In Brief Series: The Polyvocal Tribunal

The polyvocal court

The extent of the powers of the adjudicating authority, the National Company Law Tribunal (the Tribunal) dealing with a claim by a financial creditor under Article 7 of the Insolvency and Bankruptcy Code (the Code) is again under discussion. One would have thought that the matter had been settled by the Supreme Court’s decision in Innovative Industries Ltd. against ICICI Bankfollowed by its decision in ES Krishnamurthy v Bharath Hi-Techch Builders (P) Ltd. But the “polyvocal” court that is our Supreme Court, there is always a possibility of a different judicial look from another bench.

In Innovative, the Supreme Court held that when an application for the opening of insolvency resolution proceedings is brought before the Court, the latter must decide the question of the existence of a default in payment of the financial debt based on Information Utility records or evidence provided by the financial creditor within 15 days. The Court then ruled that “once the contracting authority is satisfied that a breach has occurred, the claim must be granted” unless it is incomplete, in which case the applicant must be given an opportunity to rectify the deficiency. In the event of a defect noted, the judgment rendered in Innovative does not leave any discretion to the Tribunal to pursue any course other than to allow the application. If there still remained a doubt as to the power of the Tribunal, the Court specified that “it does not matter that the debt is disputed as long as it is “due”, i.e. payable unless it is prohibited by law or is not yet due in the sense that it is payable at a later date. It is only when this is proven to the satisfaction of the contracting authority that the latter may reject a request and not otherwise”.

In Bharat Hi-Tech, the Supreme Court again considered the scope of the s. 7 inquiry at the request of a financial creditor and concluded: “so, two Classes of action are available to the contracting authority in a request under Article 7. The the contracting authority must either allow the request under clause (a) of subsection (5) or he must reject the claim under clause (b) of subsection (5). The law does not plan ee contracting authority to undertake any other action, but for ee two choices available.” The Court upheld the decision of Innovative and advised the Tribunal and the National Company Law Appellate Tribunal on the limits of their powers as “status creatures”.

These decisions held ground until the recent Supreme Court decision in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd.

In Vidarbha Industries, the Court completely reversed the previous position. He held that when considering a financial creditor’s claim under Article 7(5) of the Code, the Tribunal may “consider whether to initiate the CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Debtor Company. The contracting authority may, at its discretion, not accept the request for a financial creditr. The Court noted the use of the word “may” instead of “shall” in Article 7(5) and, for this reason, held that in the case of financial debt, the law allows for “flexibility”. ; and it conferred discretion on the Tribunal even if default is established. If the facts and circumstances justify it, the Tribunal may suspend admission or even reject the application.

The Judgment in Vidarbha Industries arguably takes a more pragmatic approach to insolvency and seeks to provide respite to businesses that may have defaulted due to temporary financial difficulties but are otherwise solvent and viable. It makes economic sense not to push these companies into insolvency by following the rigid rule in Innovative.

The judgment, however, is not a good example of judicial lawmaking.

Legal stability and predictability are fundamental to the rule of law. The predictability of legal outcomes (particularly in the case of economic legislation) allows citizens and businesses to organize their affairs according to past legal precedents without fear of being disrupted by a judicial decision. To achieve these goals, our courts adhere to the doctrine of stare decision and follow the previous decision on the same issue.

Respect for precedents is not, however, an “inexorable command”. There may be good reasons to reverse or oppose a previous decision. However, the doctrine of watch the decision requires that, in doing so, the court look to the precedent in question and consider it carefully. I submit that the Court failed to do so in its decision in Vidarbha Industries which reverses the position defended in Innovative and Bharat Hi-Tech. He was referring to the Innovative for explaining the object and purpose of the Code, but totally ignored the part of the judgment which specifically dealt with the issue in dispute. And Bharat Hi-Tech, he didn’t even refer.

Arguably, the Court had good reasons for its decision in Vidarbha Industries, however, it should have explained its departure from the previous position taken in previous decisions. It is possible that these decisions (or their relevant parts) have not been brought to the attention of the Court. But then one would expect a more rigorous and thorough judicial determination from the Supreme Court, the declared law by which it binds all courts and all citizens.

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