The enactment of the Insolvency and Bankruptcy Code, 2016 (“IBC”) marked a historic shift in India’s insolvency regime shifting the focus from recovery to resolution. The Bankruptcy Law Reform Committee (“BLRC”) reports highlighted the need for the legislative policy to initiate a resolution process at the instance of default to prevent erosion of value. Keeping this objective in mind, the IBC lays out a party driven process which places the creditors at the helm of the resolution procedure.
The Supreme Court of India (“Supreme Court”) has repeatedly held that keeping in mind the objectives of the IBC, the adjudicating authority at the stage of admission into the corporate insolvency resolution process needs to restrict its analysis to: (1) the existence of debt and (2) default in payment of debt. However, on July 12, 2022, the Supreme Court in Vidarbha Industries Power Limited v. Axis Bank Limited (“Vidarbha”), relying on the use of the word “may” in the relevant statutory provision, applied the literal interpretation test and held that National Company Law Tribunal has the discretion to admit an application after it is satisfied regarding the existence of debt.
This judgment, which departs from precedent, could have serious consequences for the insolvency regime in India. This note discusses the implications of a literal interpretation test in context of Vidarbha and highlights the need for an intervention to avoid the mistakes of the past.