In a recent order dated January 16, 2023, passed by Hon’ble Supreme Court of India (“SC”) in the matter of Maganlal Daga HUF v. Jag Mohan Daga, Civil Appeal Diary No(S). 38798/2022 (“Maganlal Order”), the validity of the judgement Vidarbha Industries Power Limited v. Axis Bank Limited, Civil Appeal No. 4633 of 2021 (“Vidarbha SC Judgement”) has again been questioned.

In the Maganlal Order, it was submitted that the Vidarbha SC Judgement is contrary to the settled position in law as laid down in Innoventive Industries Limited v. ICICI Bank, (2018) 1 SCC 407 (“Innoventive Judgement”)  and the said judgement has been followed in several decisions of the SC including in the matter of E S Krishnamurthy v. Bharath Hi-Tech Builders Private Limited, (2022) 3 SCC 161 (“Krishnamurthy Judgement”). It was also submitted that the principles laid down in the Vidarbha SC Judgement will dilute the substratum of the Insolvency and Bankruptcy Code 2016 (“the Code”). SC has issued notice in the said matter and the matter is now listed on February 6, 2023.

In the Vidarbha SC Judgement, it was held that the viability and overall financial health of the corporate debtor should be considered by the Adjudicating Authority while adjudicating a petition under section 7 of the Code. It further held that the existence of a financial debt and default in payment merely gives the financial creditor a right to apply for initiation of corporate insolvency resolution proceedings and the Adjudicating Authority is required to apply its mind. Therefore, section 7(5) (a) of the Code, confers discretionary power to the Adjudicating Authority to admit an application under section 7 of the Code. A review petition being Axis Bank Limited v. Vidarbha Industries Power Limited, Review Petition (Civil) No. 1043 of 2022, filed with respect of the Vibarbha SC Judgement, was also dismissed vide order dated September 22, 2022, as no ground was made out for any interference, and it was further held that, “…Judicial utterances and/or pronouncements are in the setting of the facts of a particular case.”

On the other hand, in the Innoventive Judgement, it was held by the SC that “…in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. 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.” The said ratio has been relied upon and upheld by numerous judgements of the SC including Krishnamurthy Judgement. The Krishnamurthy Judgement relying upon the Innoventive Judgement has again reiterated that “The Adjudicating Authority is empowered only to verify whether a default has occurred or if a default has not occurred. Based upon its decision, the Adjudicating Authority must then either admit or reject an application respectively. These are the only two courses of action which are open to the Adjudicating Authority in accordance with Section 7(5)…”

The Ministry of Corporate Affairs vide notice dated January 18, 2023 has also proposed amendment in section 7 of the Code to clear the doubts raised after the Vidarbha Judgement. The following proposal has been made “it is proposed that section 7 may be amended to clarify that while considering an application for initiation of the CIRP by the financial creditors, the AA is only required to be satisfied about the occurrence of a default and fulfilment of procedural requirements for this specific purpose (and nothing more). Where a default is established, it is mandatory for the AA to admit the application and initiate the CIRP.”

Please find attached a copy of the Maganlal order.

This update has been contributed by R. Sudhinder (Senior Partner) and Aastha Trivedi (Associate).

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