The previous quarter closed with some crucial decisions in insolvency and arbitration law. The Supreme Court ruled that the National Company Law Tribunal (NCLT) has the discretion to admit an application for corporate insolvency instituted by a financial creditor, and admission is not mandatory solely due to default on due and payable financial debt. In another decision, the Supreme Court clarified that a resolution plan is not valid unless it has provisions for payment of statutory dues to government authorities.
In arbitration law, the Supreme Court held that the scope of court’s powers under Section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) to grant interim measures is wider than the powers of a court under the Code of Civil Procedure, 1908 (CPC). In another decision, the Supreme Court held that a court may refuse to appoint an arbitrator if it is certain on the face of it that the arbitration agreement is non-existent or invalid, or if the disputes are non-arbitrable.
Supreme Court holds the NCLT’s power to admit a financial creditor’s application for corporate insolvency to be discretionary
In Vidarbha Industries Power Ltd. v Axis Bank Ltd., the Supreme Court of India held that the NCLT need not mandatorily admit an application filed by a financial creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) seeking initiation of corporate insolvency by a financial creditor even if the existence of financial debt and default by the corporate debtor is established.
Axis Bank, the financial creditor, had instituted a proceeding under Section 7 against Vidarbha. Vidarbha sought a stay on such proceedings on various grounds which were extraneous to the existence of debt and a default thereon. Vidarbha contended that the Appellate Tribunal for Electricity (APTEL) had awarded Vidarbha INR 1,730 crores, which would enable Vidarbha to clear its outstanding dues, but a challenge against the APTEL’s order before the Supreme Court stood in the way. Both the NCLT and the National Company Law Appellate Tribunal (NCLAT) dismissed Vidarbha’s stay application by holding that the moment it was established that there was a financial debt and the same was in default, there would be no question of passing an order of stay.
However, the Supreme Court allowed Vidarbha’s appeal against the NCLAT’s decision. The Supreme Court relied on the phrase “may, by order, admit such application” in Section 7(5)(a) of the IBC and held that the NCLT has discretion to admit a financial creditor’s application, and if circumstances warrant, the NCLT can keep the admission in abeyance or even reject it. The Supreme Court observed that the IBC’s object was not to penalise solvent companies, temporarily defaulting in repayment of their financial debts. Illustratively, the Supreme Court stated that if admission of an application under Section 7 is opposed on the ground of existence of an award or decree in favour of the corporate debtor exceeding the amount of debt, the NCLT may keep the admission in abeyance unless the award or decree is incapable of realisation.
A review petition against the Supreme Court’s decision has been dismissed. This ruling is likely to cause delays in the admission of insolvency petitions as borrowers may now raise extraneous reasons despite the debt and default being established.
Supreme Court rejects a resolution plan without any provision for payment of statutory dues to the state tax authority
In State Tax Officer (1) v Rainbow Papers Ltd., the Supreme Court set aside a resolution plan approved by the Committee of Creditors which had waived off the entire claim of the State Tax Officer under the Gujarat Value Added Tax Act, 2003 (GVAT Act). The Supreme Court held that if a resolution plan completely ignores statutory demands payable to any state government or legal authority, the NCLT must reject the resolution plan as financial creditors cannot secure their own dues at the cost of statutory dues.
The Supreme Court also held the State Tax Officer to be a secured creditor i.e., a creditor in whose favour 'security interest' is created. Section 48 of the GVAT Act stipulates any amount payable by a dealer on account of tax to be a first charge on the property of such dealer. The Supreme Court reasoned that the term secured creditor covers all types of security interests, and the statutory charge created under Section 48 brings the State Tax Officer’s claim within the definition of ‘security interest’ under the IBC. Significantly, a secured creditor is placed higher in the order of priority than unsecured creditors with respect to distribution of assets of the corporate debtor under Section 53 of the IBC.
Further, the Supreme Court ruled that a resolution plan which does not meet the requirements of Section 30(2) of the IBC would be invalid and would not bind the central or state governments, statutory authorities, financial or other creditors. Section 30(2)(b) stipulates that a resolution plan should pay dues of operational creditors, which shall not be less than an amount (a) which such creditors would be entitled to under the waterfall mechanism provided in section 53 in the event of liquidation; or (b) that would have been paid to such creditors if the resolution plan provided for payment/distribution in accordance with section 53 of IBC. Further section 30(2)(b) provides that the higher of the two amounts should be paid/distributed to the operational creditors.
Supreme Court delineates the scope of powers to grant interim measures under Section 9 of the Arbitration Act
In Essar House Pvt. Ltd. v Arcelor Mittal Nippon Steel India Ltd., the Supreme Court found the powers of a court to grant interim measures under Section 9 of the Arbitration Act to be wider than the powers under the CPC. The Court noted that Section 9 confers a residuary power on the court to pass such interim orders as may appear to be just and convenient, and that the rigors of every provision of the CPC cannot be used to defeat the grant of interim relief under Section 9.
However, the Court clarified that the power under Section 9 cannot be exercised by ignoring the basic principles of the CPC governing interim relief, such as (i) the existence of a good prima facie case, (ii) the balance of convenience in favour of granting interim relief, and (iii) the possibility of an irreparable harm.
Considering these principles, on the issue of granting attachment of property as an interim relief to prevent disposal of property with a view to defeat or delay the realisation of an impending arbitral award, the Supreme Court held that proof of actual attempts to remove or dispose of property is not necessary, and a strong possibility of diminution of assets would suffice.
Supreme Court rules on the scope of preliminary inquiry on the arbitrability of a dispute in an application for arbitrator appointment
In Emaar India Ltd. v Tarun Aggarwal Projects LLP & Ors., the Supreme Court observed that an assessment of arbitrability, in relation to the inquiry under Section 11, can be conducted by the courts, and may not be left unanswered for the arbitral tribunal to examine and decide.
The Supreme Court reasoned that the expression ‘existence of arbitration agreement’ in Section 11 of the Arbitration Act would include a prima facie assessment of the validity of the arbitration agreement. The Supreme Court clarified that an arbitral tribunal has the primary jurisdiction and authority to decide questions of jurisdiction and arbitrability, and if there were debatable facts, the court would compel the parties to abide by the arbitration agreement. Essentially, the purpose of the court’s interference would be to protect parties from being compelled to arbitrate when the dispute is non-arbitrable on the face of it.
The decisions on arbitration law have upheld the Arbitration Act’s intention to adopt a pro-arbitration approach and also protected the rights of parties from having to arbitrate in the absence of a valid arbitration agreement or an arbitrable dispute. Further, in the coming months, the Supreme Court is scheduled to hear challenges to the constitutional validity of multiple provisions of the IBC with respect to insolvency resolution process for personal guarantors to a corporate debtor.