CIRP Application Made By Financial Creditor Under The Insolvency Code: Does NCLT Have Any Discretion?

Published date09 August 2022
Subject MatterCorporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy
Law FirmAlaya Legal
AuthorMr Divjyot Singh and Praneet Kaur

Abstract- This article analyzes the recent judgement of the Supreme Court in the case of Vidarbha Industries Power Limited v. Axis Bank Limited, which upheld the discretionary power of the Adjudicating Authority to admit the application for initiation of the corporate insolvency resolution process under Section 7 of the Insolvency and Bankruptcy Code, 2016.

INTRODUCTION

The Insolvency and Bankruptcy Code, 20161 ('Insolvency Code'), is umbrella legislation which primarily aims at a resolution of distressed entities in a timely manner. The Insolvency Code schemes to first ensure resolution of such entity as and when a default occurs by an application to the Adjudicating Authority either by the corporate debtor itself or by a financial or operational creditor.2

Section 73 of the Insolvency Code becomes relevant when an application for initiation of the Corporate Insolvency Resolution Process ('CIRP') is made by the financial creditor to the Adjudicating Authority. Sub-section (1) of Section 7 confers upon the financial creditor the right to file an application for initiation of CIRP when a corporate debtor defaults, i.e., non-payment of debt by the corporate debtor when such payment is due and payable.

Once an application has been made to the Adjudicating Authority, and the said authority is satisfied that a default has occurred, it may by order, admit such application.4. While the literal interpretation of the Insolvency Code uses the term "may" and talks about the discretionary power of the adjudicating authority for admission of the application, in 2017, the Supreme Court took a contrary view and observed that 'the moment the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 (seven) days of receipt of a notice from the Adjudicating Authority.'5

However, recently, in Vidarbha Industries Power Limited v. Axis Bank Limited6, the Supreme Court deferred from this well-settled position and observed that the existence of financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP and that the Adjudicating Authority must apply its mind to the relevant factors before deciding upon the admission of such application.

FACTUAL BACKGROUND

Vidarbha Industries Power Limited (the 'appellant'), a generating company within the meaning of Section 2(28) of the...

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