NCLT And NCLAT Cannot Direct Settlement By Acting As Courts Of Equity: Supreme Court

Mr. Srijan Sinha, Advocate appeared on behalf of the appellants while arguments on behalf of the respondent were advanced by Ms. Aakanksha Nehra, Advocate.

The Apex Court was dealing with an appeal filed under Section 62 of the Insolvency and Bankruptcy Code, 2016, via which, a judgement of NCLAT was impugned. NCLAT had upheld the order of NCLT, Bengaluru. Essentially, the appellants had triggered a petition under Section 7 of the IBC for initiation of Corporate Insolvency Resolution Process qua Bharath Hi Tech Builders Pvt. Ltd./respondent.

The NCLT had declined to entertain the petition and curiously directly the respondent to settle the claims within 3 months. NCLAT, as noticed above, upheld the order of NCLT. Hence, the appeal before the Supreme Court.

The Court, thus, culled out the issue for its consideration as follows:

"The issue which arises for adjudication before this Court is 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 the petition on the basis that the corporate debtor has initiated the process of settlement with the financial creditors."

The Court noted that Section 7 of the IBC provides for initiation of CIRP by a financial creditor or a class of financial creditors. It was noticed that through Section 7(1) of the IBC, the financial creditor was enabled to trigger an application for initiation of CIRP against a corporate debtor before the adjudicating authority "when a default has occurred". As to what does "default" constitute, is defined under Section 3(12) of the IBC. The Court then discussed various other subsections of Section 7.

The Court noticed that Section 7(5) entails two parts; Clause (a) empowering the adjudicating authority to admit the application when it is satisfied on the grounds stipulated therein; and Clause (b), empowering the adjudicating authority to reject the application when it is satisfied that a default has not occurred, the application under subsection (2) is not complete, or a disciplinary proceeding is pending against the proposed RP. The Court noted that the time limit for completion of CIRP within 180 days (subject to further extension) commences from the date when the application to initiate the process is admitted.

The Court noted that there are two courses of action available to the adjudicating authority, and the authority has no other choice but for these two choices available.

The Court noted the principles laid down in Innoventive Industries Ltd. vs. ICICI Bank, (2018) 1 SCC 407 wherein it was held that the adjudicating authority must determine only whether a default has occurred and if it is of the opinion that the default has occurred, it ought to admit the application unless it is incomplete.

The Court observed that in the instant case the adjudicating authority had listed the petition for admission on various dates but had adjourned the same to allow the parties to explore the possibility of a settlement. No settlement was arrived at. The Court noted that the adjudicating authority, eventually, did not entertain the petition on the ground that it cannot manage or decide upon each and every claim of the individual home buyer; the procedure under the IBC being summary. The Court noted that the adjudicating authority held that since the process of settlement was progressing "in all seriousness", it would dispose of the petition directing the respondent to settle all claims "seriously".

The Court found fault with the approach adopted by the adjudicating authority in the instant case and observed as follows:-

"The Adjudicating Authority has clearly acted outside the terms of its jurisdictionunder Section 7(5) of the IBC. The Adjudicating Authority is empowered only toverify 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."

The Court also observed that, "Undoubtedly, settlements have to be encouraged because the ultimate purpose of the IBC is to facilitate the continuance and rehabilitation of a corporatedebtor, as distinct from allowing it to go into liquidation. As the Statement of Objects and Reasons accompanying the introduction of the Bill indicates, the objective of the IBC 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. What the Adjudicating Authority and Appellate Authority, however, have proceeded to do in the present case is 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 are aggrieved by the settlement process, to move fresh proceedings in accordance with law. Such a course of action is not contemplated by the IBC."

The Court observed that IBC is a complete code in itself and the adjudicating as also the appellate authority is creation of the statute; their jurisdiction being conferred statutorily. The Court came to the conclusion that while the adjudicating and appellate authority can encourage settlement, they cannot direct them by acting as courts of equity.

The Court concluded that the order of adjudicating authority suffered from an abdication of jurisdiction. The Court held that the appellate authority sought to make a distinction by observing that the directions of adjudicating authority were at pre-admission stage and order was not prejudicial.

The Court noted that the observation that appeal was not maintainable was erroneous and the adjudicating authority failed to exercise jurisdiction entrusted to it. The Court noted that a clear case was made out in appeal, and the appellate authority, too, failed to exercise its jurisdiction.

The Court, thus, allowed the appeal by setting aside the judgement of the NCLAT as also of NCLT and restored the Section 7 petition to the board of NCLT for a fresh disposal.

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