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SUPREME COURT ON THE ABDICATION OF JURISDICTION BY NCLT UNDER IBC: A CRITIQUE

INTRODUCTION

Pursuant to the introduction of insolvency and bankruptcy code (hereinafter referred to as “IBC”) in 2016, the entire legal framework concerning resolution in India has undergone structural change. The legal framework has empowered NCLT as the adjudicating authority predominantly to adjudge the fairness of the process and not intervene in the resolution process. Moreover, any structural lapse by the adjudicating authority would cripple the working of the code. While the inherent powers of the courts reflect the abundance of power they are vested with, the same power must be used to meet the ends of justice.

In the landmark case of Gujarat Urja Vikas v. Amit Gupta, the Supreme Court remarked that NCLT has the jurisdiction to adjudicate the disputes which have solely arisen from the issue of insolvency of the corporate debtor. Furthermore in the case of Tata Consultancy Services Limited v. Vishal Ghisulal Jain, wherein NCLT exercising its residuary jurisdiction granted a stay on the termination of the contract with the corporate debtor, the Supreme court highlighted that NCLT cannot intervene with the contractual rights of the parties unless they are affecting the resolution proceedings of the company. The present article will highlight the judgment of E S Krishnamurthy & Ors. v. M/s Bharath Hi-Tech Builders Pvt. Ltd, dated 14-12-2012, wherein the Apex court has held that the adjudicating authority as well as an appellate authority can encourage settlements but cannot compel the parties to settle the dispute when the petition has been filed under Section 7 of IBC.

FACTUAL BACKGROUND

The respondent along with IDBI Trusteeship Limited and Karvy Realty (India) Limited entered into a master agreement to sell in the year 2014 for the development of agricultural land. The facility agent under the agreement had to sell the plots to prospective purchasers against the payment of the lump-sum amount. While the parties were not able to generate the requisite funds, an additional loan agreement was entered between the respondent, IDBI Trusteeship Limited and facility agent and the amount for the same had to be used to develop the residential layout. In the year 2015-16, the facility agent advised the appellant and other clients to extend their loans to the respondent which was willfully done by the appellants. Furthermore, in 2016 the respondent extended the term of the loan agreement due to the inability to pay the same along with interest.

Thereafter the appellants instituted the petition under Section 7 of IBC before NCLT due to defaults in the repayments by the respondent wherein the adjudicating authority adjourned the proceedings because the parties are attempting to resolve. While the respondent failed in making any settlements towards the petitioners, the adjudicating authority provided for several opportunities to the respondents to settle the same and subsequent settlement was made with a few of them. Thus NCLT disposed of the petition on the grounds that the respondent efforts to settle the dispute are bonafide and that the initiation of CIRP will put in jeopardy the interest of all the stakeholders who have invested in the respondent’s project. Subsequently, the order was challenged but the appellate authority dismissed the same because the pandemic and the lockdown imposed have affected the business and concession should be given in adherence to timelines. Thereafter an appeal was filed against the NCLAT judgment before the Supreme court.

CONTENTIONS BY PARTIES TO THE DISPUTE

The appellants contended that NCLT has acted beyond their jurisdiction under IBC and hence the order should be set aside. Further, the orders are contrary to Section 7 requirements of IBC wherein the adjudicating authority merely has to satisfy whether a default has occurred or not and thereafter reject or accept the application. In the present case, there are numerous instances of default by the respondent and the same have not been settled with all the petitioners but even then the petition was dismissed at the pre-admission stage by the adjudicating authority and the same was upheld by the appellate authority. While both NCLT and NCLAT are creatures of the statute, they are bound by it and cannot act as courts of equity. The respondents thereafter contended that the reduced number of litigants in the present petition highlight that settlements have been done with many purchasers and efforts have been made to settle with the appellant but no options were agreeable to them and that the respondent should not be pushed to liquidation if few creditors are not willing to settle. Furthermore, the main objective of IBC is revival of the corporate debtor and protecting the same from corporate death.

THE ISSUE FOR DISCUSSION

  • Whether NCLT & NCLAT were correct in rejecting the appellant’s petition under Section & IBC at the pre-admission stage and directing them to settle with the respondents?

JUDGMENT

Through its decision in E S Krishnamurthy, the Supreme Court has emphasized on Section 7 of the code which provides for the initiation of CIRP by the financial creditor and highlighted on sub-section 5 of Section 7 which is comprised of two parts wherein the NCLT can either admit the application or reject the same. The Court emphasized that the statute does not provide for the adjudicating authority to undertake any other action, but for the two choices available. Supreme Court held that the adjudicating authority and the appellate authority cannot act as the court of equity and have ousted the terms of jurisdiction under Section 7(5) of IBC and it cannot compel the parties to settle the dispute as is not contemplated by IBC. Henceforth, the observation wherein the court said that the appeal is not maintainable is erroneous and the order by NCLT and NCLAT is set aside.

EXISTING JURISPRUDENCE ON THE POWERS OF NCLT AND NCLAT

Citing the case of Innoventive Industries Ltd. v. ICICI Bank, the Supreme Court remarked on the ambit of Section 7 IBC and held that the adjudicating authority only has to determine whether a default has occurred or not and on the basis of that, admit or reject the application. Thereafter the Court referred to the case of Pratap Technocrats (P) Ltd. and Others v. Monitoring Committee of Reliance Infratel Limited and Another wherein the courts held that the adjudicating as well as appellate authorities are bound by the code and do not have unchartered jurisdiction in equity. Furthermore, the case of Arun Kumar Jagatramka v. Jindal Steel & Power Ltd. also held that the judicial intervention or any innovation by the NCLT or NCLAT should be at its bare minimum and should not muddle the basic principles of IBC. Conclusively, in the present case, NCLT even after witnessing the defaults of the Corporate debtor, dismissed the application by the appellants erroneously at the pre-admission stage and directed the parties for settlement which was beyond their jurisdiction.

ANALYSIS AND CONCLUSION

The main objective of the code is to facilitate resolution in a time-bound manner balancing the interest of all stakeholders but the adjudicating authority abdicated their jurisdiction by directing settlement of claims. The Supreme Court, through its decision in E S Krishnamurthy, has once again made an active effort to consolidate the principles of the code and limit the jurisdictional powers of NCLT and NCLAT as mentioned in the code. It is important to emphasize that when disputes fall under a specific domain of the law that has an effective statutory remedy defined, then the courts should take recourse of the same. The underlying principle set by the Supreme Court in various cases is that the adjudicating authority must firstly assess the entire dispute and thereafter apply their judicious mind before giving any verdict.

In the present case, the adjudicating, as well as the appellate authority, were erroneous in dismissing the application of the financial creditors and giving time to the respondent to settle the claims which they were not empowered to do. The Supreme court in the present case has rendered clarity to the legal position and the extent of jurisdictional powers, the NCLT and NCLAT can use while adjudicating such disputes. Furthermore, the bench has emphasized that although settlements have to be encouraged as the ultimate purpose of the code is the rehabilitation of the debtor but the courts cannot direct settlements to the parties acting as courts of equity.   

Author(s) Name: Hiteshi Wadhwani (NMIMS, Mumbai)

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