Introduction

The Supreme Court has in ES Krishnamurthy v. M/S Bharath Hi Tech Builders Pvt Ltd 1(“ES Krishnamurthy”) held that the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) cannot act as courts of equity by directing parties to settle the dispute before it while deciding applications under Insolvency and Bankruptcy Code, 2016 (IBC).

A bench comprising of Justices DY Chandrachud and AS Bopanna was hearing an appeal from an order of NCLAT which upheld the decision of NCLT declining to admit the petition under Section 7 of the IBC by a Financial Creditor with direction to the Respondent to settle the claims within three months.

Background

The dispute arose out of a master agreement to sell which was entered into between IDBI Trusteeship Limited and Karvy Realty (India) Limited in 2014, for the development of 100 acres of agricultural land. In 2019, a number of appellants filed a Section 7 application before the NCLT, Bengaluru due to the Respondent defaulting in making the repayment of an amount of approximately Rs. 33 Crore.

In the proceedings before NCLT, the tribunal initially adjourned the proceedings on the ground that the parties were attempting to resolve the dispute. Tribunal further granted requests of extension of time to the Respondent to settle the dispute. Thereafter, Respondent filed a memo before the NCLT stating that it had reached a settlement with 13 out of the 83 petitioners who had filed the Section 7 Application. There was, in other words, no settlement with the other 70 petitioners before the NCLT.

The NCLT vide Order dated 28 February 2020 2disposed the petition while relying on the following factors:

  1. that 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;
  2. the settlement process was underway with 40 other petitioners;
  3. 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
  4. 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.

The NCLT further directed the Respondent to settle the remaining claims as expeditiously as possible, but not later than 3 months, and communicate this decision to all the concerned parties. It further directed that if the remaining petitioners, were aggrieved by the settlement process of the Corporate Debtor, they would be at liberty to approach NCLT again, in accordance with law.

The Order of NCLT was challenged in appeal before the NCLAT by 7 of the original petitioners, along with certain other allottees who were not original petitioners before the NCLT. By its impugned judgment 30 July 20203, the NCLAT dismissed the appeal and upheld the order of NCLT.

Decision of the Supreme Court

The key issue for determination before the Supreme Court was whether in terms of the provisions of the IBC, the Adjudicating Authority can without applying its mind to the merits of the petition under Section 7, simply dismiss it at a pre-admission stage on the basis that the Corporate Debtor has initiated the process of settlement with the Financial Creditors.

The Supreme Court in its decision dated 14 December 2021 quashed the orders of the NCLT and NCLAT, while finding that they had abdicated their jurisdiction to decide a petition under Section 7 IBC by directing the Respondent to settle the remaining claims within three months, noting that such a course of action is not contemplated under the IBC. The Court held that:

“The Adjudicating Authority has clearly acted outside the terms of its jurisdiction under Section 7(5) of the IBC. The Adjudicating Authority is empowered only to verify whether a default has occurred or if a default has not occurred. Based upon its decision, the Adjudicating Authority must then either admit or reject an application respectively. These are the only two courses of action which are open to the Adjudicating Authority in accordance with Section 7(5). The Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute.

In reaching the findings, the Court relied upon the objective of IBC, which is to facilitate insolvency resolution “in a time bound manner” for maximisation of the value of assets, promotion of entrepreneurship, ensuring the availability of credit and balancing the interest of all stakeholders.

The Apex Court further reinforced its earlier decision in Pratap Technocrats (P) Ltd. and Others v. Monitoring Committee of Reliance Infratel Limited and Another 4(“Pratap Technocrats”) wherein it was held:

“47. These decisions have laid down that the jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon merits of a business decision made by a requisite majority of the CoC in its commercial wisdom. Nor is there a residual equity based jurisdiction in the Adjudicating Authority or the Appellate Authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of the IBC and the Regulations under the enactment.

 […]

50 Hence, once the requirements of the IBC have been fulfilled, the Adjudicating Authority and the Appellate Authority are duty bound to abide by the discipline of the statutory provisions. It needs no emphasis that neither the Adjudicating Authority nor the Appellate Authority have an uncharted jurisdiction in equity. The jurisdiction arises within and as a product of a statutory framework.”

Conclusion

The decision in ES Krishnamurthy is another brick in the growing wall of the decisions5 where the Supreme Court has cautioned NCLT and NCLAT, that while deciding case under the IBC they are bound by the Strict Scheme of the Code. They have no equitable or residual jurisdiction to direct the parties to attempt and settle the dispute. The NCLT and NCLAT merely have the power to encourage settlement of disputes, but have no power to order mandatory attempts to settle the dispute.

The decision will ensure that future consideration of applications under the IBC by the NCLT and NCLAT will be based on a formula based approach to ensure they arrive upon a decision within the strict time-limits as envisaged under the IBC.

Footnotes

1 Civil Appeal No 3325 of 2020

2 https://archive.nclt.gov.in/sites/default/files/Feb-final-orders-pdf/Sri%20E%20S%20Krishnamurthy%20%26%20Others%20Vs%20Ms%20Bharath%20Hi-Tecch%20Builders%20Pvt%20Ltd.pdf

3 https://nclat.nic.in/Useradmin/upload/6231251285f22ae7aafc4f.pdf

4 2021 SCC OnLine SC 569

5 Arun Kumar Jagatramka v. Jindal Steel & Power Ltd., (2021) 7 SCC 474.

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