Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022)

Every earlier decision had treated admission under s. 7 as close to automatic: prove debt and default, and the Adjudicating Authority admits. Vidarbha held that s. 7(5)(a) is discretionary, and for a period that unsettled the trigger for the whole of Unit 2. The case is on the syllabus not because it is the last word — it is not — but because working through it, through the review order, and through what followed, teaches the most useful skill in this paper: reading a single auxiliary verb against the scheme of the statute, and then recognising when a proposition has been confined to its facts.

A financial creditor applied under s. 7. The corporate debtor resisted admission on the footing that it was not truly insolvent — that an amount far exceeding the claimed default was due to it under an award or determination in its favour, so that its overall financial position did not warrant a resolution process. The question was whether the Adjudicating Authority, having found a default, retained any choice.

The first decision. Section 7(5)(a) confers discretionary power on the Adjudicating Authority to admit the application of a financial creditor. Considering the facts and circumstances, including the overall financial health and viability of the corporate debtor, the Authority can admit, reject, or keep the admission in abeyance.

The review order. On review the Court observed that observations in judgments are not to be read as provisions of a statute; judicial utterances and pronouncements are made in the setting of the facts of a particular case.

What followed. In a later appeal the Court held that once the Adjudicating Authority is satisfied that a default has occurred, there is hardly any discretion left with it to refuse admission under s. 7; that even non-payment of part of a debt that has become due and payable amounts to default; that the discretionary power recognised in Vidarbha cannot be exercised arbitrarily or capriciously unless the facts and circumstances warrant it; and that Vidarbha cannot be read as taking a view contrary to the earlier authority on the trigger.

The argument is one of contrast. The legislature used may in s. 7(5)(a) but the different word shall in the otherwise almost identical s. 9(5)(a). Normally may is indicative and shall imports a necessary duty; the use of different words in parallel provisions is taken to convey different meanings. The Court accepted that the presumption raised by shall can be rebutted by the scope of the statute and the consequences of the construction, but found nothing to rebut it here. It therefore read s. 9(5)(a) as mandatory and s. 7(5)(a) as discretionary.

It supported the distinction on the merits. Section 7(5)(a) governs applications by financial creditors and s. 9(5)(a) applications by operational creditors, and non-payment of admitted dues may have significantly more serious consequences for an operational creditor than for a financial creditor. The differentiation between the two is a conscious legislative choice.

The counter-reasoning, which prevailed afterwards, is equally instructive. If viability is examined at admission, the enquiry the Code deliberately moved to the committee of creditors under s. 30(4) is dragged back before the Tribunal, and the fourteen-day timeline becomes unworkable. Hence the later insistence that the discretion, if any, is narrow and cannot be exercised capriciously.

1. Set out the may / shall contrast — it is the reasoning the examiner wants, and it is transferable to any two parallel provisions.
2. Never state the discretion flatly. State it, then immediately state the review order and the later decision confining it. A student who stops at the first decision has read half the material.
3. Use it to make the structural point: the Code separates the question of default (admission) from the question of viability (the committee's commercial judgment under s. 30(4)). Vidarbha is interesting precisely because it blurred that separation.
4. What it does not decide. It does not decide that a solvent company can never be admitted, nor does it give the corporate debtor a right to a viability hearing.

The point has since been settled by amendment rather than by decision. Section 7(5) has been substituted so that the Adjudicating Authority shall, within fourteen days of receipt of the application, admit where it is satisfied that a default has occurred, the application is complete and no disciplinary proceeding is pending against the proposed resolution professional, or reject where those conditions are not met, after giving notice to rectify a defect. An Explanation clarifies that where those requirements have been complied with, no other ground shall be considered to reject an application filed under the section. A second Explanation makes a record of default with an information utility, filed along with an application by a financial institution, sufficient to ascertain the existence of default. Where a question is set on the current law, say that the discretion debate has been closed by the substituted sub-section; where the question is on the case, give the reasoning above.