SC In Vidharbha Industries – IBC must or can survive? – Insolvency/Bankruptcy

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The Supreme Court (speaking primarily through Justice (Retired) Nariman) in a series of decisions from Innovative Industries set the case law for NCLTs to adjudicate claims filed by financial creditors (heart rate) under the Insolvency and Bankruptcy Code 2016 (“IBCThese rulings have to a large extent saved India’s fledgling insolvency regime and contributed to the progressive development of the IBC. Simply put, the Supreme Court in several cases has ruled that under the Section 7 of the IBC, the contracting authority is only required to be satisfied that a breach has occurred.The moment the contracting authority is satisfied that a breach has occurred, the claim must be allowed – a tick box exercise The decision of the Supreme Court in Vidarbha Industries Power Limited v Axis Bank Limited1(“Vidarbha“) overturns and subverts well-established case law and ignores previous Supreme Court decisions. A brief overview of pain points.


The Vidarbha decision appears be a mishap in several respects: (a) the judgment relies too much on the literal interpretation of the word “may” at section 7 of the IBC losing sight of the economic logic of the IBC. Economic laws must be interpreted commercially. The reasoning of the Court overlooks the legislative intention underlying the IBC. Previous decisions of the Supreme Court which require the adjudicating authority to be satisfied with default without venturing into the history of default is correct and has been overlooked; (b) the judgment in conferring discretion on NCLTs to adjudicate claims under Article 7, without setting guidelines for the exercise of discretion, will lead to inconsistent decisions by different panels on somewhat similar facts; (c) the judgment leads to an anomaly insofar as it maintains the existing position of allowing the compulsory admission of applications filed by operational creditors (OC) (subject to satisfaction of the requirements of Article 9 of the IBC) but not that of the financial creditors. This distinction is not considered by the CIB. Financial creditors have superior status under the IBC. Financial debts to banks and financial institutions are well documented and defaults are easily verifiable. A more fundamental point is ultimately that most creditors seeking to use the IBC, whether banks or financial institutions, have depositors’ money that needs protection. The Vidarbha The judgment ignores all those recognized by previous Supreme Court rulings – in particular Essar steel2.

Impact on IPC

As of March 2022, 66% of the corporate insolvency resolution process is underway (CIRP) crossed a period of 270 days. From April 2021 to March 2022, 121 CIRPs took an average of 711 days to complete, more than double the planned 333-day period. Clearly, the timelines envisioned by IBC were not met. The delays in the insolvency process are mainly attributed to protracted litigation by promoters or debtors, the large backlog of NCLTs and the lack of business acumen of NCLT members. The VidarbhaThe judgment will be an unhealthy infusion of existing uncertainty in a process that is already struggling on several fronts.


The Vidarbha Judgment is not aligned with market expectations/requirements or IBC objectives. This decision of the highest court will create serious challenges for the banking and insolvency system. It is in the interests of all stakeholders that the judgment be reviewed by a larger bench of the Supreme Court at the earliest or that the IBC be amended to clarify that NCLTs have no discretion when settling disputes. debts of financial and operational creditors.


1 Civil Appeal 4633 of 2021.

2 CIVIL APPEAL NO. 8766-67 OF 2019

The foregoing is a generic analysis and should not be considered a substitute for specific advice based on the facts of a client’s objectives and specific business agreements entered into. Please contact us at [email protected] for any queries.

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