A Twist in the Tale
Has the Supreme Court diluted the Insolvency and Bankruptcy Code?
Since the advent of the Insolvency & Bankruptcy Code, 2016 (“IBC”), the insolvency law regime in
India has been consolidated and uniformized. Courts have repeatedly held that the IBC is a code in itself
and that one need not look elsewhere in deciding matters under it.
A key element that makes the IBC effective (and at times, almost mechanical) is the manner in which
it provides for deciding insolvency petitions, particularly those filed by financial creditors. As
understood historically on a reading of the IBC and the jurisprudence that has developed over the years,
it was a settled position of law that in an insolvency petition filed by a financial creditor, the
Adjudicating Authority, being the National Company Law Tribunal (“NCLT”), is required only to
ascertain the existence of debt and the factum of default. The presence of both elements was, until now,
understood to mean an almost assured result, being the commencement of corporate insolvency
resolution process (“CIRP”) of the corporate debtor.
The above principle has been enunciated in one of the formative judgments in IBC jurisprudence of the
Supreme Court of India in Innoventive Industries Limited v. ICICI Bank & Another1 (“Innoventive
Industries”) wherein the Court held that the NCLT, upon ascertaining the existence of a debt and
default, must initiate CIRP of the corporate debtor.
However, a recent judgment of the Supreme Court in the case of Vidarbha Industries Power Limited v.
Axis Bank Limited2 (“Vidarbha Industries”), has created paradigm shift in this settled position, wherein
the Supreme Court being seized of what seemed to be an ordinary, straightforward case of financial
debt and default, has applied an altogether different and novel test for deciding the case.
The facts of the case were fairly straightforward. The debtor, Vidarbha Industries Power Limited
(“Debtor”) was a power generation company, one of whose financial creditors, Axis Bank Limited
(“Bank”), had filed a petition before the NCLT as a financial creditor basis a default of Rs. 553 Crores.
While the Petition was pending, the Debtor filed an application for stay on the ground that it had in its
favour an order of the Appellate Tribunal for Electricity (“APTEL Order”), whereunder it was liable
to recover an amount of Rs. 1,731 Crores. However, since the APTEL Order was challenged before the
Supreme Court (which was still pending), the Debtor had yet not received the amounts due under the
The NCLT, Mumbai Bench found that the Debtor had defaulted in repayment of a financial debt and
basis this, rejected the Debtor’s stay application, which decision was upheld in appeal by the National
Company Law Appellate Tribunal. Aggrieved, the Debtor appealed to the Supreme Court.
Supreme Court’s findings
The judgment of the Supreme Court is centred around the interpretation of Section 7 of the IBC and
whether existence of a debt and default ought to mandatorily result in admission of an insolvency
- Innoventive Industries Limited v. ICICI Bank & Another, Civil Appeal Nos. 8337-8338 of 2017, decided on
August 31, 2017.
- Vidarbha Industries Power Limited v. Axis Bank Limited, Civil Appeal No. 4633 of 2021, decided on July 12,
petition. The Court observed that in cases of financial debt, when the NCLT is satisfied of the existence
of a debt and a default, there exists a further discretion with it to reject the petition for other reasons.
The rationale given by the Court for this is that Section 7 of the IBC uses the word ‘may’ and not ‘shall’.
This, in the Court’s view, is because the object of the IBC is not to ‘penalize solvent companies
temporarily defaulting in repayment of their debts’.
Delving into the facts of the case, the Court noted that while the default amount claimed in the Petition
was Rs. 553 Crores, the Debtor stood to recover a far greater amount under the APTEL Order. In the
Court’s view, this fact ought to have weighed with the NCLT while deciding the Debtor’s stay
It was argued on behalf of the Bank that the Supreme Court’s earlier decision in Swiss Ribbons Private
Limited v. Union of India & Others3 (“Swiss Ribbons”), which authoritatively quotes Innoventive
Industries, mandates the NCLT to admit a petition on ascertaining the existence of a debt and default
and hence, there was no discretion with the NCLT to reject a petition of a financial creditor in the face
of a debt and default. The Court, however, opined that the Swiss Ribbons judgment was passed in a
challenge to the constitutional validity of the IBC and hence, it could not be applied in interpreting
Section 7 of the IBC.
Based on the above reasoning, the Court directed the NCLT to re-consider the Debtor’s stay application
In addition to the discussion on a financial creditor’s petitions, the Court also made certain observations
on insolvency petitions by operational creditors and noted that it is, in fact, in those cases that the NCLT
has no discretion. The Court’s reasoning for taking this position was that Section 9 of the IBC (which
concerns operational creditors) uses the word ‘shall’ instead of ‘may’. The Court also observed that the
financial strength and bargaining power of a typical operational creditor is usually far lesser than that
of a financial creditor. Consequently, the impact of non-payment of dues would be much greater on an
operational creditor as compared to a financial creditor. This, in the Court’s view, is why the legislature
intended to make petitions by operational creditors inflexible but chose to give some leeway to the
NCLT while deciding petitions filed by financial creditors.
Judicial record is testament to the fact since inception, the IBC has been embroiled in a myriad of
litigation with the Supreme Court intervening on various occasions to interpret the legislation in its true
spirit. All the significant judgments that emerged, including the earliest one in the case of Innoventive
Industries, parrot the same intent and mandate over and over, being that financial debt and default ought
to necessarily result in admission of an insolvency petition. On the other hand, early judgments of the
Supreme Court, starting from the case of Mobilox Innovations Private Limited v. Kirusa Software
Private Limited4 (“Mobilox”), have reiterated that in cases of insolvency petitions filed by operational
creditors, the NCLT must examine the pre-existence of disputes between the parties and only upon
being satisfied that there is no pre-existing dispute, operational creditor petitions should be admitted.
Compared to the jurisprudence that has developed in a pointed direction and which has formed the
bedrock of insolvency, the view taken by the Supreme Court in Vidarbha Industries appears to have
3. Swiss Ribbons Private Limited & Another v. Union of India & Others, Writ Petition (Civil) No. 99 of 2018,
decided on January 25, 2019
4. Mobilox Innovations Private Limited v. Kirusa Software Private Limited, Civil Appeal No. 9405 of 2017,
decided on September 21, 2017.
been based on a rather startling approach on certain fundamental aspects of the IBC. We analyse some
- A debtor’s defences to a financial creditor’s petition, that the NCLT now needs to consider, have
become seemingly limitless. All extraneous factors can be pleaded and will have to be dealt with
by the NCLT on a case-by-case basis. This is a complete overhaul from the existing regime as
contemplated in Innoventive Industries.
- The apprehension of financial creditors triggering the IBC was a consistent motivation for
promoters and management to keep bank defaults in check. However, the Supreme Court has now
provided promoters and management of defaulting companies with a handle to plead extraneous
reasons for defaults, which is bound to result in slower adjudication of petitions by NCLT. This
risks taking the edge out of the IBC and is contrary to the intent of the legislation.
- While placing reliance on the APTEL Order to keep on hold the Bank’s petition, the Supreme Court
did not consider that the APTEL Order was under challenge and could well be reversed in the future.
The Supreme Court also did not consider that while the APTEL Order may be sufficient to cover
the debt of the Bank, the default committed by the Debtor in repayment of the other lenders in the
consortium was much larger. This judgment, thus, sets a precedent in that a money decree in a
defaulting debtor’s favour is to be treated as grounds for rejection of insolvency petitions, regardless
of the fact that the decree may be set aside or reversed in appeal. In fact, it could be argued that any
contingent / future asset would qualify as a defence to an insolvency action by a financial creditor.
The judgment seems to miss the point that a financial creditor’s right to be paid is not contingent
upon receipt of moneys due to the corporate debtor. It appears to go against the settled concept of
contract law that parties must be held to their bargain.
- A shift in the position of law has also been caused on account of the Supreme Court handing
significance to concepts such as “solvency” or “bankruptcy” of a company. Such a view effectively
marks a shift to the pre-IBC regime when the winding-up of companies was governed by the
Companies Act, 2013 / 1956 where “inability to pay debts” was considered a sin qua non for
initiation of winding-up. That apart, this also contradicts the Supreme Court’s judgment in the case
of Swiss Ribbons where it was observed that with the enforcement of the IBC, the legislative policy
has moved away from “inability to pay debts” to “determination of default”.
- As in the case of financial creditors, this judgment also marks a slight shift in the jurisprudence in
respect of operational creditors. Given that judgments on operational creditor issues have reiterated
that pre-existence of dispute could be determined by the NCLTs, operational creditor petitions were
as such decided on a case-by-case basis.
- Another interesting aspect of the judgment is the Court’s observations on the comparison between
the position of financial creditors and operational creditors in the insolvency regime. The finding
of the Court that there is more flexibility with the NCLTs in deciding financial creditor applications
rather than operational creditor applications, is yet another deviation from the settled understanding.
- An altogether different question that arises is on the legality of this judgment itself. This judgment
contradicts two earlier decisions of the Supreme Court, viz. Innoventive Industries and Swiss
Ribbons, both passed by coordinate benches of the Supreme Court.
The judgment is transformative on many fronts and has the potential to reshape the IBC regime,
essentially to the detriment of banks and financial institutions. The intent behind certain provisions of
the Reserve Bank of India’s prudential framework for stressed assets may also stand diluted.
Whether the judgment stands as good law in future, is something only time will tell. For now, it seems
fitting to say that in the life of the IBC, there is never a dull moment. The hope remains that this twist
in the tale does not take the sting out of the legislation that intended with rigour to resolve stressed
assets in a timely manner. We fear that unscrupulous defaulters may use this judgement to default in
payment of financial debt resulting in the agency problem sought to be resolved by IBC being reinstated.
This is a space to watch.