawn to Section 10(4) of the IBC, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s context is set out hereinbelow:- 64. The trigger for a financial creditor's application is non-payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. Legislative policy now is to move away from the concept of inability to pay debts to determination of default . The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation. 36. Mr. Mehta argued that Section 7(5)(a) of the IBC cast a mandatory obligation on the Adjudicating Authority to admit an application of the Financial Creditor, under Section 7(2), once it was found that a Corporate Debtor had committed default in repayment of its dues to the Financial Creditor. This is what the Adjudicating Authority (NCLT) has done. 37. Mr. Mehta argued that the application under Section 7 of the IBC was filed by the Respondent Financial Creditor before the NCLT, Mumbai on 15th January 2020. The debt due from the Appellant to the Respondent Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd time bound insolvency resolution. Section 7(5)(a) of the IBC had, therefore, necessarily to be construed as mandatory in the light of the objects of the IBC. 44. The IBC has been enacted for reasonably expeditious, time bound insolvency resolution of, inter alia, corporate bodies as observed by this Court in Swiss Ribbons (supra). As observed by this Court in Swiss Ribbons (supra) timely resolution of a Corporate Debtor, who is in the red, by an effective legal framework and process, would go a long way to support the development of the credit market. 45. As per the Statement of Objects and Reasons of the IBC, and its preamble, the objective of the IBC is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals, in a time bound manner, inter alia, for maximization of the value of the assets of such persons, promoting entrepreneurship and availability of credit, balancing the interest of all the stakeholders and matters connected therewith or incidental thereto. 46. Prior to enactment of the IBC, there was no single law in India that dealt with insolvency and bankruptcy. Provisions rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt restructuring, where the creditors accept a reduction of debt on an NPV basis, and hope that the negotiated value exceeds the liquidation value. Another possibility is to sell the firm as a going concern and use the proceeds to pay creditors. Many hybrid structures of these broad categories can 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 keep an organisation afloat, without the full clarity of ownership and control, significant decisions cannot be made. Without effective leadership, the firm will tend to atrophy and fail. The longer the delay, the more likely it is that liquidation will be the only answer. Second, the liquidation value tends to go down with time as many assets suffer from a high economic rate of depreciation. From the viewpoint of creditors, a good realisation can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realisation is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a high recov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Code will respect the rights of all creditors equally. (10) The law must be impartial to the type of creditor in counting their weight in the vote on the final solution in resolving insolvency. VI. The Code must ensure that, when the negotiations fail to establish viability, the outcome of bankruptcy must be binding. (11) The law must order the liquidation of an enterprise which has been found unviable. This outcome of the negotiations should be protected against all appeals other than for very exceptional cases.... 49. The new Insolvency and Bankruptcy framework has been designed, inter alia, to facilitate the assessment of viability of an enterprise at a very early stage, and to ensure a time bound Insolvency Resolution Process to preserve the economic value of the enterprise. 50. Section 6 of the IBC provides that where any Corporate Debtor commits a default, a Financial Creditor, an Operational Creditor or the Corporate Debtor itself may initiate the CIRP in respect of such Corporate Debtor. 51. Under Section 7(1) of the IBC, a Financial Creditor may, either by itself, or jointly with other financial creditors, file an application for initiatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed Resolution Professional, the Adjudicating Authority (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 Appellate Tribunal (NCLAT) proceeded on the premises that an application must necessarily be entertained under Section 7(5)(a) of the IBC, if a debt existed and the Corporate Debtor was in default of payment of debt. In other words, the Adjudicating Authority (NCLT) found Section 7(5) (a) of the IBC to be mandatory. The Adjudicating Authority (NCLT) was of the view that Section 7(5)(a) did not admit any other interpretation, with which the Appellate Tribunal (NCLAT) agreed. 57. The Appellate Tribunal (NCLAT) affirmed the finding of the Adjudicating Authority (NCLT) that the Adjudicating Authority was only required to see whether there had been a debt, and the Corporate Debtor had defaulted in making the repayments. These two aspects, when satisfied, would trigger Corporate Insolvency. Since the Adjudicating Authority (NCLT) did not consider the merits of the contention of the Respondent Corporate Debtor, the only question in this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut by Mr. Gupta, Legislature has, in its wisdom, chosen to use the expression may in Section 7(5)(a) of the IBC. When an Adjudicating Authority (NCLT) is satisfied that a default has occurred and the application of a Financial Creditor is complete and there are no disciplinary proceedings against proposed resolution professional, it may by order admit the application. Legislative intent is construed in accordance with the language used in the statute. 63. The meaning and intention of Section 7(5)(a) of the IBC is to be ascertained from the phraseology of the provision in the context of the nature and design of the IBC. This Court would have to consider the effect of the provision being construed as directory or discretionary. 64. Ordinarily the word may is directory. The expression may admit confers discretion to admit. In contrast, the use of the word shall postulates a mandatory requirement. The use of the word shall raises a presumption that a provision is imperative. However, it is well settled that the prima facie presumption about the provision being imperative may be rebutted by other considerations such as the scope of the enactment and the consequences flow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not the word may . There is no ambiguity in Section 7(5)(a) of the IBC. Purposive interpretation can only be resorted to when the plain words of a statute are ambiguous or if construed literally, the provision would nullify the object of the statute or otherwise lead to an absurd result. In this case, there is no cogent reason to depart from the rule of literal construction. 70. Section 8 of the IBC relates to the initiation of CIRP by an Operational Creditor. There are noticeable differences between the procedure by which a Financial Creditor may initiate CIRP and the procedure by which an Operational Creditor may apply for CIRP. 71. The Operational Creditor is, on occurrence of a default, required to serve on the Corporate Debtor, a demand notice of the unpaid Operational Debt, or a copy of an invoice demanding payment of the amount involved in the default of the Corporate Debtor. Within ten days of receipt of the demand notice or copy of the invoice, the Corporate Debtor may respond by drawing the notice of the Operational Creditor to the existence of a dispute, in relation to the claim or to the payment of the unpaid operational debt. 72. Section 9 prescribes the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Corporate Debtor, provided, the conditions stipulated in clauses (a) to (e) of Section 9(5)(i) of the IBC are satisfied. The Adjudicating Authority (NCLT) must reject the application of the Operational 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 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. 76. The fact that Legislature used may in Section 7(5)(a) of the IBC but a different word, that is, shall in the otherwise almost identical provision of Section 9(5)(a) shows that may and shall in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. An application of an Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of a financial debt, there is a little more flexibility. The Adjudicating Authority (NCLT) has been conferred the discretion to admit the application of the Financial Creditor. If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application. Of course, in case of rejection of an application, the Financial Creditor 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 and amend the laws with a view to reorganize Corporate Debtors and resolve insolvency in a time bound manner for maximization of the value of the assets of the Corporate Debtor. 81. The title Insolvency and Bankruptcy Code makes it amply clear 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 of CIRP. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner out of context. 85. Legislature has, in its wisdom made a distinction between the date of filing an application under Section 7 of the IBC and, the date of admission of such application for the purpose of computation of timelines. CIRP commences on the date of admission of the application for initiation of CIRP and not the date of filing thereof. There is no fixed time limit within which an application under Section 7 of the IBC has to be admitted. 86. Even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances 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 to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition. 88. The Adjudicating Authority (NCLT) has to consider the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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