The Hon’ble Supreme Court (“SC”) has in its judgement dated December 14, 2021, in the matter of E S Krishnamurthy and others v. M/s Bharath Hi Tech Builders Private Limited [Civil Appeal No. 3325 of 2020], held that the National Company Law Tribunal (“Adjudicating Authority”) and the National Company Law Appellate Authority (“Appellate Authority”) can encourage, but cannot compel the parties to settle a dispute under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

A master agreement (“Master Agreement”) was entered into between M/s Bharath Hi Tec Builders Private Limited (“Corporate Debtor”), IDBI Trusteeship Limited and Karvy Realty (India) Limited (“Facility Agent”) on June 22, 2014, to raise an amount of Rs.50 crores for the development of agricultural land. The terms of the Master Agreement required the Facility Agent to sell the plots to prospective purchasers and the Corporate Debtor was then required to register and convey the plots to the purchasers. However, since the requisite funds could not be generated through the Master Agreement, a Syndicate Loan Agreement (“Loan Agreement”) was entered into on November 22, 2014, for availing a term loan of Rs.18 crores from prospective lenders. As per the Loan Agreement, the prospective lenders were to lend money to the Corporate Debtor by executing a Deed of Adherence at an assured return for the development of the proposed residential layout in its project.

Thereafter, on the advice of the Facility Agent, their clients extended loans to the Corporate Debtor by executing Deeds of Adherence and through the said Loan Agreement, the Corporate Debtor raised over Rs.15 Crores from nearly 300 investors. The Corporate Debtor sought multiple extensions of the loan period, but failed to convey the plots to the purchasers and make the repayment to the investors. Hence, on April 26, 2019, being aggrieved, 83 purchasers/investors (“Petitioners”) instituted a petition under Section 7 of the IBC before the Adjudicating Authority, due to the Corporate Debtor’s default in making the re-payment of an amount of Rs.33,84,32,493.

The Adjudicating Authority on being satisfied that a settlement process was underway, disposed of the petition and directed the Corporate Debtor to settle the claims of all remaining purchasers/investors within a period of 3 months and if any party was aggrieved by the settlement process of the Corporate Debtor, they would be at liberty to approach the Adjudicating Authority, in accordance with law (“NCLT Order”). Thereafter, the Appellate Authority by way of its order dated July 30 2020, upheld the NCLT order and observed that the Adjudicating Authority by deciding to dismiss the petition under Section 7 of the IBC at the ‘pre-admission stage’, since a settlement process was underway, protected the rights of all the Petitioners by setting a time-frame of 3 months for the settlement process (“NCLAT Order/Impugned Order”). Aggrieved by the NCLAT Order, few of the Petitioners, along with others (“Appellants”) preferred the present appeal before the SC under Section 62 of the IBC. (“Appeal”).

Issue

Whether the Adjudicating Authority can without applying its mind to the merits of the petition under Section 7 of the IBC, dismiss the petition on the basis that the Corporate Debtor initiated the process of settlement.

Arguments

Contentions raised by the Appellants:

1. The NCLT Order and the NCLAT Order were contrary to the mandate of Section 7 of the IBC

• As per the scope of Section 7 of the IBC, the Adjudicating Authority merely has to satisfy itself whether a default has occurred or not. Section 7(5) of the IBC only provides the Adjudicating Authority with two options-to pass an admission order under Section 7(5)(a) of the IBC or reject the petition under Section 7(5)(b) of the IBC.
• The Appellate Authority had also erred in observing that the petition under Section 7 of the IBC was disposed of at a ‘pre-admission stage’ by the Adjudicating Authority. In the event that the Adjudicating Authority is not satisfied that the financial debt is owed and a default has occurred, Section 7(5)(b) of the IBC provides that it shall reject the application. Thus, an option to dispose at a ‘pre-admission stage’ was not available to the Adjudicating Authority.

2. The Adjudicating Authority and the Appellate Authority acted beyond the scope of their jurisdiction under the IBC

• Once there is an admitted default, the Adjudicating Authority was statutorily bound to admit the petition and had acted patently beyond its jurisdiction in not entertaining it on the ground that there was a possibility of a settlement. Further, out of the 83 Petitioners before the Adjudicating Authority, only 13 had entered into a settlement. As a result, there was no settlement with the remaining 70 Petitioners.
• The direction by the Adjudicating Authority to the Corporate Debtor to settle all individual claims was beyond its jurisdiction, as a judicial authority cannot dispose of a petition with a direction to settle a dispute. At the highest, a proceeding may be adjourned in order to enable the parties to explore the possibility of a settlement.

Contentions raised by the Corporate Debtor:

1. Since the settlement process was progressive, it was in this backdrop that the Adjudicating Authority disposed of the petition, with specific directions that the Appellants could approach it if the Corporate Debtor did not settle their claims within three months.

2. The Corporate Debtor should not be pushed to insolvency merely because a few of its alleged creditors are not willing to settle and reiterated its commitment to settle with the proposed purchasers, despite the real-estate industry being severely affected due to the COVID-19 pandemic.

Observations of the Supreme Court:

The SC on its careful perusal of the criteria set out under Section 7, Section 3(11) and Section 3(12) of the IBC, which provide for the initiation of corporate insolvency resolution process (“CIRP”) by a financial creditor, the definition of debt and the definition of default, respectively, opined that the Adjudicating Authority had clearly acted outside the terms of its jurisdiction under Section 7(5) of the IBC, as being an Adjudicating Authority, it is empowered only to verify whether a default has occurred or if a default has not occurred. Thereafter, the Adjudicating Authority must either admit or reject an application, as these are the only two courses of action which are open to the Adjudicating Authority in accordance with Section 7(5) of the IBC.

The SC noted that no settlement was arrived at by all the original Petitioners who had instituted the proceedings and the Adjudicating Authority disposed of the petition under Section 7 of the IBC on the ground that the settlement process was progressing. Hence, the SC observed that the Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute and that the Adjudicating Authority and the Appellate Authority, in the present case, abdicated their jurisdiction to decide a petition under Section 7 of the IBC by directing the Corporate Debtor 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, the course of action of which is not contemplated under the IBC.

Decision of the Supreme Court:

In view of the above, the SC held that the NCLT Order and the NCLAT Order suffered from an abdication of jurisdiction and thus set aside the Impugned Order. Accordingly, the petition under Section 7 of the IBC was restored to the Adjudicating Authority for disposal afresh.

VA View:

The IBC is a complete code in itself and the Adjudicating Authority and the Appellate Authority are creatures of the statute. The provisions of the IBC do provide for settlements even after a petition under Section 7 of the IBC is admitted, and before the Committee of Creditors (“CoC”) is formed the parties can settle the dispute. Further, even after the CoC is formed, Section 12A of the IBC does provide for a mechanism through which the petition can be withdrawn in the event that the parties were to reach a settlement.

The powers of the Adjudicating Authority under the ambit of Section 7 of the IBC are limited to determining whether a default under Section 3(12) of the IBC has occurred and if it is of the opinion that a default has occurred, it has to admit the application as per the IBC. Thus, the Adjudicating Authority cannot act like a court of equity and its jurisdiction is limited by the provisions of the IBC.

For more information please write to Mr. Bomi Daruwala at [email protected]

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