Axis Bank vs Vidarbha Industries: A cursory look at SC judgment

In the case of Axis Bank Ltd. v. Vidarbha Industries Power Limited, the Supreme Court of India held that the Adjudicating Authority (AA) under the Insolvency and Bankruptcy Code (IBC) must consider the financial health and viability of the corporate debtor (CD) while admitting a petition under Section 7 of the IBC.

The case arose out of a dispute between Axis Bank and Vidarbha Industries Power Limited, a power company that had defaulted on its loans. Axis Bank filed a petition with the Adjudicating Authority under Section 7 of the IBC, seeking to initiate corporate insolvency resolution proceedings (CIRP) against Vidarbha Industries Power.

The AA admitted Axis Bank’s petition and initiated CIRP against Vidarbha Industries. Vidarbha Industries challenged the AA’s order before the National Company Law Appellate Tribunal (NCLAT), which dismissed the challenge. Vidarbha Industries then appealed to the Supreme Court.

Supreme Court’s observation

The Supreme Court held that the AA must consider the financial health and viability of the CD while admitting a petition under Section 7 of the IBC. The Court held that the AA must consider whether the CD is capable of repaying its debts and whether CIRP is in the best interests of all stakeholders.

The apex court also says that the Adjudicating Authority has to consider the grounds made out by the Corporate Debtor against admission, on its own merits.

It further said in its order that the Adjudicating Authority (NCLT) as also the Appellate Tribunal (NCLAT) fell in error in holding that once it was found that a debt existed and a Corporate Debtor was in default in payment of the debt there would be no option to the Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the IBC.

“If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application. Of course, in case of rejection of an application, the Financial Creditor is not denuded of the right to apply afresh for initiation of CIRP, if its dues continue to remain unpaid,’ says the court.

The Supreme Court’s decision in Axis Bank v. Vidarbha Industries is significant because it clarifies the AA’s discretion under Section 7 of the IBC. The decision makes it clear that the AA must consider the financial health and viability of the CD before admitting a petition for CIRP. This decision will help to ensure that CIRP is used as a last resort and that only viable companies are subject to the IBC’s restructuring process.

Here are some key takeaways from the Supreme Court’s decision on Axis Bank vs Vidarbha Industries Power:

• The AA must consider the financial health and viability of the CD before admitting a petition for CIRP.
• The AA must consider whether the CD is capable of repaying its debts.
• The AA must consider whether CIRP is in the best interests of all stakeholders.
• The decision makes it clear that CIRP is a last resort and that only viable companies should be subject to the IBC’s restructuring process.

Also See: Landmark Judgments