To reduce a legal nuance into simple English, ‘may’ means existence of discretion, while ‘shall’ means no option
Who would have thought that the Supreme Court of India would be called upon to give a verdict that the word ‘may’ does not mean ‘shall’? Yet, the apex court had to perform this job in a dispute between Vidharbha Industries Power vs Axis Bank.
(Pre-script: Axis Bank lost the case.)
Supreme Court’s seminal verdict in this case is likely to set a benchmark on whether the National Company Law Tribunal has the discretion to admit insolvency petition filed by a financial creditor under section 7 of the IBC, or it has no option but to admit the petition if it is proven that there has been a debt and a default.
To reduce a legal nuance into simple English, ‘may’ means existence of discretion, while ‘shall’ means no option.
Gist of the case
Here is the gist of the case. Vidharbha Industries Power, a subsidiary of Reliance Power, part of Anil Ambani group, runs a 600 MW thermal power plant. A decade ago, it ran into a tiff with the Maharashtra Electricity Regulatory Commission (MERC) over the allowability of certain costs, for fixing tariffs. Vidharbha Industries appealed to the Appellate Tribunal for Electricity (APTEL), which said that the costs ought to be taken into account and ordered MERC to pay ₹1,730 crore. MERC went on appeal to the Supreme Court; during the pendency of the case, it did not pay Vidharbha Industries.
Because of this, Vidharbha Industries ran into financial troubles and defaulted on its debt. The total claim of all the lenders is ₹2,727 crore. Axis Bank, one of the lenders, claims ₹533 crore including interest and penal interest. The bank sued Vidharbha Industries for insolvency under Section 7 of the IBC.
Vidharbha Industries’ stand was that it defaulted only because APTEL’s order was not implemented by MERC. “I don’t care, I want my money back,” said Axis Bank.
NClat refused to stay proceedings
NCLT, Mumbai allowed insolvency proceedings. Vidharbha Industries appealed to NCLAT which refused to stay the proceedings. Aggrieved, the company approached the Supreme Court.
Jaideep Gupta, who appeared for Vidharbha Industries, argued that
Section 7(5)(a) of IBC says the adjudicating authority (NCLT) “may” admit the petition. “It cannot be said that NCLT has no power, except to examine whether a debt exists or not and accordingly accept or reject the application under Section 7 of the IBC,” he said.
His opponent, Dhruv Mehta, argued that the section “cast a mandatory obligation” on the adjudicating authority to admit an application of the Financial Creditor, if it is proved that there was a debt and a default.
Supreme Court’s judges, Indira Banerjee and J K Maheswari, observed that
NCLT had found the dispute between Vidharbha Industries and MERC to be “extraneous to the matters involved in the petition.”
They observed: “The question is whether an award of the APTEL in favour of the corporate debtor, can completely be disregarded by NCLT, when it is claimed that, in terms of the award, a sum of ₹1,730 crores, that is, an amount far exceeding the claim of the financial creditor, is realisable by the corporate debtor. The answer, in our view, is necessarily in the negative.”
Intent of the words ‘may’ and ‘shall’
They stressed that the use of the word “may” revealed the legislative intent, especially when another identical section, Section 9(5) uses the word “shall”, thus indicating a careful choice of words.
In this case, the NCLT “has simply brushed aside” the case of Vidharbha Industries that ₹1,730 crore due to the company in terms of the APTEL order.
They said that NCLT and NCLAT “fell in error” in holding that once it was found that a debt existed and a default happened, the NCLT had no option but to admit the petition under Section 7 of the IBC. They directed NCLT to re-consider Vidharbha Industries’ application for stay on the insolvency proceedings.
Published on July 17, 2022