Supreme Court of India
E S KRISHNAMURTHY & ORS.versusM/S BHARATH HI TECH BUILDERS PVT. LTD.
- Citation
- 2021 INSC 884
- Decided
- 14 December 2021
- Disposal
- Appeal(s) allowed
- Bench
- D Y CHANDRACHUD
Holding
The adjudicating authority under Section 7(5) of the IBC is limited to admitting or rejecting a petition after ascertaining default and cannot compel settlement, rendering the NCLT and NCLAT orders ultra vires.
Summary
The appellants, a group of home buyers, filed a petition under Section 7 of the Insolvency and Bankruptcy Code (IBC) against M/s Bharath Hi Tech Builders for defaulting on a repayment of Rs 33.84 crore. The National Company Law Tribunal (NCLT) declined to admit the petition and instead directed the corporate debtor to settle all outstanding claims within three months; the National Company Law Appellate Tribunal (NCLAT) upheld this order. The Supreme Court held that the adjudicating authority under Section 7(5) can only admit or reject an application after determining the existence of a default and cannot compel parties to settle disputes or issue directions beyond those two statutory options. By directing settlement, the NCLT and NCLAT had abdicated their jurisdiction, acting beyond the scope of the IBC. Consequently, the Court set aside the orders of the NCLT and NCLAT and restored the petition to the NCLT for fresh consideration. The appeal was allowed.
Issues considered
- The adjudicating authority under Section 7(5) of the IBC may only admit or reject a petition and cannot direct parties to settle claims.
- Whether the NCLT and NCLAT acted within their jurisdiction by disposing of the petition at the pre‑admission stage and directing settlement.
- Interpretation of the scope of powers conferred on the adjudicating authority by the IBC, particularly in relation to settlement encouragement versus equity jurisdiction.
Legislation cited
- Insolvency and Bankruptcy Code, 2016s. 12(1), s. 12(3), s. 3(11), s. 3(12), s. 62, s. 7
Subjects
insolvencycorporate insolvency resolution processSection 7 IBCadjudicating authority jurisdictionsettlement directionNCLTNCLATpre‑admission stage
Judgment
28 [2021]REPORTS
SUPREME COURT 12 S.C.R. 28 [2021] 12 S.C.R.
A E S KRISHNAMURTHY & ORS.
v.
M/S BHARATH HI TECH BUILDERS PVT. LTD.
(Civil Appeal No 3325 of 2020)
B DECEMBER 14, 2021
[DR. DHANANJAYA Y CHANDRACHUD AND
A S BOPANNA, JJ]
Insolvency and Bankruptcy Code, 2016: s. 7 – Initiation of
C Corporate Insolvency Resolution Process by financial creditor –
On facts, respondent defaulted in making re-payment of an amount
of Rs 33 crores to the appellants – Petition u/s. 7 instituted by the
appellants against respondents – Adjudicating Authority-NCLT
declined to admit the petition and directed the respondent to settle
all the remaining claims within three months – Appeal there against
D
dismissed by the Appellate Authority-National Company Law
Appellate Tribunal – On appeal, held: Order of the Adjudicating
Authority, and the directions issued, suffered from an abdication of
jurisdiction – Adjudicating Authority acted outside the terms of its
jurisdiction u/s. 7(5) – Adjudicating Authority cannot compel a party
E to the proceedings before it to settle a dispute – Such a course of
action is not contemplated by the IBC – While, adjudicating Authority
and Appellate Authority can encourage settlements, they cannot
direct them by acting as courts of equity – Adjudicating Authority is
empowered only to verify whether a default has occurred or not –
Based thereupon, the Adjudicating Authority must then either admit
F
or reject an application – These are the only two courses of action
which are open to the Adjudicating Authority in accordance with s.
7(5) – Furthermore, the Appellate Authority sought to make a
distinction by observing that the directions of the Adjudicating
Authority were at the ‘pre-admission stage’, and that the order was
G not of such a nature which was prejudicial to the rights and interest
of the stakeholders – Also, settlement has not been arrived at by the
respondents with the appellants – Observation that the appeal was
not maintainable is erroneous – Order passed by the NCLAT and
NCLT set aside – Proceedings to be restored back to the adjudicating
authority for afresh consideration.
H
28
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 29
BUILDERS PVT. LTD.
s. 7 – Corporate Insolvency Resolution Process under – Scope A
and jurisdiction of the powers of the Adjudicating authority –
Discussed.
Allowing the appeal, the Court
HELD: 1.1 Sub-Section (1) of Section 7 of the Insolvency
and Bankruptcy Code, 2016 enables the financial creditor to file B
an application for initiation of Corporate Insolvency Resolution
Process-CIRP against the corporate debtor before the
Adjudicating Authority “when a default has occurred”. The
expression ‘default’ is defined in Section 3(12) of the IBC. The
definition of default adverts to the non-payment of a debt, when it C
has become due and payable in whole or in part, by the debtor or
the corporate debtor. Since the definition of “default” incorporates
the expression “debt”, it is necessary to advert to the definition
of the latter expression under Section 3(11) of the IBC. Thus, a
“debt” is defined to be a liability or an obligation in respect of a
claim due from any person. This includes a financial debt and an D
operational debt. If the above criteria are met, the financial
creditor can make an application under sub-Section (2) of Section
7, in the manner prescribed, along with the necessary fees. Sub-
Section (3) requires the financial creditor, inter alia, to furnish a
record of the default with the information utility or such other E
record or evidence of default as may be specified along with the
application. Under sub-Section (4), the Adjudicating Authority
must, within 14 days of the receipt of the application under sub-
Section (2), ascertain the existence of a default from the record
of an information utility or on the basis of other information
furnished by the financial creditor under sub-Section (3). F
[Para 21, 22][49-B-H]
1.2 Sub-Section (5) of Section 7 is comprised in two parts:
Clause (a), which is the first part, empowers the Adjudicating
Authority to admit the application where it is satisfied that: (i) a
default has occurred; (ii) the application under sub-Section (2) is G
complete; and (iii) no disciplinary proceeding is pending against
the proposed resolution professional; Clause (b), which is the
second part, empowers the Adjudicating Authority to reject the
application where it is satisfied that: (i) default has not occurred;
H
30 SUPREME COURT REPORTS [2021] 12 S.C.R.
A or (ii) the application under sub-Section (2) is incomplete; or (iii)
a disciplinary proceeding is pending against the proposed
resolution professional. Under sub-Section (7), the Adjudicating
Authority has to communicate its order of acceptance or rejection
to the financial creditor and the corporate debtor or the financial
creditor, as the case may be. In accordance with sub-Section (6),
B
the CIRP process commences from the date of the admission of
the application under sub-Section (5). Thus, a time limit for the
completion of the CIRP within a period of 180 days (under sub-
Section (1) of Section 12, subject to a further extension under
sub-Section (3)) commences from the date of the admission of
C the application to initiate the process. [Para 23][50-A-D]
1.3 On a bare reading of the provision, it is clear that both,
Clauses (a) and (b) of sub-Section (5) of Section 7, use the
expression “it may, by order” while referring to the power of the
Adjudicating Authority. In Clause (a) of sub-Section (5), the
D Adjudicating Authority may, by order, admit the application or in
Clause (b) 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).
E The statute does not provide for the Adjudicating Authority to
undertake any other action, but for the two choices available.
[Para 24][50-E-F]
1.4 The Adjudicating Authority noted that it had listed the
petition for admission on diverse dates and had adjourned it, inter
F alia, to allow the parties to explore the possibility of a settlement.
Evidently, no settlement was arrived at by all the original
petitioners who had instituted the proceedings. The Adjudicating
Authority noticed that joint consent terms had been filed before
it. But it is common ground that these consent terms did not
G cover all the original petitioners who were before the Adjudicating
Authority. The Adjudicating Authority was apprised of the fact
that the claims of 140 investors had been fully settled by the
respondent. The respondent also noted that of the claims of the
original petitioners who have moved the Adjudicating Authority,
H
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 31
BUILDERS PVT. LTD.
only 13 have been settled while, according to it “40 are in the A
process of settlement and 39 are pending settlements”.
Eventually, the Adjudicating Authority did not entertain the
petition on the ground that the procedure under the IBC is
summary, and it cannot manage or decide upon each and every
claim of the individual home buyers. The Adjudicating Authority
B
also held that since the process of settlement was progressing
“in all seriousness”, instead of examining all the individual claims,
it would dispose of the petition by directing the respondent to
settle all the remaining claims “seriously” within a definite time
frame. The petition was accordingly disposed of by directing the
respondent to settle the remaining claims no later than within C
three months, and that if any of the remaining original petitioners
were aggrieved by the settlement process, they would be at
liberty to approach the Adjudicating Authority again in accordance
with law. The Adjudicating Authority’s decision was also upheld
by the Appellate Authority. [Para 26][52-D-H]
D
1.5 The Adjudicating Authority has acted outside the terms
of its jurisdiction under Section 7(5). 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
E
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. [Para 27]
[53-A-B]
F
1.6 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. 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 G
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 instant case is to abdicate their jurisdiction
H
32 SUPREME COURT REPORTS [2021] 12 S.C.R.
A 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.
[Para 28][53-C-E]
B
1.7 The IBC is a complete code in itself. The Adjudicating
Authority and the Appellate Authority are creatures of the statute.
Their jurisdiction is statutorily conferred. The statute
which confers jurisdiction also structures, channelises and
circumscribes the ambit of such jurisdiction. Thus, while the
C
Adjudicating Authority and Appellate Authority can encourage
settlements, they cannot direct them by acting as courts of equity.
[Para 29][53-F]
1.8 The statement indicating the settlement process shows
that a settlement has admittedly not been arrived at by the
D
respondent with all the appellants. Moreover, impleadment
applications have also been filed on behalf of an additional set of
individuals claiming non-payment of their dues by the respondent.
[Para 31][55-F-G]
1.9 The order of the Adjudicating Authority, and the
E
directions which eventually came to be issued, suffered from an
abdication of jurisdiction. The Appellate Authority sought to make
a distinction by observing that the directions of the Adjudicating
Authority were at the ‘pre-admission stage’, and that the order
was not of such a nature which was prejudicial to the rights and
F interest of the stakeholders. 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 COVID-19 pandemic
on the real estate market, including on the respondent. While
acknowledging that the consent terms were “filed by some of
G
the stake holders though may not be all encompassing”, the
Appellate Authority nonetheless proceeded to dismiss the appeal
as not maintainable. The observation that the appeal was not
maintainable is erroneous. Plainly, the Adjudicating Authority
H
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 33
BUILDERS PVT. LTD.
failed to exercise the jurisdiction which was entrusted to it. A A
clear case for the exercise of jurisdiction in appeal was thus made
out, which the Appellate Authority then failed to exercise.
[Para 32][55-G-H; 56-A-C]
1.10 Since there is inclination to restore the proceedings
back to the Adjudicating Authority for a fresh consideration, it is B
not necessary for this Court to dwell on any other aspect, save
and except for what weighed with the Adjudicating Authority in
disposing of the petition without adjudicating on other issues of
maintainability or merits. It is left open all the rights and
contentions of the parties to be submitted before and decided by
C
the Adjudicating Authority. The impugned judgment and order of
the NCLAT and of the NCLT is set aside. The petition under
Section 7 is restored to the NCLT for disposal afresh. [Para 33,
34][56-D-F]
Manish Kumar v. Union of India (2021) 5 SCC 1;
D
Embassy Property Developments (P) Ltd. v. State of
Karnataka (2020) 13 SCC 308 : [2019] 17 SCR 559;
Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC
407 : [2017] 8 SCR 33; Pratap Technocrats (P) Ltd.
and Others v. Monitoring Committee of Reliance Infratel
Limited and Another 2021 SCC OnLine SC 569; Swiss E
Ribbons Pvt Ltd and Anr. v. Union of India and Ors.
(2019) 4 SCC 17 : [2019] 3 SCR 535; Arun Kumar
Jagatramka v. Jindal Steel & Power Ltd. (2021) 7 SCC
474 – referred to.
Case Law Reference F
[2019] 17 SCR 559 referred to Para 16(i)
[2017] 8 SCR 33 referred to Para 16(ii)(a)
[2019] 3 SCR 535 referred to Para 16(iii)(e)
G
(2021) 5 SCC 1 referred to Para 16(v)
(2021) 7 SCC 474 referred to Para 30
H
34 SUPREME COURT REPORTS [2021] 12 S.C.R.
A CIVIL APPELLATE JURISDICTION: Civil Appeal No.3325 of
2020.
From the Judgment and Order dated 30.07.2020 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No.649 of 2020.
B
Srijan Sinha, Himanshu Chaubey, Ms. Parul Dhurvey, Advs. for
the Appellants.
Ms. Aakanksha Nehra, Sandeep Bajaj, Soayib Qureshi, Ms.
Sangya Gupta, Siddharth Shukla, Advs. for the Respondent.
C The Judgment of the Court was delivered by
DR. DHANANJAYA Y CHANDRACHUD, J.
1. Admit.
2. The present appeal under Section 62 of the Insolvency and
D Bankruptcy Code 20161 has arisen from a judgment of the National
Company Law Appellate Tribunal2 dated 30 July 2020, which upheld an
order dated 28 February 2020 of the National Company Law Tribunal 3
at its Bengaluru Bench.
3. On a petition4 which was instituted by the appellants (and others)
E under Section 7 of the IBC for initiating the Corporate Insolvency
Resolution Process5 in respect of the respondent, the NCLT declined to
admit the petition and instead directed the respondent to settle the claims
within three months. The NCLAT found no merit in the appeal 6 against
the NCLT’s order.
F 4. 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.
G
1
“IBC”
2
“NCLAT”/“Appellate Authority”
3
“NCLT”/“Adjudicating Authority”
4
C.P(IB)No. 188/BB/2019
5
“CIRP”
6
H Company Appeal (AT) (Insolvency) No 649 of 2020
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 35
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
5. The genesis of the case arises from a Master Agreement to A
Sell7 which was entered into between the respondent, IDBI Trusteeship
Limited and Karvy Realty (India) Limited8 on 22 June 2014, in order to
raise an amount of Rs.50 crores for the development of 100 acres of
agricultural land. Under the terms of the Master Agreement, the Facility
Agent was to sell the plots to prospective purchasers against the payment
B
of a lumpsum amount. The respondent was then required to pay interest
at the rate of 25 per cent per annum compounded annually to the
purchaser, under the Master Agreement. It has been stated that in
furtherance of the Master Agreement, the ninth appellant was allotted a
plot in the project being developed by the respondent on the payment of
a sum of Rs 12,50,000. Thus, the respondent was obligated to convey C
and register the plots to the ninth appellant within 21 months from the
date of execution of the Master Agreement (i.e., by 21 March 2016).
6. Since the requisite funds could not be generated through the
Master Agreement, a Syndicate Loan Agreement9 was entered into
between the respondent, IDBI Trusteeship Limited and the Facility Agent D
on 22 November 2014 for availing a term loan of Rs18 crores from
prospective lenders. Such prospective lenders were to lend moneys by
executing a Deed of Adherence. In accordance with the terms of the
Loan Agreement, the respondent had to utilise the funds raised for
developing the proposed residential layout in its project and it was to pay E
an assured return at the rate of 20 per cent annum on the principal
amount. Further, the tenure of the loan was to be 24 months from the
execution of the Loan Agreement, and in the event of default, the
respondent was liable to pay an additional interest of one per cent for
every month.
F
7. The case of the appellants is that during the year 2015-2016,
the Facility Agent acting through its sister concern (Karvy Private Wealth)
advised its clients to extend loans to the respondent. The appellants claim
that they (with the exception of the ninth appellant), along with several
others, extended term loans to the respondent acting on the advice of
the Facility Agent and its sister concern. Thus, requisite Deeds of G
Adherence were signed. It is alleged by the appellants that through the
7
“Master Agreement”
8
“Facility Agent”
9
“Loan Agreement” H
36 SUPREME COURT REPORTS [2021] 12 S.C.R.
A Loan Agreement, the respondent raised over Rs 15 crores from nearly
300 investors in the first tranche of loans.
8. By a letter dated 29 February 2016, addressed to one of the
original petitioners in the petition before the NCLT who was allotted a
plot under the Master Agreement, the respondent sought an extension
B of time till 31 October 2016 for conveying the plots. It has been alleged
that in its letter, the respondent undertook that in the event of its failure
to convey the plots by 31 October 2016, the entire amount which was
paid would be returned, together with interest as agreed in the Master
Agreement itself.
C 9. Further, on 30 November 2016, the respondent is stated to have
extended the term of the Loan Agreement, due to its alleged inability to
refund the principal amount along with interest. The respondent is also
alleged to have sought an extension of the loan period by 12 months,
with an assurance that the principal amount would be repaid in three
equal instalments in the 13th, 14th and 15th months.
D
10. However, on 26 April 2019, 11 out of the 17 appellants before
this Court (together with 72 other petitioners) instituted a petition under
Section 7 of the IBC before the Adjudicating Authority, due to the
respondent’s default in making the re-payment of an amount of Rs
33,84,32,493.
E
11. On 11 September 2019, the Adjudicating Authority adjourned
the proceedings on the ground that the parties were attempting to resolve
the dispute. A further extension of time for exploring the possibility of a
settlement was sought on 24 October 2019 by the respondent, which
F was granted by the Adjudicating Authority and the petition was posted
for 5 November 2019. On 22 November 2019, the respondent informed
the Adjudicating Authority that it was exploring the possibility of a
settlement, following which it was observed that any proposal for
settlement should be furnished to the petitioners well before the next
date of hearing. On 20 December 2019, with the respondent having
G failed to resolve the issue, the Adjudicating Authority posted the petition
for admission on 29 January 2020. On 29 January 2020, on the
respondent’s request, the Adjudicating Authority granted a further
opportunity to the respondent to settle the dispute with the petitioners
before it. On 27 February 2020, the respondent filed a memo before the
H Adjudicating Authority stating that it had reached a settlement with 140
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 37
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
investors. According to the appellants, however, out of 83 petitioners A
who were before the Adjudicating Authority in the petition, a settlement
had been arrived at only with 13 petitioners. There was, in other words,
no settlement with the other 70 petitioners before the NCLT.
12. Eventually, by its order dated 28 February 2020, the NCLT
disposed of the petition. The Adjudicating Authority noted that “both the B
learned Counsels have filed Joint Consent Terms dated 12.02.2020”.
Admittedly, however, these consent terms were arrived at by the
respondent with only one of the petitioners before the Adjudicating
Authority, and not with all of the petitioners (including the appellants).
Before the Adjudicating Authority, the respondent submitted that C
“subsequently they have settled the claims of about 140 Creditors” and
counsel for the respondent also filed a memo indicating the steps that
they had taken to settle the claims of “various others creditors and clients”.
In this backdrop, the Adjudicating Authority observed:
“6. It is not in dispute that the Corporate Debtor with bona fide D
intention is exploring the possibility of the settlement in question
and the project is in advanced stage of completion, and if the
Company is put under CIRP, interest of all the Home Buyers as
well as other Creditors will be in jeopardy. He further submits
that the Corporate Debtor is taking all steps to settle the remaining
claims of the Petitioners as well as other Creditors within a time E
frame. Lists showing the number of cases settled and those
remaining have been filed.
7. It is a settled position of law that this procedure under the Code
is contemplated to be summary in nature, and it cannot manage or
F
decide upon each and every case of individual homebuyers. Lists
of Individual cases have been placed on record which show that
140 investors have been fully settled by the Corporate Debtor
and an amount of Rs.27.25 crore has been paid to them. 13 claims/
Petitioners before us have been settled, 40 are in the process of
settlement and 39 pending settlement. Thus the process of G
settlement appears to be progressing in all seriousness. Instead of
examining all the individual claims in detail, we would like to dispose
of the instant case by directing the Corporate Debtor to settle all
the remaining claims sincerely within a definite lime frame.”
H
38 SUPREME COURT REPORTS [2021] 12 S.C.R.
A Thus, the Adjudicating Authority decided to dispose the petition
based on the following factors: (i) 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; (ii) the
settlement process was underway with 40 other petitioners; (iii) the
procedure under the IBC was summary in nature, and could not be used
B
to individually manage the case of each of the 83 petitioners before it;
and (iv) 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.
In disposing of the petition, the Adjudicating Authority issued the following
C directions:
“a. The Corporate Debtor is directed to settle the remaining claims
as expeditiously as possible, but not later than 3 months, and
communicate this decision to all the concerned parties.
b. If aggrieved by the settlement process of the Corporate Debtor,
D
the remaining Petitioners, if any, would be at liberty to approach
this Adjudicating Authority again, in accordance with law.”
13. The order of the Adjudicating Authority was challenged in
appeal before the NCLAT by 7 of the original petitioners, all of whom
are appellants before this Court as well, along with certain other allottees
E
who were not original petitioners before the NCLT. By its impugned
judgment 30 July 2020, the Appellate Authority dismissed the appeal,
noting thus:
“3. It is manifestly clear that the application under Section 7 of
F the l&B Code came to be disposed of at the pre-admission stage
and no order of admission or rejection of application was passed
by the Adjudicating Authority keeping in view the nature of claims
which admittedly were relatable to a Housing Project. The
Adjudicating Authority appears to have been influenced by the
fact that claims of the maximum number of stakeholders have
G been settled which included some claims settled at pre-admission
stage before the Adjudicating Authority. In so far as the remaining
claims were concerned, the Adjudicating Authority allowed a
definite time frame viz. 3 months giving liberty to the claimant(s}
whose claims would remain unsettled after expiry of the given
time frame, to come back and re-agitate the matter.
H
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 39
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
4. Viewed in these circumstances, it cannot be said that the A
impugned order is of such a nature which is prejudicial to the
rights and interests of any of the stakeholders. The claimant(s)
who may be dissatisfied or whose claims remain unsettled during
the given time frame can approach the Adjudicating Authority
who has not shut its doors. Assailing of the impugned order in
B
appeal would not be the appropriate course.
5. It is a fact that the given time frame has already elapsed but
we take judicial notice of the fact that normal business operations
had been adversely affected by the imposition of lockdown due to
outbreak of COVID-19 which has been declared pandemic. Even
after unlocking, the pace of business operations is far from normal. C
In these circumstances, some concession has to be given in
adherence to the timelines set in terms of the impugned order.
Be-that-as-it-may, this situation may also have to be addressed
by the Adjudicating Authority, if approached by a claimant whose
claim has not been settled so far. It is not disputed that there D
solution of disputes relating to claims, more particularly of Allottees
in Housing Projects, has to be given primacy and pushing the
Corporate Debtor into liquidation would only be the last option.
6. In view of the foregoing discussion and also bearing in mind
that the settlement process set in motion at the pre-admission
E
stage is supported by the Consent Terms filed by some of the
stakeholders, though it may not be all encompassing, this appeal
would not lie. We accordingly hold that the appeal is not
maintainable. There being no legal infirmity in the impugned order,
the appeal is dismissed.”
The Appellate Authority’s decision to dismiss the appeal and uphold F
the Adjudicating Authority’s order was thus based upon the following
considerations: (i) the NCLT decided to dismiss the petition under Section
7 at the ‘pre-admission stage’ itself, since the settlement process was
underway; (ii)the NCLT protected the rights of all the appellants/
petitioners by setting a time-frame for settlement by the respondent, and G
leaving them open the option of approaching it in case their claims
remained un-settled; (iii) while the timeframe for settlement had elapsed,
the respondent had to be shown leniency due to the effects of the COVID-
19 pandemic on businesses; and (iv)in disputes of this nature, the claims
of the home buyers have to be given priority, and the respondent should
not be pushed into liquidation, until as the last resort. H
40 SUPREME COURT REPORTS [2021] 12 S.C.R.
A 14. The NCLAT’s judgment and order dated 30 July 2020 has
now been challenged before this Court by a variety of individuals –
some of whom were original petitioners before the NCLT and went in
appeal before the NCLAT, some who joined the appeal before the NCLAT
directly, some who were original petitioners before the NCLT but did
not join the appeal before the NCLAT and others who have joined the
B
cause before this Court for the first time. A tabular representation is
provided below:
C
D
E
F
During the course of the appeal, there have also been two
applications10 seeking impleadment in the proceedings by ten individuals
who are similarly placed to the appellants. Some of these individuals
were also original petitioners before the NCLT.
15. We have heard Mr Srijan Sinha, Counsel for the appellants
G
and Ms Aakanksha Nehra, Counsel for the respondent.
16. On behalf of the appellants, the principal challenge is on the
ground that:
10
H IA No 4783 of 2021 and IA No 97193 of 2021
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 41
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
(i) The Appellate Authority as well as the Adjudicating Authority A
have acted beyond the scope of their jurisdiction under the
IBC, and thus their orders are liable to be set aside since
they were coram non judice. Reliance has been placed
upon the judgment of this Court in Embassy Property
Developments (P) Ltd. v. State of Karnataka11 in support
B
of this proposition;
(ii) The impugned orders are contrary to the mandate of Section
7 of the IBC. This ground has been sought to be substantiated
by urging as follows:
(a) The orders of the Adjudicating Authority and the C
Appellate Authority are contrary to the principles
enunciated in the judgment of this Court in
Innoventive Industries Ltd. v. ICICI Bank 12
(“Innoventive Industries”), with respect to the
scope and extent of the enquiry which has to be made
D
in a petition under Section 7 of the IBC. This Court
has held that while entertaining the petition under
Section 7, the Adjudicating Authority has to merely
satisfy itself whether a default has occurred. As such,
Section 7(5) only provides the Adjudicating Authority
with two options – to pass an admission order under E
Section 7(5)(a) or reject the petition under Section
7(5)(b). Thus, unless the debt has not become due or
is interdicted by some law, the Adjudicating Authority
must admit a petition under Section 7;
(b) Admittedly, in the present case, the respondent has F
committed an act of default as understood in the
provisions of Section 3(12) of the IBC. This is evident
from the fact that it is willing to settle the debt owed
to the appellants, which was also noted by the
Adjudicating Authority. Further, the dispute between
G
the respondent and as many as 70 original petitioners
had not been settled, at the time when the Adjudicating
Authority passed its order. In spite of this, the
11
(2020) 13 SCC 308
12
(2018) 1 SCC 407, paras 28 and 30 H
42 SUPREME COURT REPORTS [2021] 12 S.C.R.
A Adjudicating Authority failed to act in accordance
with the provisions of Section 7(5)(a) and issue an
order admitting the application; and
(c) Further, the Appellate Authority has also erred in
observing that the petition under Section 7 was
B disposed of at a ‘pre-admission stage’ by the
Adjudicating Authority. Where the Adjudicating
Authority is not satisfied that the financial debt is
owed and a default has occurred, Section 7(5)(b)
provides that it shall reject the application. Thus, an
C option to dispose at a ‘pre-admission stage’ is not
available to the Adjudicating Authority;
(iii) The Adjudicating Authority and Appellate Authority have
acted beyond the scope of their jurisdiction in ‘directing’
the parties to settle with the respondent. To substantiate
D this argument, it has been urged:
(a) The Adjudicating Authority as well as the Appellate
Authority are creatures of the statute – the IBC –
and are bound by its provisions. Thus, their jurisdiction
is limited by the provisions of the IBC;
E (b) Hence, once there is an admitted default by the
respondent, the Adjudicating Authority was statutorily
bound to admit the petition and has acted patently
beyond its jurisdiction in not entertaining it on the
ground that there was a possibility of a settlement.
F The Appellate Authority has merely placed its stamp
of approval on the judgment of the Adjudicating
Authority. In doing so, Adjudicating Authority and
Appellate Authority have acted as courts of equity,
which is not prescribed by the IBC. In support of
this proposition, reliance has been placed upon the
G judgment of this Court in Pratap Technocrats (P)
Ltd. and Others v. Monitoring Committee of
Reliance Infratel Limited and Another 13
(“Pratap Technocrats”);
13
2021 SCC OnLine SC 569, paras 37, 47 and 50
H
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 43
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
(c) In any case, out of 83 petitioners before the A
Adjudicating Authority, only 13 had entered into a
settlement. As a result, there was no settlement with
the remaining 70 petitioners. Moreover, even in
respect of the financial creditors with whom the
respondent had entered into a settlement, the
B
respondent had failed to comply with the settlement
even before the passing of the impugned order;
(d) Further, the direction by the Adjudicating Authority
to the respondent to settle all individual claims is
beyond its jurisdiction, as a judicial authority cannot
C
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. In the present case, as
many as four opportunities were granted to the
respondent to resolve the dispute with the petitioners, D
but to no avail. Hence, once the parties failed to arrive
at a settlement, the judicial authority was duty bound
to decide the case on merits alone; and
(e) Finally, the admission of the petition by the
Adjudicating Authority would not have automatically E
nullified any potential for settlement. This Court has
held in its judgment in Swiss Ribbons Pvt Ltd and
Anr. v. Union of India and Ors.14 that even after a
petition under Section 7 of the IBC is admitted and
before the Committee of Creditors15 is formed, the
F
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 (if the parties were to reach a settlement);
(iv) The IBC envisages two classes of creditors – financial and
G
operational creditors. Except some differences in their rights
and role in the CIRP, the IBC confers equal rights upon
both the classes of creditors. However, through the
14
(2019) 4 SCC 17
15
“CoC” H
44 SUPREME COURT REPORTS [2021] 12 S.C.R.
A impugned judgment, the Appellate Authority has created a
sub-class within the class of financial creditors by observing
that in the resolution of disputes relating to claims of allottees
in housing projects, their rights have to be given primacy
and the project entity/corporate debtor should not be sent
into liquidation only at the behest of the other investors; and
B
(v) The threshold requirement of 10 per cent allotees of a
housing project filing a petition under Section 7 of the IBC
has been upheld by this Court in Manish Kumar v. Union
of India16 (“Manish Kumar”). However, in paragraph 181,
this Court has held that such a requirement only needs to
C
be assessed at the threshold while admitting the petition.
Hence, if subsequent to the admission, withdrawal
applications are preferred and the 10 per cent threshold is
reduced, it shall not affect the maintainability of the original
petition. Thus, in the present case, the 83 original petitioners
D did meet the 10 per cent threshold and the petition should
have been admitted.
Based on the above submissions, the appellants have prayed that
the orders of the NCLAT and NCLT be set aside, and the original petition
under Section 7 of the IBC be restored for a decision on its admissibility
E under Section 7(5) of the IBC.
17. On the other hand, the respondent counters by submitting that:
(i) The present appeal has been filed by the appellants to obviate
the procedural requirements of Section 7 of the IBC. It has
been urged:
F
(a) The petition under Section 7 was instituted by the
first appellant on behalf of himself and 82 other
petitioners/proposed purchasers. Out of these 83
petitioners, only 7 of the original petitioners (including
the first appellant) approached the NCLAT in appeal.
G The present appeal has been filed by the first appellant
on behalf of the following persons:
i. First to seventh appellants, who were parties
before the NCLT and the NCLAT;
16
H (2021) 5 SCC 1
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 45
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
ii. Eight and ninth appellants, who were not A
parties to the original petition under Section 7
but had filed an appeal before the NCLAT;
iii. Tenth, eleventh, fifteenth and sixteenth
appellants, who were parties before the NCLT
but not before the NCLAT; and B
iv. Twelfth to fourteen and seventeenth
appellants, who were neither parties before
the NCLT nor the NCLAT;
The reduced number of litigants establishes that the C
respondent has made efforts to settle the disputes
with many of the proposed purchasers;
(b) Further, the Parliament has amended Section 7 with
effect from 28 December 2019, which was upheld
by the judgment of this Court in Manish Kumar D
(supra). The amendment has introduced the threshold
requirement (of 10 per cent or 100 home buyers) for
filing a petition under Section 7, with the objective of
protecting a corporate debtor from being dragged into
insolvency proceedings by an isolated set of creditors; E
(c) Thus, the present appeal being a continuation of the
original proceedings under Section 7, the threshold
requirement would have to be met. Evidently, with
the reduced number of litigants, it is not met; and
F
(d) Further, if the appellants have to file a fresh
proceeding before the Adjudicating Authority or if
their proceedings are restored before the Adjudicating
Authority at this stage, they would still have to fulfil
the mandatory requirement of bringing together 100
creditors in the same class or 10 per cent of the total G
number of such creditors;
(ii) The present proceedings have only been filed by the
appellants to arm-twist the respondent, instead of taking up
the settlements offered to them:
H
46 SUPREME COURT REPORTS [2021] 12 S.C.R.
A (a) The first appellant preferred a petition on behalf of
82 home buyers. The Adjudicating Authority in its
order dated 28 February 2020 recorded that the
respondent had fully settled with 140 investors against
a payment of Rs 27.25 crores. Further, it was noted
that the claims of 13 petitioners before the NCLT
B
were settled, 40 were in the process of settlement
and 39 were pending settlements. It was in this
backdrop that the NCLT disposed of the petition, with
specific directions that the appellants could approach
it if the respondent did not settle their claims within
C three months;
(b) Even after the disposal of the proceedings by the
NCLT, the respondent has continued to settle with
proposed purchasers. However, while numerous
efforts have been made to arrive at a settlement with
D the appellants, none of the options offered were
agreeable to them;
(c) During the pendency of the appeal, agreed amounts
have been paid in full to the eighth, fourteenth and
sixteenth appellants in November 2020. With respect
E to the tenth, twelfth, thirteenth and seventeenth
appellants, a settlement was arrived at and cheques
have been handed over by the respondent to them,
which have not been encashed; and
(d) The respondent reiterates its commitment to settle
F with the proposed purchasers, despite the real-estate
industry being severely affected due to the COVID-
19 pandemic; and
(iii) The respondent should not be pushed to insolvency merely
because a few of its alleged creditors are not willing to
G settle. In any case, the appellants are merely speculative
investors and are not allottees within the meaning of Section
5(8)(12) of the IBC, and thus they have no claim under
Section 7 of the IBC.
On the above hypothesis, it has been submitted that the appellants
H are utilising the process to facilitate recovery whereas the primary focus
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 47
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
of IBC is to ensure revival and continuation of the corporate debtor, and A
to protect it from corporate death by liquidation.
18. The rival submissions will now be considered.
19. At the very outset, there is a factual question in relation to the
settlements which have been made by the respondent with the present
appellants. The respondent has alleged that settlements have been reached B
with the eighth, fourteenth and sixteenth appellants and agreed amounts
have been paid in full. Further, settlements were arrived at with tenth,
twelfth, thirteenth and seventeenth appellants and cheques have been
handed over to them, but they have not been encashed. However, the
appellants note that while a settlement amount was agreed between the C
respondent and the fourteenth appellant, it was never actually paid before
the appeal was filed. Further, upon the filing of the present appeal, when
the respondent offered a new settlement amount, it was rejected by the
fourteenth appellant. Similarly, no settlement has been arrived at with
the sixteenth appellant. In respect of the tenth, twelfth, thirteenth and
seventeenth appellants, it is submitted that the cheques were issued in D
June 2020 but the respondent itself in October 2020 told them not to
encash them till the outcome of the present appeal. Presently, the
appellants acknowledge that final settlements have been reached between
the respondent and the eighth, tenth and twelfth appellants. This position
has not been controverted by the respondent. E
20. The central question in this appeal then is whether the NCLT
and the NCLAT were correct in their approach of rejecting the appellants’
petition under Section 7 of the IBC at the ‘pre-admission stage’, and
directing them to settle with the respondent within 3 months. Section 7
of the IBC provides for the initiation of CIRP by a financial creditor or a F
class of financial creditors. Section 7, as it stood prior to its amendments
in 201917, is reproduced below:
“7. Initiation of corporate insolvency resolution process by
financial creditor.—(1) A financial creditor either by itself or
jointly with other financial creditors, or any other person on behalf G
of the financial creditor, as may be notified by the Central
Government, may file an application for initiating corporate
insolvency resolution process against a corporate debtor before
the Adjudicating Authority when a default has occurred:
17
Through Act 26 of 2019 and Act 1 of 2020
H
48 SUPREME COURT REPORTS [2021] 12 S.C.R.
A Explanation.—For the purposes of this sub-section, a default
includes a default in respect of a financial debt owed not only to
the applicant financial creditor but to any other financial creditor
of the corporate debtor.
(2) The financial creditor shall make an application under sub-
B section (1) in such form and manner and accompanied with such
fee as may be prescribed.
(3) The financial creditor shall, along with the application furnish—
(a) record of the default recorded with the information utility or
such other record or evidence of default as may be specified;
C
(b) the name of the resolution professional proposed to act as an
interim resolution professional; and
(c) any other information as may be specified by the Board.
(4) The Adjudicating Authority shall, within fourteen days of the
D
receipt of the application under sub-section (2), ascertain the
existence of a default from the records of an information utility or
on the basis of other evidence furnished by the financial creditor
under sub-section (3):
(5) Where the Adjudicating Authority is satisfied that—
E
(a) a default has occurred and the application under sub-section
(2) is complete, and there is no disciplinary proceedings pending
against the proposed resolution professional, it may, by order, admit
such application; or
F (b) default has not occurred or the application under sub-section
(2) is incomplete or any disciplinary proceeding is pending against
the proposed resolution professional, it may, by order, reject such
application:
Provided that the Adjudicating Authority shall, before rejecting
G the application under clause (b) of sub-section (5), give a notice
to the applicant to rectify the defect in his application within seven
days of receipt of such notice from the Adjudicating Authority.
(6) The corporate insolvency resolution process shall commence
from the date of admission of the application under sub-section
H (5).
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 49
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
(7) The Adjudicating Authority shall communicate— A
(a) the order under clause (a) of sub-section (5) to the financial
creditor and the corporate debtor;
(b) the order under clause (b) of sub-section (5) to the financial
creditor, within seven days of admission or rejection of such
application, as the case may be.” B
21. Sub-Section (1) of Section 7 enables the financial creditor to
file an application for initiation of CIRP against the corporate debtor
before the Adjudicating Authority “when a default has occurred”. The
expression “default” is defined in Section 3(12) of the IBC in the following
terms: C
“(12) “default” means non-payment of debt when whole or any
part or instalment of the amount of debt has become due and
payable and is not paid by the debtor or the corporate debtor, as
the case may be;”
D
The definition of default adverts to the non-payment of a debt,
when it has become due and payable in whole or in part, by the debtor or
the corporate debtor. Since the definition of “default” incorporates the
expression “debt”, it is necessary to advert to the definition of the latter
expression under Section 3(11) of the IBC:
E
“(11) “debt” means a liability or obligation in respect of a claim
which is due from any person and includes a financial debt and
operational debt;”
Thus, a “debt” is defined to be a liability or an obligation in respect
of a claim due from any person. This includes a financial debt and an
F
operational debt.
22. If the above criteria are met, the financial creditor can make
an application under sub-Section (2) of Section 7, in the manner
prescribed, along with the necessary fees. Sub-Section (3) requires the
financial creditor, inter alia, to furnish a record of the default with the
information utility or such other record or evidence of default as may be G
specified along with the application. Under sub-Section (4), the
Adjudicating Authority must, within 14 days of the receipt of the application
under sub-Section (2), ascertain the existence of a default from the record
of an information utility or on the basis of other information furnished by
the financial creditor under sub-Section (3). H
50 SUPREME COURT REPORTS [2021] 12 S.C.R.
A 23. Sub-Section (5) of Section 7 is comprised in two parts: Clause
(a), which is the first part, empowers the Adjudicating Authority to admit
the application where it is satisfied that : (i) a default has occurred;
(ii)the application under sub-Section (2) is complete; and (iii)no
disciplinary proceeding is pending against the proposed resolution
professional; Clause (b), which is the second part, empowers the
B
Adjudicating Authority to reject the application where it is satisfied
that:(i)default has not occurred; or (ii)the application under sub-Section
(2) is incomplete; or (iii)a disciplinary proceeding is pending against the
proposed resolution professional. Under sub-Section (7), the Adjudicating
Authority has to communicate its order of acceptance or rejection to the
C financial creditor and the corporate debtor or the financial creditor, as
the case may be. In accordance with sub-Section (6), the CIRP process
commences from the date of the admission of the application under sub-
Section (5).Thus, a time limit for the completion of the CIRP within a
period of 180 days (under sub-Section (1) of Section 12, subject to a
further extension under sub-Section (3)) commences from the date of
D
the admission of the application to initiate the process.
24. On a bare reading of the provision, it is clear that both, Clauses
(a) and (b) of sub-Section (5) of Section 7, use the expression “it may,
by order” while referring to the power of the Adjudicating Authority. In
E Clause (a) of sub-Section(5), the Adjudicating Authority may, by order,
admit the application or in Clause (b) 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
F statute does not provide for the Adjudicating Authority to undertake any
other action, but for the two choices available.
25. In Innoventive Industries (supra), a two-judge Bench of
this Court has explained the ambit of Section 7 of the IBC, and held that
the Adjudicating Authority only has to determine whether a “default”
G has occurred, i.e., whether the “debt” (which may still be disputed) was
due and remained unpaid. If the Adjudicating Authority is of the opinion
that a “default” has occurred, it has to admit the application unless it is
incomplete. Speaking through Justice Rohinton F Nariman, the Court
has observed:
H
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 51
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
“28. When it comes to a financial creditor triggering the process, A
Section 7 becomes relevant. Under the Explanation to Section
7(1), a default is in respect of a financial debt owed to any financial
creditor of the corporate debtor — it need not be a debt owed to
the applicant financial creditor. Under Section 7(2), an application
is to be made under sub-section (1) in such form and manner as is
B
prescribed, which takes us to the Insolvency and Bankruptcy
(Application to Adjudicating Authority) Rules, 2016. Under Rule
4, the application is made by a financial creditor in Form 1
accompanied by documents and records required therein. Form 1
is a detailed form in 5 parts, which requires particulars of the
applicant in Part I, particulars of the corporate debtor in Part II, C
particulars of the proposed interim resolution professional in Part
III, particulars of the financial debt in Part IV and documents,
records and evidence of default in Part V. Under Rule 4(3), the
applicant is to dispatch a copy of the application filed with the
adjudicating authority by registered post or speed post to the D
registered office of the corporate debtor. The speed, within which
the adjudicating authority is to ascertain the existence of a default
from the records of the information utility or on the basis of evidence
furnished by the financial creditor, is important. This it must do
within 14 days of the receipt of the application. It is at the stage
of Section 7(5), where the adjudicating authority is to be E
satisfied that a default has occurred, that the corporate
debtor is entitled to point out that a default has not occurred
in the sense that the “debt”, which may also include a
disputed claim, is not due. A debt may not be due if it is not
payable in law or in fact. The moment the adjudicating F
authority is satisfied that a default has occurred, the
application must be admitted unless it is incomplete, in which
case it may give notice to the applicant to rectify the defect
within 7 days of receipt of a notice from the adjudicating
authority. Under sub-section (7), the adjudicating authority shall
G
then communicate the order passed to the financial creditor and
corporate debtor within 7 days of admission or rejection of such
application, as the case may be.
[…]
H
52 SUPREME COURT REPORTS [2021] 12 S.C.R.
A 30. On the other hand, as we have seen, in the case of a
corporate debtor who commits a default of a financial debt,
the adjudicating authority has merely to see the records of
the information utility or other evidence produced by the
financial creditor to satisfy itself that a default has occurred.
It is of no matter that the debt is disputed so long as the
B
debt is “due” i.e. payable unless interdicted by some law
or has not yet become due in the sense that it is payable at
some future date. It is only when this is proved to the
satisfaction of the adjudicating authority that the
adjudicating authority may reject an application and not
C otherwise.”
(emphasis supplied)
26. In the present case, the Adjudicating Authority noted that it
had 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.
D Evidently, no settlement was arrived at by all the original petitioners who
had instituted the proceedings. The Adjudicating Authority noticed that
joint consent terms dated 12 February 2020 had been filed before it. But
it is common ground that these consent terms did not cover all the original
petitioners who were before the Adjudicating Authority. The Adjudicating
E Authority was apprised of the fact that the claims of 140 investors had
been fully settled by the respondent. The respondent also noted that of
the claims of the original petitioners who have moved the Adjudicating
Authority, only 13 have been settled while, according to it “40 are in the
process of settlement and 39 are pending settlements”. Eventually, the
Adjudicating Authority did not entertain the petition on the ground that
F the procedure under the IBC is summary, and it cannot manage or decide
upon each and every claim of the individual home buyers. The Adjudicating
Authority also held that since the process of settlement was progressing
“in all seriousness”, instead of examining all the individual claims, it would
dispose of the petition by directing the respondent to settle all the
G remaining claims “seriously” within a definite time frame. The petition
was accordingly disposed of by directing the respondent to settle the
remaining claims no later than within three months, and that if any of the
remaining original petitioners were aggrieved by the settlement process,
they would be at liberty to approach the Adjudicating Authority again in
accordance with law. The Adjudicating Authority’s decision was also
H upheld by the Appellate Authority, who supported its conclusions.
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 53
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
27. The Adjudicating Authority has clearly acted outside the terms A
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
B
Adjudicating Authority in accordance with Section 7(5).The Adjudicating
Authority cannot compel a party to the proceedings before it to settle a
dispute.
28. Undoubtedly, settlements have to be encouraged because the
ultimate purpose of the IBC is to facilitate the continuance and C
rehabilitation of a corporate debtor, 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 D
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
E
in accordance with law. Such a course of action is not contemplated by
the IBC.
29. The IBC is a complete code in itself. The Adjudicating Authority
and the Appellate Authority are creatures of the statute. Their jurisdiction
is statutorily conferred. The statute which confers jurisdiction also F
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. In Pratap Technocrats (supra), a two-judge Bench of this Court,
speaking through Justice DY Chandrachud, held:
G
“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 H
54 SUPREME COURT REPORTS [2021] 12 S.C.R.
A decision, so long as it is otherwise in conformity with the
provisions of the IBC and the Regulations under the
enactment.
[…]
B 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
C within and as a product of a statutory framework.”
(emphasis supplied)
30. In Arun Kumar Jagatramka v. Jindal Steel & Power
Ltd.18, a two judge Bench of this Court issued a note of caution to the
D Adjudicating Authorities and the Appellate Authority against judicial
interference with the framework created by the IBC. Speaking through
Justice DY Chandrachud, the Court held:
“95…we do take this opportunity to offer a note of caution for
NCLT and NCLAT, functioning as the adjudicatory authority and
E appellate authority under the IBC respectively, from judicially
interfering in the framework envisaged under the IBC. As we
have noted earlier in the judgment, the IBC was introduced in
order to overhaul the insolvency and bankruptcy regime in India.
As such, it is a carefully considered and well thought out piece of
F legislation which sought to shed away the practices of the past.
The legislature has also been working hard to ensure that the
efficacy of this legislation remains robust by constantly amending
it based on its experience. Consequently, the need for judicial
intervention or innovation from NCLT and NCLAT should be kept
at its bare minimum and should not disturb the foundational
G
principles of the IBC…”
31. In the synopsis which has been appended to the paper book, a
tabulated statement has been appended for the purpose of indicating the
status of the settlement process. The statement is reproduced below:
18
H (2021) 7 SCC 474
E S KRISHNAMURTHY & ORS. v. M/S BHARATH HI TECH 55
BUILDERS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
A
B
C
D
E
F
The above statement indicates that a settlement has admittedly
not been arrived at by the respondent with all the appellants. Moreover,
in the present appeal, impleadment applications have also been filed on
behalf of an additional set of individuals claiming non-payment of their G
dues by the respondent.
32. For the above reasons, we have come to the conclusion 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 sought to make a distinction by observing that the H
56 SUPREME COURT REPORTS [2021] 12 S.C.R.
A directions of the Adjudicating Authority were at the ‘pre-admission stage’,
and that the order was not of such a nature which was prejudicial to the
rights and interest of the stakeholders. 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
B
estate market, including on the respondent. 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. The observation that the appeal
was not maintainable is erroneous. Plainly, the Adjudicating Authority
C failed to exercise the jurisdiction which was entrusted to it. A clear case
for the exercise of jurisdiction in appeal was thus made out, which the
Appellate Authority then failed to exercise.
33. We may note at this stage that the provisions of Section 7 of
the IBC have been amended with retrospective effect from 28 December
D 2019 by Act 1 of 2020. These provisions have been construed in the
judgment of this Court in Manish Kumar (supra). Since we are inclined
to restore the proceedings back to the Adjudicating Authority for a fresh
consideration, it is not necessary for this Court to dwell on any other
aspect, save and except for what weighed with the Adjudicating Authority
in disposing of the petition without adjudicating on other issues of
E maintainability or merits. We leave open all the rights and contentions of
the parties to be urged before and decided by the Adjudicating Authority.
34. We accordingly allow the appeal and set aside the impugned
judgment and order dated 30 July 2020 of the NCLAT in Company Appeal
(AT) (Insolvency) No 649 of 2020 and of the NCLT dated 28 February
F 2020 in CP (IB) No.188/BB/2019. The petition under Section 7 of the
IBC (i.e., CP (IB) No.188/BB/2019) is accordingly restored to the NCLT
for disposal afresh.
35. The impleadment applications shall stand disposed of, with
liberty being granted to the applicants to adopt appropriate proceedings
G in accordance with law before the Adjudicating Authority, or before such
other forum as they may be advised.
36. Pending application(s), if any, shall stand disposed of.
H Nidhi Jain Appeal allowed.
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "insolvency"Sign in to search