Jawaharlal Nehru famously complained about lawyers having purloined the Constitution. Anyone following the judgments issued by the Supreme Court ever since the Insolvency and Bankruptcy Code was passed by Parliament might identify with the first PM’s frustration. Yet, after the Supreme Court’s ruling in Vidarbha Industries, I don’t even need to refer to these earlier pronouncements to make this point. This one judgment, taken by itself, is worse than all the earlier ones put together.

Why do I say this?

Ever since 2016, when this revolutionary law was passed, a procession of debt-laden companies, old and new, famous and infamous, has passed, as if in an assembly line, through the portals of the National Company Law Tribunal and into the scrap yard that is the insolvency resolution process, to be transmuted, if all went well, into a fresh, viable enterprise, able once again to add value and generate employment.

Through all these years, and through all the fisticuffs that inevitably accompanied the snatching away of corporate fiefdoms from their erstwhile masters, several ingenious arguments were proffered by well-paid lawyers to avoid the instant doom that is the hallmark of the Code. Yet no one thought to say this – that a company that has defaulted on its debt can, notwithstanding the default, avoid insolvency if the NCLT thought so.

But that is exactly what was argued, and accepted, in Vidarbha Industries.

The appellant was a power generating company whose fortunes, like so many of its contemporaries, plummeted with a rise in the price of its main raw material, coal. Its debt burden to a consortium of lenders was Rs. 2,727 crores. One of these lenders, Axis Bank, to whom Rs. 553 crores were owed, approached the NCLT in a Section 7 petition. Axis succeeded in the NCLT and NCLAT, and the matter reached the Supreme Court.

Here it was argued by the company that under Section 7 of the IBC, the tribunal had a discretion to admit insolvency petitions, since the word used in Section 7(5)(a) was “may”. In this case, the company had won an award of Rs. 1,730 crores from the APTEL (the appellate tribunal in electricity cases), but hadn’t received payment since the award was challenged in the Supreme Court. It would be able to pay off Axis if it succeeded in the Supreme Court. So the “discretion” in Section 7(5)(a) should be exercised in its favour.

It should not have been hard work for the Court to reject this “discretion” argument. 7(5)(a) uses “may” because 7(5) gives two options to a Court. If it is satisfied that a default has occurred, it may admit the insolvency application [clause (a)], and if it is satisfied that a default has not occurred, then it may reject such application [clause (b)]. Holding that the first “may” in clause (a) endowed the tribunal with discretion in cases where a default was found to have occurred is as absurd as stating that the second “may” in clause (b) gives the tribunal a discretion in the matter of rejecting an application even if a default has not occurred. It is clear that in both cases, the tribunal has no option in the matter of admitting or rejecting a petition, depending on whether a default has or has not occurred.

This textual reasoning aside, the absurdity of the “may” argument is visible from the scheme of the Code. In the case of operational creditors, where the tribunal considers the application under Section 9, the word used is “shall”. The appellant’s argument amounted to saying that there was a discretion in the matter of admitting applications when the applicant was a financial creditor, but none when the applicant was an operational creditor. The IBC locus classicus, the judgment of the Court in Swiss Ribbons, was based on the argument that the favourable treatment given to financial creditors over operational creditors by the Code was constitutionally valid. This argument inverts that logic and propels operational creditors above financial creditors.

All this aside, even if the appellant had succeeded in getting its award of Rs. 1730 crores, since its debt was Rs. 2,727 crores, it would still remain hopelessly sunk in debt. So the expected windfall was not going to save Vidarbha Industries from insolvency.

Amazingly, the Supreme Court held in favour of the appellant.

It accepted the “may” argument without any engagement with the statute, aside from noting that the word “may” confers discretion.

It even nodded at the superior status that its finding would give operational creditors, with the words “The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor” and “The impact of the non-payment of admitted dues could be far more serious on an operational creditor than on a financial creditor.” With the stroke of a pen, the Court reversed its earlier stand in Swiss Ribbons – that not only did the Code give preferential treatment to financial creditors, but this was exactly how it should and could be.

The discontents of this judgment are potentially limitless. From now on, the NCLT will have to contend with ceaseless appeals to its sense of “discretion” – almost every corporate debtor has some distant windfall, similar to Vidarbha Industries’, that it can point to – the turn of the business cycle, a shift in the regulatory regime, the prospect of a defaulting debtor paying up… One can do no better than hope for legislative deliverance from the judiciary’s latest blow to the Code.