A two-judge Bench of Justice Indira Banerjee and Justice J.K. Maheshwari reversed the findings of the NCLT and NCLAT that an application u/s 7(5)(a) of the Insolvency and Bankruptcy Code (IBC) must be mandatorily admitted if a debt exists and the Corporate Debtor is in default of payment.

The Bench held that the National Company Law Tribunal (NCLT) should exercise discretion before admitting an application to initiate insolvency proceedings against a Corporate Debtor.

"...On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor," the Bench opined.

In this case, the Appellant was a Generating Company u/s 2(28) of the Electricity Act, 2003. The business of the Electricity Generating Company is regulated and controlled by the State Electricity Regulatory Commission.

To realize costs payable by the Maharashtra Electricity Regulatory Commission (MERC), the Appellant approached the Appellate Tribunal for Electricity (APTEL) which directed the MERC to pay the cost of Rs.1,730 crores owed to the Appellant. However, the MERC challenged the decision of the APTEL, the same being pending before the Supreme Court.

Meanwhile the Respondent, Axis Bank Ltd. filed an application u/s 7(2) of IBC for initiation of Corporate Insolvency Resolution Process (CIRP) against the Appellant for recovery of debt amounting to Rs. 533 crores before the NCLT. On that, the Appellant filed for a stay of CIRP proceedings in view of the pending hearing and realization of costs from MERC.

The NCLT refused to stay the proceedings. Upon further appeal, the order of the NCLT was upheld and confirmed by the National Company Law Appellate Tribunal (NCLAT). Aggrieved by the orders of the NCLT and the NCLAT, the Appellant approached the Apex Court u/s 62 of IBC.

Mr. Jaideep Gupta, Senior Advocate appearing on behalf of the Appellant submitted that the debt owed to the Respondent could not cleared only due to the pendency of recovery of costs from MERC and as such the word 'may' in Section 7(5)(a) of the IBC indicates that it is not mandatory to admit an application in each and every case of existence of debt. He further contended that a conjoint reading of section 7(5)(a) and Rule 11 of the NCLT Rules 2016, lays down that the NCLT has discretion to admit or not admit a CIRP application.

Mr. Dhruv Mehta, Senior Advocate representing the Financial Creditor opposing the appeal, relied on Innoventive Industries Ltd. v. ICICI Bank and Another (2018) to argue that the object of IBC was to provide a framework for expeditious and time bound insolvency resolution and as such Section 7(5)(a) of the IBC is to be construed tp be a mandatory provision.

The Bench in its findings observed that – "It is well settled that the first and foremost principle of interpretation of a statute is the rule of literal interpretation, as held by this Court in Lalita Kumari v. Government of Uttar Pradesh and Ors. (2014). If Section 7(5)(a) of the IBC is construed literally the provision must be held to confer a discretion on the Adjudicating Authority (NCLT)"

The Bench also took note that – "had it been the legislative intent that Section 7(5)(a) of the IBC should be a mandatory provision, Legislature would have used the word 'shall' and not the word 'may'."

"Ordinarily the word "may" is directory. The expression 'may admit' confers discretion to admit. In contrast, the use of the word "shall" postulates a mandatory requirement. The use of the word "shall" raises a presumption that a provision is imperative. However, it is well settled that the prima facie presumption about the provision being imperative may be rebutted by other considerations such as the scope of the enactment and the consequences flowing from the construction," the Court noted in this context.

The Bench highlighted the legislative intent by holding that – "Legislature has in its wisdom used the word 'may' in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression 'shall' in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor."

Further the Bench opined that – "Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously"

In view of the above, the Bench allowed the appeal and set aside the orders passed by the NCLT and NCLAT, while directing the NCLAT to re-consider the application of the Appellants seeking stay of CIRP proceedings.

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