NCLT, NCLAT cannot force parties to settle an issue under IBC: Supreme Court

The Supreme Court of India has said that the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal can encourage settlements under the Insolvency and Bankruptcy Code (IBC) but they cannot direct parties to settle an issue by acting as courts of equity.

The apex court of the India in an order dated 14 December 2021 said that the Adjudicating Authority (NCLT) as well as the appellate authority (NCLAT) failed to exercise the jurisdiction which was entrusted to them by directing the parties involved in Section 7 of IBC to settle aggrieving the petitioner.

The Supreme Court said in its order: “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 Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.”

Brief of the case

The case is related to an insolvency application filed under Section 7 of IBC by purchasers of plots against Bengaluru-based real estate company Bharath Hi Tech Builders Pvt. Ltd.

Bharath Hi Tech Builders, IDBI Trusteeship Limited and Karvy Realty (India) Limited had entered in to a Master Agreement to raise an amount of Rs 50 crores for the development of 100 acres of agricultural land. As per the agreement, the Facility Agent (Karvy Realty) was to sell the plots to prospective purchasers against the payment of a lumpsum amount, and Bharat Hi Tech Builders was then required to pay interest at the rate of 25% per annum compounded annually to the purchaser. However, when the requisite funds could not be generated through the Master Agreement, a Syndicate Loan Agreement was entered into between Bharat Hi Tech, IDBI Trusteeship Limited and the Facility Agent on 22 November 2014 for availing a term loan of Rs 18 crores from prospective lendersIn 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 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.

Bharta Hi Tech and its partners also raised Rs 15 crore in first tranche from 300 purchasers.

However, when Bharat Hi tech Builders failed to deliver the plots and also return the amount paid by the purchasers, some of them (83) in April 2019 filed insolvency petition against the builder under Section 7 of the IBC for default in making the repayment of an amount of Rs 33.84 crore

On 27 February 2020, the respondent filed a memo before the Adjudicating Authority stating that it had reached a settlement with 140 investors. According to the appellants, however, out of 83 petitioners 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.

Eventually, by its order dated 28 February 2020, the NCLT disposed of the petition.

The Adjudicating Authority noted that both the learned Counsels have filed Joint Consent Terms dated 12 February 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 “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”.

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 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.

The order of the Adjudicating Authority was challenged in appeal before the NCLAT by seven of the original petitioners, all of whom were also appellants before the Supreme Court, along with certain other allottees who were not original petitioners before the NCLT.

However, the NCLAT in an order dated 30 July 2020, dismissed the appeal.

SC argument

The apex court in its order said that Section 7 of the IBC empowers the Adjudicating Authority to either admit or reject application if certain conditions are met (or not met). The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available. The Apex Court said that forcing the parties to settle is not a choice available to either the adjudicating or appellate authority.

The court further said that in the present case, the Adjudicating Authority has clearly acted outside the terms 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 Adjudicating Authority in accordance with Section 7(5). The Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute.

It further said that the Adjudicating Authority and Appellate Authority had abdicated 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,” it concluded.

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