Case Analysis – Authored by Manan Agarwal (Jurist)

Facts of the Case

A 600 MW thermal power plant owned by the appellant VPIL (Vidarbha Power Industries Private Ltd) is located in Maharashtra. The MIDC (Maharashtra Industrial Development Corporation) gave the appellant a contract via a competitive bidding procedure for a group power project, which was subsequently transformed into an independent power project. A power purchase agreement between RIL (Reliance Industries Limited) and VPIL was authorized by the MERC (Maharashtra Electricity Regulatory Commission) on February 20, 2013, subject to receiving an MIDC non-objection certificate for the power project agreement.

On April 1st, 2014, the appellant began supplying electricity to RIL in accordance with a PPA (Power Purchase Agreement) approved by MERC. Additionally, MERC accepted the final rate for the appellant’s power plant for the years 2014–2015 and 2015–2016. The issue here is that the appellant submitted a request in January 2016 to raise the authorized tariff rates allowed by MERC due to an increase in fuel expenses as a result of the cost of acquiring coal for the power plant’s operation. Ironically, the appellant has no choice but to update the tariff rates since, in the absence of doing so, the sale of electricity will result in a loss given the ongoing increase in fuel costs.

However, as of 20 June 2016, the MERC has decided the matter, rejecting the large percentage of real gasoline expenses that the appellant claimed for the years 2014–2015 and 2015–2016. The MERC has also limited the rate for the years 2016–2017 through 2019–2020. APTEL (Appellate Tribunal for Electricity) received an appeal from the party that felt wronged by the decision, disputing the exclusion of real fuel expenses, against the MERC ruling. The APTEL found in favor of the appellant and approved the amount of Rs. 1730 crores that represented the appellant’s true cost.

They had brought a petition before the Supreme Court opposing the enforcement of an APTEL order that was submitted before MERC, but which is still pending. Therefore, the Company was unable to pay its financial creditor, i.e., Axis Bank.

NCLT, Mumbai:

Axis Bank filed a Section-7 application at Mumbai NCLT to start a corporate insolvency resolution procedure (CIRP) against Vidarbha Power Industries Private Limited (VPIL). As there was an ongoing arbitration award case before the supreme court, the Respondent submitted a variety of applications for a stay of proceedings. However, on January 29, 2021, the adjudicating body rejected the MA and started the CIRP against the VPIL.

“This Authority is required only to see whether there has been debt and the Corporate Debtor defaulted in making the repayments. These two aspects when satisfied would trigger Corporate Insolvency. Therefore, the decision of the Authorities as well as of the Hon ‘ble Apex Court would not affect the proceedings before this Authority one way or the other. Therefore, we are of the considered opinion that this Authority need not stay its hands from considering the Company Petition as prayed for. As it is, there has been a considerable delay in the disposal of the Company Petition. It will accordingly be appropriate that the Company Petition is disposed of as expeditiously as possible. Hence ordered.”

Supreme Court Held:

The adjudicating authority should also take into account the reasons the CD gave for the occurrence of default with the financial creditor, such as the existence of awards or decrees with amounts greater than the debt’s total, as well as the fact that the NCLAT made a mistake in determining that the debt existed and the CD award was pending. The Supreme Court ruled that the appeal was valid, overturned the NCLT and NCLAT decisions rejecting the petition, and directed NCLT to evaluate the appellant’s request for a stay of the proceedings pending consideration of the merits and the CD situation.

A fresh start for businesses halted by decremental amounts

This Supreme Court decision in the Vidarbha Industries case has established a precedent for corporate debtors and created a new alluring defense against the start of the corporate bankruptcy resolution procedure. specifically in circumstances when the decision in CD’s favor exceeds the present sum. Therefore, this has evolved into a new standard under which the adjudicating body would cross-verify the corporate debtor’s justification for the stay of proceedings. If it is determined to be legal and the decree amount is more than the default, the adjudicating body is required to take it into account. The Supreme Court has made mention of the NCLT’s authority as well as its purview.

“Section 7(5)(a) of the IBC may confer discretionary power on adjudicating authority and such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant the exercise of discretion in a particular manner, discretion would have to be exercised in that manner. Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on the satisfaction of the existence of financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition. The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example, when admission is opposed on the ground of the existence of an award or a decree in favor of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance unless there is a good reason not to do so.”

Thus, Vidarbha Power Industries Limited v. Axis Bank is a significant piece of law, and the Hon’ble Supreme Court has provided a new line of defense for corporate debtors for the revival of businesses that are actually not at fault. Additionally, after critically assessing the situation, the Supreme Court has increased the duty placed on adjudicating authorities to examine and verify the claims made by the parties and their position regarding debt default.