Court ruling on IBC creates uncertainty in admission of cases. Timelines envisaged in code must be adhered to

Source: The post is based on the article “Court ruling on IBC creates uncertainty in admission of cases. Timelines envisaged in code must be adhered to” published in Indian Express on 23rd July 2022.

What is the News?

The Supreme Court in Vidarbha Industries Power Ltd vs Axis Bank Ltd has held that it is not mandatory for the National Company Law Tribunal(NCLT) to admit an application to initiate Corporate Insolvency Resolution Process(CIRP) even if a debt exists and the Corporate debtor is in default.

What has been the process to initiate Corporate Insolvency Resolution Process(CIRP) so far?

Till now, in order to initiate proceedings under the IBC, financial creditors had to provide proof of the corporate debtor’s default. 

Once the adjudicating authority, the National Company Law Tribunal, was convinced of the default, the application was admitted. This allowed for quick admission of cases. 

However, the judgment in Vidarbha Industries Power Ltd. v. Axis Bank appears to have created ambiguity in this process. 

What has changed after this judgment?

The Supreme Court has held that NCLT has to consider the grounds made out by the corporate debtor against admission, on its own merits.

This creates space for applications by financial creditors to be rejected even if there is a default. 

What will be the impact of this judgment?

The success of the IBC was in its attempt to transform the credit culture in the country. The threat of losing control over the firms was meant to ensure that borrowers honour their obligations.

There are indications of this threat has become a credible deterrence. Till March 2022, 21,000 applications for the initiation of the resolution process were resolved before their admission. 

However, if the admission of cases itself becomes a matter of discretion, this will impinge on IBC being an effective deterrence for errant borrowers.