[Amar is a Partner at JSA. The following article was first published on Lexology.]
The scope of power of the Adjudicating Authority, the National Company Law Tribunal (Tribunal), dealing with an application of a financial creditor under Section 7 of the Insolvency and Bankruptcy Code 2016 (Code) is once again under discussion. One would have thought that the issue had been settled by the Supreme Court’s decision in Innoventive Industries Limited v. ICICI Bank (Innoventive), followed by its decision in E.S. Krishnamurthy v. Bharath Hi-Tecch Builders (Private) Limited (Bharath Hi-Tecch). However, the ‘polyvocal’ court that our Supreme Court is, there is always a possibility of different judicial view of another bench.
In Innoventive, the Supreme Court held that when an application for initiation of insolvency resolution process is brought before the Tribunal, it must decide the question of existence of default in payment of financial debt on the basis of the records of information utility or the evidence furnished by the financial creditor within 15 days. The court then ruled 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, an opportunity is required to be given to the applicant to rectify the deficiency. In case the default is established, the ruling in Innoventive leaves no discretion to the Tribunal to follow any other course except to admit the petition. If there was still any doubt regarding the power of the Tribunal, the court made it clear that “it is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise”.
In Bharath Hi-Tecch, the Supreme Court once again examined the scope of enquiry under Section 7 upon a petition by a financial creditor and concluded, “thus, two courses of action are available to the adjudicating authority in a petition under Section 7. The adjudicating authority must either admit the application under clause (a) of sub-section (5) or it must reject the application under clause (b) of sub-section (5). The statute does not provide for the adjudicating authority to undertake any other action, but for the two choices available.” The court affirmed the decision in Innoventive and counselled the Tribunal and the Appellate Tribunal (National Company Law Appellate Tribunal) about the limits of their powers as “creatures of the statute”.
These decisions held the field until the recent decision of Supreme Court in Vidarbha Industries Power Limited v. Axis Bank Limited (Vidarbha Industries).
In Vidarbha Industries, the court completely reversed the earlier position. It held that while considering an application by a financial creditor under Section 7(5) of the Code, the Tribunal may “examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.” The court noted the use of the word 'may' instead of 'shall' in Section 7(5) and for that reason held that in case of financial debt, the statute allows “flexibility”, and it has conferred the discretion on the Tribunal even if the default in payment is established. If facts and circumstances so warrant, the Tribunal can keep the admission in abeyance or even reject the application.
The judgment in Vidarbha Industries arguably adopts more pragmatic approach to insolvency and seeks to provide respite to companies who may have defaulted due to temporary financial distress but are otherwise solvent and viable. It does make economic sense to not push such companies into insolvency following the rigid rule in Innoventive.
The judgment, however, is not a good example of judicial law making.
Legal stability and predictability are fundamental to rule of law. Predictability of legal outcome (particularly in case of economic legislation) enables citizens and businesses to arrange their affairs based on past judicial precedents without fear of disruption on account of judicial decision. To achieve these ends, our courts adhere to the doctrine of stare decisis and follow previous decision on the same issue.
The adherence to precedents, however, is not an “inexorable command”. There may be good reasons to overrule or dissent from a previous decision. However, the doctrine of stare decisis requires that, while doing so, the court must engage with the precedent in question and give it careful consideration. I submit that the court failed to do that in its ruling in Vidarbha Industries which reverses the position upheld in Innoventive and Bharath Hi-Tecch. It referred to the Innoventive for expounding on the object and purpose of the Code but totally overlooked the part of the judgment which specifically dealt with the issue at hand. As for Bharath Hi-Tecch, the court did not even refer to the same.
Arguably, the court had good reasons for the ruling it made in Vidarbha Industries; however, it ought to have explained its departure from the earlier position upheld in the previous decisions. It is possible that those decisions (or their relevant parts) were not brought to the notice of the court. However, one would expect more rigorous and thorough judicial determination from the apex court, the law declared by which is binding on all courts and citizens.