IBC- Adjudicating Authority and Appellate Authority can Encourage Settlements, Cannot Direct Them


This post has been written by Rishika Sharma a student of the 4th Year, B.B.A.LL.B.

Symbiosis Law School, Noida who is currently working as an intern with Sigma Chambers.

Case: ES Krishnamurthy v. Bharath Hi Tech Builders Private Limited

Citation: 2021 SCC OnLine 1242

Bench: D.Y. Chandrachud and A.S. Bopanna, JJ


Introduction

Recently, in the decision of ES Krishnamurthy v. Bharath Hi Tech Builders Private Limited, the Supreme Court laid down certain principles:

  • The AA must either admit the application under Section 7(5)(a) or it must reject it under Section 7(5)(b). These are the only two choices available to the AA ss per the provisions of the IBC.

  • The AA cannot compel the parties to settle their dispute.

  • Even though the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.

This case note provides a brief analysis of the aforementioned judgement pronounced by the Apex Court while tracing the dictums of the NCLT and NCLAT.


Facts

  • On 22 June 2014, a Master Agreement to Sell was executed between the Bharath Hi Tech Builders Pvt. Ltd (hereinafter referred to as the Respondent), IDBI Trusteeship Limited and Karvy Realty (India) Limited (hereinafter referred to as the Facility Agent). The purpose of this agreement was to raise an amount of Rs 50 crore for the development of 100 acres of agricultural land. Required funds could not be generated through the aforesaid Master Agreement.

  • Consequently, on 22 November 2014, a Syndicate Loan Agreement was entered into between the Respondent, IDBI Trusteeship Limited and the Facility Agent. This agreement was executed in order to avail a term loan of Rs. 18 crore from prospective lenders. It is the allegation of the Appellants that Rs. 15 crore from nearly 300 investors was raised through the loan agreement.

  • One allottee who was also the original petitioner in the petition before NCLT, was sent a letter by the Respondent wherein he sought for extension in conveying of the plot and assured that if Respondent fails to convey the plot by 31 October 2016, the entire amount which was paid would be returned, together with interest as agreed in the Master Agreement itself.

  • Subsequently, in the month of November, 2016, the Respondent also extended the loan agreement by 12 months due to inability to pay.

  • On 26 April, 2019, a Section 7, a petition was filed before the Adjudicating Authority (“AA”). The AA 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 was granted by the AA. In subsequent hearings also the Respondent informed the AA that it was exploring the possibility of a settlement and it furnished a memo stating that it had reached a settlement with 140 investors.

  • It was the case of the appellants that out of 83 petitioners who were before the AA in the petition, a settlement had been arrived at only with 13 petitioners. So, actually, there was no settlement with the other 70 petitioners before the NCLT.

NCLT’s Decision


The NCLT disposed of the petition on the following grounds:

  • The Respondent had made efforts to settle the dispute and this was substantiated by the submission that they had already settled with 140 investors.

  • There was ongoing settlement with the remaining petitioners.

  • Considering the summary nature of IBC, individual case management of the 83 petitioners could not be done.

  • If CIRP is initiated then it will endanger the interests of the homebuyers and financial creditors.

NCLAT’s Decision

  • The NCLAT upheld the decision of NCLT and dismissed the appeal on the following grounds:

  • The NCLT had taken into account the ongoing settlement process and had therefore dismissed the Section 7 petition at the 'pre-admission stage' itself.

  • The NCLT had recognised the rights of all the petitioners by setting a time-frame for settlement by the Respondent. It also gave them the option of approaching it in case their claims remained unsettled

  • The COVID-19 pandemic had hit all businesses and so even though the time frame for settlement had elapsed, the Respondent had to be shown leniency.

  • Liquidation is the last resort and the interests of the home buyers have to be safeguarded.

Issue before the Supreme Court


Whether the AA can dismiss a Section 7 petition under the IBC without applying its mind to the merits of the petition on the basis that the corporate debtor has initiated the process of settlement with the financial creditors and whether this is within the ambit of the provisions under the IBC?


Supreme Court’s Decision


The Apex Court set aside the decisions of both NCLT and NCLAT and made the following observations:

  • That the AA must either admit the application under Section 7(5)(a), IBC or it must reject it under Section 7(5)(b) of IBC. As per the provisions of the IBC the AA is not equipped to undertake any other action, but for the two choices available. The AA has the authority to determine whether a default has occurred or not and upon that determination, it must either admit or reject the petition.

  • The Court went on to say that the AA cannot compel a party to the proceedings before it to settle a dispute. However, in the present case, “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.” The Court opined that this falls outside the ambit of IBC.

  • The Supreme Court referred to its judgement in the case of Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Limited wherein it had 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.”

  • Thus the Apex Court opined, “while the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.”

Conclusion

Through this judgement, the Supreme Court has once again demarcated the powers that can be exercised by the NCLT and NCLAT in IBC related matters. It is important that the sanctity of the code is respected by the Tribunals and they must not exceed in their jurisdiction by compelling the parties to settle the matters.



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