Power to admit insolvency application not binding even when debt owed: SC

The bench said NCLT failed to appreciate the question of time-bound initiation and completion of corporate insolvency resolution process could only arise if companies were bankrupt or insolvent

In a breather to defaulting companies, the Supreme Court held that the provision to admit an application starting the insolvency process is not binding even when a debt is owed.

The appeal was filed by Vidarbha Industries, which is a power generating company, against the order of the National Company Law Appellate Tribunal (NCLAT).

NCLAT had refused to stay the insolvency proceedings started by Axis Bank against the company.  

A Bench comprising Justices Indira Banerjee and JK Maheshwari said the adjudicating authority (NCLT) failed to appreciate that the question of time-bound initiation and completion of corporate insolvency resolution process (CIRP) could only arise if the companies were bankrupt or insolvent and not otherwise. Moreover, the timeline starts ticking only from the date of admission of the application for initiation of CIRP and not from the date of filing it.

“Appellate tribunal (NCLAT) also 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,” the bench said.

"The objective of the IBC is not to penalise solvent companies, temporarily defaulting in repayment, by the initiation of CIRP. Therefore, if a compelling fact situation warrants, the adjudicating authority does have the discretion to reject the application — even if there is a debt and existence of default,” said Sidharth Sethi, Partner at JSA.

Before the insolvency proceedings were started, the power company was involved in a legal tussle with Maharashtra Electricity Regulatory Commission (MERC).

The company had claimed that under new government regulations, an amount Rs 1,730 crore was to be paid to it as outstanding dues of the actual fuel costs for two financial years. However, the MERC disposed of the case.