Lost in Translation: Legislative Drafting and Judicial Discretion

This paper studies an instance of ambiguous drafting and the subsequent exercise of judicial discretion in the context of a Supreme Court decision in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. The Bankruptcy Law Reforms Commission’s (BLRC) had clearly recommended that the judiciary not have any discretion on accepting an insolvency petition once the objective criteria for admitting it were met. The legislation, however, provided no rationale for why it chose to ignore the BLRC report and allow for the possibility of discretion, with the use of the word “may”, while adjudicating applications under Section 7 of the Insolvency and Bankruptcy Code (IBC). The Supreme Court used the phrase “may” to hold that the judiciary has the discretion to not admit applications under Section 7. The Court also did not provide tests for exercise of this discretion or for determination of insolvency. Since this decision, thirteen petitions under Section 7 have been dismissed. Litigation and delayed timelines caused as a result of this discretionary power will result in erosion of the economic value of the Corporate Debtor’s assets, and make financial creditors more wary of extending credit. The paper underscores the need to improve the quality of drafting and the importance of tempering judicial decisions with a practical understanding of commercial realities.