On
Section 7(5)(a) of the IBC reads: "Where the Adjudicating Authority is satisfied that— a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application."
The
In the review petition, reliance was placed on the
The
Objectives of the IBC
Prior to the enactment of the IBC, insolvency and bankruptcy law in
The Bankruptcy Law Reforms Committee ("BLRC") in its report dated
Interpretation of Section 7
The IBC promotes a party driven insolvency resolution process. Section 7 of the IBC allows a financial creditor to initiate an insolvency resolution process against the corporate debtor upon showing a default in debt owed by the corporate debtor. In
Further, in
This shift is highlighted in the BLRC Report5 as the committee was against introducing a test of solvency under Section 7 of the IBC. The reasoning behind this approach was that there exists no standardized, indisputable way to establish insolvency. Rather, the IBC presumes that creditors only file an application for insolvency after failing to resolve conflicts through negotiation. In this context, the BLRC specified that the trigger for the insolvency resolution process is the evidence of default.
Analysis
In Vidarbha, the
- Conflict with established rule of law
TheSupreme Court in Vidarbha did not adequately differentiate application of this new test from the tests laid down previously. The twin test of "debt" and "default" laid down inInnoventive advocated for a binary approach of only inquiring the existence of a debt to admit an application. In Vidarbha, theSupreme Court stated that the NCLT cannot ignore relevant surrounding factors of the case. It was held that where the realizable dues of the corporate debtor were more than the payable dues, the NCLT must exercise its discretion in not admitting the petition. TheSupreme Court has however failed to outline to extent of the discretion exercisable by the NCLT apart from stating that it must not be arbitrary. Not only does this approach run contrary to theInnoventive judgment, but it also goes against the recommendations of the BLRC. In the BLRC interim report datedFebruary 10, 2015 , the committee recommended the following:
"The rules for operationalization of the NCLT should specify that, whenever a company is given an opportunity to file a reply before admission of a petition, the NCLT should not hear the matter on merits at that stage"
In the final BLRC Report ofNovember 2015 , the committee further stated that due to the unreliable nature of the solvency test inIndia , the insolvency resolution process should be triggered upon existence of default. This approach was cited in Swiss Ribbons as well whereby it was held that "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." - Counterintuitive to the objectives of the IBC
TheSupreme Court in Vidarbha held that the objective of the IBC is not to "penalize solvent companies, temporarily defaulting in repayment of its financial debts, by initiation of CIRP." While this is not disputed, it is also true that the IBC was designed to expediate insolvency disputes in a transparent and predictable manner.
An important aspect behind the failure of SICA was the significant degree of court involvement in the rescue process.6 The BLRC noted that it took five to seven years for a sick industrial company to be revived under the previous legislations due to routine challenges to the appellate courts on the merits of insolvency in the process. As a result, the IBC has always advocated for a minimum judicial intervention approach. It is evident from the BLRC Report and the citedSupreme Court judgements that the NCLT should not look into the merits of the case and must restrict its analysis to the existence of default. This "hands-off" approach is not restricted to the stage of admission. InCommittee of Creditors of Essar Steel India Limited v.Satish Kumar Gupta , theSupreme Court held that the NCLT must not question the commercial wisdom of the committee of creditors and must restrict its analysis to ensuring that the process laid down in the IBC has been followed. - Dilution of the power of the committee of creditors
The committee of creditors is empowered to file an application of withdrawal and end the process of resolution under Section 12A of the IBC. This provision, which requires an approval of 90% of the voting share, can be perceived as an existing failsafe in the IBC, which prevents abuse of the insolvency process. Ultimately, this decision is left to the commercial wisdom of the committee of creditors and not the NCLT to decide.
Conclusion
The decision of the
The authors submit that Vidarbha judgement has not given any compelling reasons why the test laid down in
Footnotes
1. 2022 SCC OnLine SC 841.
2. (2022) 3 SCC 161.
3. (2018) 1 SCC 407.
4. (2019) 4 SCC 17.
5. 5.2.2, Bankruptcy Law Reforms Committee Report,
6. 4.1, Bankruptcy Law Reforms Committee Interim Report,
This insight/article is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.
Mr
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