Genuine defaults by the Companies and the Landmark Supreme Court judgement in the case of Vidarbha Industries Power Limited
Here is a landmark order by the Hon’ble Supreme Court in favour of the defaulting company.
The issue before the Supreme court in the case of Vidarbha Industries Power Limited Vs Axis Bank Limited was whether NCLT has the power to look into merits and stall insolvency proceedings when an application is filed by a financial creditor u/s 7 of the Insolvency and Bankruptcy Code(IBC)-
The Supreme Court of India in this case was considering SLP of the defaulting company which had defaulted on loan from Axis Bank Limited being a financial creditor. The appellant pleaded that the default was on account of dispute relating to the price of the electricity which was to be settled by Maharashtra Electricity Regulatory Commission(MERC) and upon which the appellant was expecting to receive a substantial amount which would enable the appellant to pay off the debt.
However, the NCLT as well as NCLAT decided that u/s 7(5)(a) of the IBC, once an application is filed by the Financial creditor then extraneous consideration cannot be taken into account to stall the insolvency proceedings.
However, the Supreme Court interpreted the provisions of Section 7(5)(a) by comparing the same with the provisions of Section 9(5)(a) which dealt with the operational creditor where the language used was “shall” as against “may” in Section 7(5)(a) and thus it was held that though the existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP, 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, and the overall financial health and viability of the Corporate Debtor under its existing management.
Thus the appeal was allowed by directing NCLT to consider the stay of the proceedings on merits in accordance with the law.
This judgement is a welcome case in this complex corporate world where genuine default in payment due to circumstances beyond control cannot lead to the promoters getting ripped off the control of the companies.
The copy of the order is as under:
