The Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced to bring clarity to India’s legislative framework dealing with financial failure and insolvency. The regime it replaced comprised various overlapping statutes such as the Sick Industrial Companies Act, 1985 (“SICA”) and the Board for Industrial and Financial Reconstruction (“BIFR”), along with multiple fora with conflicting jurisdictions. This had created cumbersome procedures that were often ineffective in attaining their primary intent, which was to assist lenders in timely and efficacious recovery and rearrangement of the assets of the defaulter.

 

With the enforceability of IBC, the insolvency regime was supposed to move on from the ineffectual “debtor in control” model to a “creditor in control” model. In the aforementioned “debtor in control” model, the Defaulter/ Corporate Debtor was provided with an easy escape route from the forums to avoid paying their debt and creditors were left helpless whereas the new “creditor in control” model empowers the Creditors and provides them with the power to decide upon the assets of the Defaulter debtor.

 

Furthermore, IBC differentiated itself from the old regime by setting revival of the Company i.e., saving the business as one of its primary objectives. Unlike the previous regime, IBC stressed upon ensuring time-bound resolution i.e., ensuring that the cases are resolved within 330 days, which if followed, would have ensured minimum delays and would have provided better chances for the business to survive. Most important of all, it was supposed to bring much-needed transparency and clarity to the insolvency regime. This transparency and clarity would not only have promoted entrepreneurship but also, enhanced the confidence of domestic and international creditors in the Indian market.

 

While Innoventive Industries Limited. V. ICICI Bank [1] stressed on the dual test of the existence of “Debt” and “Default” for admission of a company into Corporate Insolvency Resolution Process (“CIRP”), which was also reiterated in E.S. Krishnamurthy v. Bharath HiTecch Builders Private Limited[2], the Supreme Court’s decision in Vidharba Industries Power Limited V. Axis Bank Limited [3] went on a difference path by providing discretion to the Adjudicating Authority to admit or reject a Section 7 Application, despite the existence of both “debt” and “default”. The said conclusion was drawn after analysing the wording of Section 7(5)(a) of the IBC which uses “may” instead of “shall” while granting power to the Adjudicating Authority to admit a Section 7 Application. The said discretion was largely viewed as against the objective of IBC, wherein it was held that if circumstances warrant, the Adjudicating Authority can keep the proceeding in abeyance.


While the intention of the Supreme Court might have been to protect solvent entities from going through the hassles of the insolvency regime, and to ensure that IBC is not misused as a “recovery mechanism”, however, it led to dire consequences, leading to myriad of case laws which were inconsistent with each other and demonstrated unpredictability of the current insolvency regime.

 

In one such case, the Adjudicating Authority while hearing a Section 7 Application against a Real Estate Company, rejected the same while citing loss to the project’s homebuyers. [4] It was clarified that the homebuyers will suffer if CIRP is initiated against the Real Estate Company. Ironically, the homebuyers were not party to the said case. Whereas in another similar case, the Adjudicating Authority rejected a similar argument taken by the Real Estate Company, the Corporate Debtor therein.[5]

 

These are just two of the several cases which were impacted by the Vidharbha judgement. A recent search suggested that the Vidharbha judgement has been quoted in as many as 106 cases.[6] It is clear from the aforesaid, that the principles of the Vidarbha judgment diluted the very substratum of IBC and significantly impacted the insolvency regime, while delaying the CIRP as well as being misused by the stressed entities.

 

Resolving the anomaly and a glimmer of hope:

 

In May 2023, the Supreme Court in M. Suresh Kumar Reddy V. Canara Bank & Others [7] while dealing with contradictory judgments qua the interpretation of Section 7 of IBC, noted that the judgment in Vidarbha Industries introduced an element of discretion for the Adjudicating Authority in admitting a Section 7 Application, provided there were valid reasons to reject it. However, relying upon the Judgment dated 22.09.2022, wherein the review of Vidarbha Industries was adjudicated upon, observed that “judicial utterances and/or pronouncements are in the setting of the facts of a particular case, and the words of the Judges interpreting statute are not to be interpreted as statutes”, the Court clarified that the ruling in Vidarbha Industries was in the context of the factual matrix of that particular case and its universal application cannot be done, and further once “debt” and “default” are established, no discretion is left with the Adjudicating Authority. The Supreme Court further went on to reaffirm its decisions in Innoventive Industries and E.S. Krishnamurthy.


The aforementioned view was also in line with the Banking Law Reform Committee’s Report [8] which assumed that in situations of financial stress of an entity, the debtors and creditors having already gone through various rounds of negotiations for repayment of debts, initiation of CIRP is the last recourse. In these circumstances, the discretion to reject the Section 7 Application may be misused by the Corporate Debtors to delay its resolution and repayment to creditors.


M. Suresh Kumar Reddy played a seminal role in clarifying the rule regarding the discretion of Adjudicating Authority to admit an Application filed under Section 7 of IBC. The ambiguity that arose due to the supposed contradiction between Vidarbha Industries and Innoventive Industries has been efficaciously resolved. It has now been clarified that the discretion of Adjudicating Authority to admit an Application under Section 7, the applicable rule is the existence of “debt” in respect of which a “default” has taken place. The same is a sufficient ground for admitting a stressed company into CIRP. However, the Adjudicating Authority may exercise its discretion in admitting the said Application only if the facts of the specific case call for such an exercise of discretion but in only exceptional circumstances. Nevertheless, the M. Suresh Kumar Reddy Judgment is a glimmer of hope towards fulfilling the objective of IBC and bringing clarity to the insolvency regime.


[1] Innoventive Industries Limited. V. ICICI Bank, Civil Appeal No. 8337-8338 OF 2017

[2] E.S. Krishnamurthy v. Bharath HiTecch Builders Private Limited, Civil Appeal No. 3325 of 2020

[3] Vidharba Industries Power Limited V. Axis Bank Limited, Civil Appeal No. 3325 of 2020

[4] Bank of Maharashtra v. Newtech Promoters and Developers Private Limited, C.P. (IB) No. 2465/NCLT/ND/2019

[5] Induslnd Bank Limited v. Hacienda Projects Private Limited, C.P. (IB) No. 419/NCLT/ND/2022

[6] Manupatra, Vidarbha Industries: Cited in Courts & Tribunals: 106

[7] Suresh Kumar Reddy V. Canara Bank & Others, Civil Appeal No. 7121 of 2022

[8] Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, BANKING LAW REFORM COMMITTEE, (March 22, 2024, 10:00 am), https://ibbi.gov.in/BLRCReportVol1_04112015.pdf