Does NCLT have discretion to admit CIRP under Section 7, IBC? Supreme Court to reconsider Vidarbha Industries judgment

The Supreme Court is slated to hear a plea that has questioned the correctness of the ruling in Vidarbha Industries Power Limited v. Axis Bank Limited, which had held that the NCLT has the discretion to admit or reject CIRP applications filed by Financial Creditors under Section 7(5)(a) of the Insolvency and Bankruptcy Code (IBC) [Maganlal Daga HUF v Jag Mohan Daga]..A bench comprising Chief Justice of India (CJI) DY Chandrachud, Justices PS Narasimha and JB Pardiwala on January 16 issued notice returnable by February 6 in the matter. .The plea moved by Financial Creditors has challenged an order of the National Company Law Appellate Tribunal (NCLAT) which brought a corporate debtor out of the Corporate Insolvency Resolution Process (CIRP). Pertinently, it was argued that the decision in Vidarbha Industries Power Limited v. Axis Bank Limited, which was relied on by the NCLAT, ran contrary to settled law. In the Vidarbha Industries case, the Supreme Court had concluded:"The Adjudicating Authority (NCLT) has been conferred the discretion to admit the application of the Financial Creditor. If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application. Of course, in case of rejection of an application, the Financial Creditor is not denuded of the right to apply afresh for initiation of CIRP, if its dues continue to remain unpaid."A review petition challenging this verdict was dismissed by the Supreme Court in September, last year.On Monday, Solicitor General of India (SG) Tushar Mehta, who happened to be present in court during the hearing, also raised concerns over this ruling, submitting that the principle laid down in the Vidarbha Industries case is liable to dilute the substance of the IBC. The Court took this submission on record and agreed to hear the matter further..The appeal before the Court also highlighted the necessity of constituting a Committee of Creditors (CoC) and placing before it any offer for settlement before bringing the debtor out of the CIRP..The appellants submitted that they were creditors of the debtor, having extended loans collectively amounting to ₹1,65,29,500 which were in default..The NCLAT had allowed the debtor’s plea on the understanding that the debtor offered to pay the entire money owed to one of the financial creditors. However, an adverse inference was made since this offer was refused by them.“..we find it a fit case where CIRP should not be allowed to continue when Financial Creditor proceeded for 'CIRP' not for purposes of Resolution of Insolvency of the Corporate Debtor but for other purposes with some other agenda,” the NCLAT had held..The creditors argued that this reasoning was a “serious error” as it failed to appreciate that the debtor had huge amounts outstanding to other creditors as well. Thus, there was no basis to bring the debtor out of the CIRP.“The appropriate course was to allow the Committee of Creditors (“CoC”) to be constituted and direct the Corporate Debtor to place its offer for settlement before the CoC, for consideration, in accordance with provisions of the IBC”, said the plea..It was the creditors’ contention that this was a step contrary to the letter and spirit of the IBC. Further, it would set a dangerous precedent, they contended.“The IBC does not envisage piece meal settlements at the instance of the Corporate Debtor, rather the same are discouraged," the creditors submitted..Reliance was also placed on the case of ES Krishnamurthy v Bharath Hi Tech Builders, wherein the top court held that the NCLT and NCLAT, being creatures of statute, were not courts of equity and could not compel parties to enter into a settlement..The appellants were represented by Senior Advocate AM Singhvi, Dhruv Mehta and advocates Aman Raj Gandhi, Parthasarathy Bose, Nidhiram Sharma, Saloni Kumar, Pranay Tuteja and Pranaya Goyal. The respondents were represented by Advocates Anirudh Sanganeria, Patitha Paban Biswal..[Read Order]