NCLT Cannot Exercise Power To Initiate Insolvency Proceedings Arbitrarily: SC

The Supreme Court Tuesday held the National Company Law Tribunals (NCLTs) cannot exercise the discretionary power to order initiation of insolvency proceedings “arbitrarily or capriciously” and are required to consider grounds made by the corporate debtor against it.

The top court said if a corporate debtor opposes the initiation of insolvency proceedings on the ground that it has a money award in its favour and the awarded amount exceeds the debt, then NCLT “would have to exercise its discretion under Section 7(5)(a) of the IBC (Insolvency and Bankruptcy Code) to keep the admission of the application of the Financial Creditor in abeyance”.

“Even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority (NCLT/NCLAT), such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant an exercise of discretion in a particular manner, discretion would have to be exercised in that manner,” a bench comprising justices Indira Banerjee and J K Maheswari said.

The bench, in its 34-page judgement, set aside the verdicts of NCLT and the National Company Law Appellate Tribunal (NCLAT) refusing to stay the insolvency proceedings sought to be initiated by corporate creditor Axis Bank Limited against defaulting firm, Vidarbha Industries Power Limited (VIPL),  of  Maharashtra.

The top court said that the VIPL, a power-producing firm, had opposed the insolvency proceedings on grounds including that it had won a case in the Appellate Tribunal for Electricity (APTEL)  challenging the disallowance of the actual fuel cost for the financial years 2014-2015 and 2015-2016.

The APTEL, on November 3, 2016, had allowed the appeal of VIPL and had directed MERC to allow the firm the actual cost of coal purchased and the amount of Rs.1,730 crore is due to it in terms of the order.

The appeal against the APTEL order is still pending in the apex court.

The NCLT disregarded the contention of the defaulting firm and allowed the plea of Axis Bank to initiate the insolvency proceedings to recover its dues to the tune of approximately Rs 553 crores.

“In this case, the Adjudicating Authority (NCLT) has simply brushed aside the case of the Appellant that an amount of Rs 1,730 Crores was realizable by the Appellant in terms of the order passed by APTEL in favour of the Appellant, with the cursory observation that disputes if any between the Appellant and the recipient of electricity or between the Appellant and the Electricity Regulatory Commission were inconsequential.

“We are clearly of the view that the Adjudicating Authority (NCLT) as also the Appellate Tribunal (NCLAT) fell in error in holding that once it was found that a debt existed and a Corporate Debtor was in default in payment of the debt there would be no option to the Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the IBC,” Justice Banerjee, writing the verdict, said.

The NCLT has to consider the grounds made out by the corporate debtor against admission, on its own merits.

“For example when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is a good reason not to do so,” it said.

It agreed with the contention of VIPL that it had applied for a stay of the proceedings before the NCLT, Mumbai under extraordinary circumstances in which it had not been able to pay the dues to Axis Bank only because of an appeal of the MERC against the order of the APTEL in its favour was pending in the apex court.

"Since the aforesaid appeal is pending in this Court, the Appellant is unable to realize a sum of Rs 1,730 Crores, which is due and payable to the Appellant, in terms of the order of APTEL,” the firm had argued.