“NCLT can encourage settlements, it cannot direct it by acting as courts of equity” SC holds NCLT has limited powers to either admit or reject an application u/s 7(5) of IBC

Supreme Court: The Division Bench comprising of Dr Dhananjaya Y Chandrachud* and A S Bopanna, JJ., held that the powers of NCLT under S. 7(5) of IBC are limited to verifying existence of default and then accordingly, either admit or reject an application. Holding that the Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute, the Bench remarked,

“While the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.”

The question before the Bench for adjudication was whether, in terms of the provisions of the IBC, the Adjudicating Authority (NCLT) can without applying its mind to the merits of the petition under Section 7, simply dismiss the petition on the basis that the corporate debtor has initiated the process of settlement with the financial creditors?

The grievance of the appellants was that on a petition instituted under Section 7 of the IBC for initiating the Corporate Insolvency Resolution Process (CIRP) in respect of the respondent, the NCLT declined to admit the petition and instead directed the respondent to settle the claims within three months which was further affirmed by the NCLAT.

Noticeably, a Master Agreement to sell was entered into between the respondent, IDBI Trusteeship Ltd. and Karvy Realty (India) Ltd. in order to raise an amount of Rs 50 crores for the development of 100 acres of agricultural land. Since the requisite funds could not be generated through the Master Agreement, a Syndicate Loan Agreement was entered into between the respondent, IDBI Trusteeship Ltd. and the Facility Agent for availing a term loan of Rs 18 crores from prospective lenders. It was in that background that the petitioners-appellants had instituted a petition under Section 7 of the IBC before the NCLT due to the respondent’s default in making the re-payment of an amount of Rs 33,84,32,493.

Decisions of NCLT

The Adjudicating Authority listed the petition for admission on diverse dates and had adjourned it, inter alia, to allow the parties to explore the possibility of a settlement yet no settlement was arrived at by all the original petitioners who had instituted the proceedings. Though, the Adjudicating Authority noticed that joint consent terms had been filed before it but it was common ground that those consent terms did not cover all the original petitioners who were before the Adjudicating Authority. Eventually, the Adjudicating Authority did not entertain the petition due to following factors:

  • Respondent’s efforts to settle the dispute were bona fide, as evinced by the fact that they had already settled with 140 investors, including 13 petitioners before it;
  • The settlement process was underway with 40 other petitioners;
  • The procedure under the IBC was summary in nature, and could not be used to individually manage the case of each of the 83 petitioners before it; and
  • Initiation of CIRP in respect of the respondent would put in jeopardy the interests of home buyers and creditors, who have invested in the respondent’s project, which was in advanced stages of completion.

IBC Mandate

On a bare reading of the provision, Section 7 (5) Clauses (a) and (b) use the expression “it may, by order” while referring to the power of the Adjudicating Authority. Section 7(5)(a) states that the Adjudicating Authority may, by order, admit the application while Section 7(5)(b) states that it may, by order, reject such an application.

Thus, two courses of action are available to the Adjudicating Authority in a petition under Section 7. The Adjudicating Authority must either admit the application under Clause (a) of sub-Section (5) or it must reject the application under Clause (b) of sub-Section (5). The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available.

Factual Analysis

Observing that no settlement had been arrived at by the respondent with all the appellants and impleadment applications had also been filed on behalf of an additional set of individuals claiming non-payment of their dues by the respondent, the Bench held that the order of the Adjudicating Authority, and the directions which eventually came to be issued, suffered from an abdication of jurisdiction.

The Appellate Authority was cognizant of the fact that even the time schedule for settlement which had been indicated by the Adjudicating Authority had elapsed, but then noted the impact of the outbreak of COVID-19 pandemic on the real estate market, including on the respondent. Therefore, the Adjudicating Authority failed to exercise the jurisdiction which was entrusted to it. Furthering, holding that the Adjudicating Authority’s observation that the appeal was not maintainable was erroneous, the Bench remarked,

“While acknowledging that the consent terms were “filed by some of the stake holders though may not be all encompassing”, the Appellate Authority nonetheless proceeded to dismiss the appeal as not maintainable.”

Findings of the Court

IBC is a complete code in itself and the Adjudicating Authority and the Appellate Authority are creatures of the statute and their jurisdiction is statutorily conferred, the Bench stated that the statute which confers jurisdiction also structures, channelises and circumscribes the ambit of such jurisdiction. Thus, while the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.

Referring to the IBC mandate, the Bench opined that the Adjudicating Authority had clearly acted outside the terms of its jurisdiction as it is empowered only to verify whether a default has occurred or if a default has not occurred and accordingly, it must then either admit or reject an application.

There are the only two courses of action which are open to the Adjudicating Authority in accordance with Section 7(5), therefore, the Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute.”

Further, opining that undoubtedly, settlements have to be encouraged because the ultimate purpose of the IBC is to facilitate the continuance and rehabilitation of a corporate debtor, as distinct from allowing it to go into liquidation, the Bench stated, what the Adjudicating Authority and Appellate Authority, however, had proceeded to do was to abdicate their jurisdiction to decide a petition under Section 7 by directing the respondent to settle the remaining claims within three months and leaving it open to the original petitioners, who were aggrieved by the settlement process, to move fresh proceedings in accordance with law.

Conclusion

Consequently, the appeal was allowed and the impugned judgments of NCLT and NCLT were set aside. The petition was restored to the NCLT for disposal afresh. [E S Krishnamurthy v. Bharath Hi Tech Builders Pvt. Ltd, 2021 SCC OnLine SC 1242, decided on 14-12-2021]


Kamini Sharma, Editorial Assistant has put this report together


Appearance by:

For the Appellants: Srijan Sinha, Advovate

For the Respondent: Aakanksha Nehra, Advocate


*Judgment by: Justice Dhananjaya Y Chandrachud

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