He said the ruling could put a halt to the already delayed process under the Insolvency and Bankruptcy Code.IBC) and will be used to argue against accepting cases by unscrupulous promoters, potentially denting the power of the dedicated recovery mechanism.
Shiju P Veetil, Senior Partner, Indialaw LLP, said the court order has the potential to harm IBC in the long run as cases cannot be admitted, taking the system back to the days before the code came into existence. .
“Previously, creditors were required to prove the inability of the debtors to accept a winding up petition. The IBC changed this criterion because creditors were required to only prove the existence of the debt and admit an insolvency case in payment. The omission was needed,” Veitel said. “unfortunately Supreme court The judgment takes jurisprudence back to an earlier ruling, and is now required to prove the debtor’s inability to pay the debt, including the feasibility of initiating the process. This would make the IBC more controversial and less effective.”
In a case related to thermal power company last month Vidarbha Industries Power (VIPL), the apex court ruled that proven default cannot be a reason to initiate insolvency proceedings, contrary to the long-held view that a corporate in default has to be mandatorily admitted under Section 7 of the IBC.
VIPL, a part of the Anil Dhirubhai Ambani Group (ADAG), had appealed against the order of the National Company Law Appellate Tribunal (NCLAT), which upheld the NCLT’s decision.
by default.
The company argued that its inability to pay was due to an ongoing dispute for which it is already fighting in the apex court.
VIPL was granted permission by the Maharashtra Electricity Regulatory Commission (MERC) to supply electricity
() But some disputes arose between VIPL and MERC on capping of operating cost and tariff. Adjudicating those disputes, the Appellate Tribunal for Electricity (APTEL) awarded VIPL ₹1,730 crore, an award challenged in the Supreme Court by MERC. VIPL argued that it could not pay back the banks due to this pending appeal and thus was not insolvent.
Justice Indira Banerjee and Justice JK Maheshwari said in their order that there is no fixed time limit for admitting a case. “The Legislature, in its discretion, has made a distinction between the date of filing of an application under section 7 of the IBC and the date of admission of such application for the purpose of computing the time limit. CIRP (Corporate Insolvency Resolution Process) begins The judges said, the date of filing the application for initiation of CIRP and not the date of filing the same. There is no fixed time limit within which the application under Section 7 of the IBC is to be accepted.
Bankers said allowing the courts to look into the merits of admitting a case would provide an escape route to the defaulting promoters.
“If we analyze the reasons for default, it is going to be a mess. Anyway, the law has been compromised due to various delays. It is now another tool to avoid paying defaulting promoters We can be sure that many promoters will use this order to stop recovery from them, said a senior public sector banker.
Since the order is from the apex court, the bankers and lawyers said that there are limited avenues to challenge it. Possible recourse is either a change in the law or a possible hearing by a five-judge bench in the case of such hearings in future.
Rajesh Narayan Gupta, managing partner, SNG & Partners, said the decision defeats IBC’s time-bound entry target.
“It is not a good order from IBC’s point of view. It can be misused as some unscrupulous borrowers will use it to prevent their cases from being accepted,” Gupta said.
Bankers said they are looking at options to challenge the order and have also approached the Insolvency and Bankruptcy Board of India (IBBI) to consider some changes in the law.