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The Vidarbha Judgment: Return to an era of chaos and confusion

Updated: Oct 19, 2022

The author is Devansh Dixit, third year student at Gujarat National Law University, Gandhinagar.


The Insolvency and Bankruptcy Code, 2016 (IBC) marked a paradigm shift in the Indian insolvency regime by enabling swift initiation of insolvency proceedings to achieve the best possible economic outcome guided by the market forces without compromising on the value maximization of assets. Notably, it elevated the creditors by granting them control in the Corporate Insolvency Resolution Process (CIRP).

Sections 7 and 9 of the IBC enable the financial and operational creditor (FC & OC) to apply to the NCLT to initiate CIRP against a corporate debtor (CD). Initially, there were many ambiguities over the admission of such applications by the NCLTs. However, the Supreme Court, in Innoventive Industries Ltd vs ICICI Bank cleared the position by laying down that all such applications must be mandatorily admitted upon satisfaction that:

(a) There exists a “debt” which is due, and

(b) there is a “default” in payment of such debt on the part of the CD.

However, the Apex court has diluted this twin test through its recent ruling in Vidarbha Industries Power Ltd. vs Axis Bank Ltd. holding that an Adjudicating Authority (AA) has discretion to reject a CIRP application by an FC u/s 7(5)(a) even when the default has been established. The ruling has come under fire for opening Pandora’s box in an otherwise smooth jurisprudence and returning the position to the pre-IBC regime.


Vidarbha Industries Power Limited (VIPL), a power generating company, had defaulted on a loan from Axis Bank Ltd. Hence, as FC, the bank filed an application u/s 7 of the IBC before NCLT seeking initiation of CIRP against VIPL. However, VIPL applied to stay the proceedings claiming that the default resulted from a dispute that was to be resolved by the Maharashtra Electricity Regulatory Commission (MERC) and that they were anticipating a sizeable sum upon resolution of the dispute that would allow them to settle the debt against the bank. However, after getting a favourable order from the Appellate Tribunal for Electricity (APTEL), the matter was then pending before the Supreme Court (SC) and hence, the delay.

The NCLT dismissed the stay application by VIPL, holding that Section 7(5) of the IBC puts an obligation over the AA to admit such applications if a debt existed and the default had been established. The NCLAT upheld this reasoning and dismissed the appeal. Consequently, VIPL filed a Special Leave Petition, and the SC was called upon to examine whether Section 7(5)(a) of the IBC is a mandatory or discretionary provision.

The decision of the Supreme Court

Setting aside the order by the NCLAT, the SC held that the power of the AA to admit an application for initiation of CIRP by an FC u/s 7(5)(a) of the IBC is only discretionary and not mandatory. Deviating from its previous position, the Court held that the legislature has consciously used the word “may” and not “shall” in Section 7(5)(a) of the IBC, indicating that this provision is discretionary by the literal rule of interpretation. In contrast, in Section 9(5)(a) of the Code, which pertains to the initiation of CIRP by OC, the term “shall” has been used, making it a mandatory provision. The Court observed that the legislature intended to distinguish between the FCs and the OCs, and it was only when the latter applied for CIRP that the AA had no discretion.

Furthermore, the court held that when deciding the applications u/s 7 of the IBC, the NCLT may examine the “expedience of initiation of CIRP” and apply its mind to the relevant factors before exercising discretion in admitting or rejecting such applications. The court concluded that since the anticipated award amount was more than the debt and hence, a relevant factor to be considered. Hence, the NCLT erred by relying on the Swiss Ribbons v. Union of India to reject the application as the CD’s viability and overall financial health are not “extraneous matters” coming in the way of deciding petitions u/s 7 of IBC.

The Supreme Court further noted that the existence of debt only gives the right to FC to apply for initiation of CIRP and not the right to have such application admitted. However, it clarified that if an application for CIRP is rejected, it does not mean that the FC’s right to apply afresh is denuded if the dues remain unpaid. The court concluded that,

It is not the object of the IBC to penalize solvent companies temporarily defaulting on financial debts by initiating CIRP against them”.

Lastly, the court cautioned that such discretion must not be exercised arbitrarily or capriciously, and the grounds made by the CD against the admission of the application must be considered on its own merits. Therefore, the appeal was allowed, and the orders passed by the NCLT and the NCLAT were set aside.


The interpretation given by the court in this case is unwarranted and has significant implications on the effectiveness of IBC in the Indian Insolvency Regime:

Deviation from already established jurisprudence

This decision marks a complete overhaul of well-settled jurisprudence. The SC has intervened various times to interpret IBC in its true spirit and has consistently held that financial debt and default should necessarily result in the admission of an insolvency petition.

The 2D test of debt and default was laid down in Innoventive Industries Ltd vs ICICI Bank, wherein it was categorically held that,

The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete...”.

The SC again upheld this position in Swiss Ribbons vs Union of India and ES Krishnamurthy vs M/S Bharath Hi-Tech Builder, making this a benchmark for the NCLTs and NCLATs while deciding cases on Section 7 of the IBC. However, by introducing the new “expediency test”, the Vidarbha decision has once again brought uncertainty to an already settled principle.

Overlooking the objectives and legislative intent

By conferring discretion to the AAs, the Apex court has overlooked the objectives and legislative intent behind the code. The Court has handed significance to concepts such as “solvency” or “bankruptcy” of a company which effectively marks a U-turn to the pre-IBC era.

The BLRC report is considered an essential tool to interpret the intention in the IBC, as has been recognized by the Apex Court in Innovative Industries and Essar Steel India Ltd vs Satish Kumar Gupta. After considering the BLRC recommendations, the legislature consciously shifted the criteria for initiating the insolvency process against a CD from “inability to pay debt” to “existence of debt and default” to enter a faster, better and more efficient insolvency regime. Hence, the cause of default became irrelevant, and default in debt repayment became the sole criterion for initiating CIRP. Justice Nariman in Swiss Ribbons also highlighted this change in approach, where he observed four policy reasons for this shift, one of them being that the cause of default is not relevant in a situation of financial stress.

By adding the expedience test, SC has provided another option to the AA, i.e., to keep the insolvency proceedings in abeyance, defeating this paradigm shift’s whole purpose.

Mechanical defence for CDs

The decision gives the CDs a mechanical defence against the CIRP initiated against them whenever an award or decree has already been passed in favour of them and is under appeal by the judgment debtor. Interestingly, in this case, the SC ignored the possibility that the money decree in CD’s favour might be set aside or reversed on appeal. The bench seems to miss that an FC’s right to be paid is not contingent upon receipt of money due to the CD. Authorizing the NCLT to delay the commencement of the CIRP due to a future unpredictable occurrence may be detrimental to the interests of all stakeholders since other assets of CD may deteriorate over time due to poor management and lack of investment.

Furthermore, the decision allows CDs to rely on seamless defences against an FC’s claim. Extraneous factors before the NCLT may be regularly pleaded, causing undue hardship and delay. Further, such debtors will no longer have any incentive to keep the defaults in check as there will be no fear of CIRP being triggered. In effect, this would lead to an erosion of the IBC regime.

Discretionary power with NCLT

The Court has, therefore, interpreted the usage of “may” in Section 7(5)(a) to mean that the provision is discretionary. However, discretion was only intended to be limited to rejection of applications with mala fide intention. For instance, in Hytone Merchants v. Satbadi Investments Consultants, the NCLT rejected the application because the CD and FCs colluded and acted against the company’s interest. Further, the use of “shall” in Section 9(5)(a) may be understood based on the fact that the OCs are third parties which are not concerned with the company, and the chances of such collusion are improbable.

The Vidarbha judgement, thus, brings the scope for subjectivity in the initiation of CIRP. It introduces ambiguity by providing NCLT with discretionary powers as no standardized test has been laid down. The NCLT may exercise its discretion by applying less reliable tests like the Balance Sheet and Commercial Insolvency tests, which are subject to accounting standards and practice. Hence, unless the NCLT consciously constrains its discretion at the admission stage, the IBC may end up like the Sick Industrial Companies Act, 1985 (SICA), which suffered from unnecessary delays due to similar reasons and hence, was subsequently repealed.

Previous positions have pointed out that the NCLTs are not equipped to decide a CD’s financial viability at admission. The commercial wisdom of the Committee of Creditors (CoC) shall be considered the best course of action in such cases. Even if the CD gets a favourable award in the future, an option of settlement with the CoC and withdrawal from the resolution process u/s 12A of IBC is always present. However, this judgement has taken away the CoC’s power to make such credit decisions.

Differential treatment of FC and OCs?

Another significant aspect of the judgement is the observation made by the court on the comparison between the position of FCs and OCs under IBC. The interpretation given by the court may be inequitable as the SC has failed to consider repeatedly affirmed jurisprudence that the FC has the whip in the CIRP. Imagine a situation where both FC and OC file an application for CIRP, and CD is expecting a favourable award that can repay their debt. Going by the court’s interpretation, the OC’s application must be mandatorily admitted, while the FC’s application may be rejected by exercising discretionary power. Such differential treatment of FCs and OCs will undoubtedly be met by multiple challenges in courts, escalating confusion and leading to delays.


Vidharbha has thus brought subjectivity to the adjudicating process at the time of admission of CIRP applications. Even the insolvency laws United Kingdom and the United States lean towards the debt and default test to admit the application filed by a creditor for insolvency proceedings. Hence, the judgement failed to move alongside the landmark precedents and the position taken by our foreign counterparts. The Indian insolvency regime is already marred with the issue of delays in the admission of CIRP applications, and the ruling will only exacerbate the issue.

Such a broad interpretation of the word “may” in Section 7(5)(a) was unnecessary. It has the potential effect of leading to confusion and chaos in the insolvency regime, and undoing the benefits of the established jurisprudence . Hence, the legislature needs to step up and make the necessary changes in the section or at least add an explanation on the extent to which the discretionary power of AAs can be exercised.

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