Supreme Court: NCLT cannot direct parties to settle a dispute

The Supreme Court in its recent judgment in E.S. Krishnamurthy and Ors. vs. M/s. Bharath Hi-Tech Builders Private Limited held that the NCLT cannot compel any party to settle a dispute. The Court was reiterating that the powers of the National Company Law Tribunal under Section 7 of the Insolvency and Bankruptcy Code are restricted only to verifying whether or not a ‘default’ has occurred, basis which it may decide to either admit or reject an application for initiation of corporate insolvency resolution process (CIRP). .The judgment marks an important checkpoint in relation to the extent of the NCLT’s jurisdiction and powers at the pre-admission stage of an application filed under the Code seeking an initiation of CIRP.Before analysing the judgment, it is necessary to advert briefly to the factual background..In order to raise funds for development of 100 acres of agricultural land, the Corporate Debtor, IDBI Trusteeship Limited and Karvy Realty (India) Limited (Facility Agent), entered into a Master Agreement to Sell dated 22 June 2014 (Master Agreement) under which the Facility Agent was to sell plots to prospective purchasers against the payment of a lumpsum amount..Since the requisite funds for developing the land could not be raised, a Syndicate Loan Agreement dated 22 November 2014 (Loan Agreement) was entered into between the Corporate Debtor, Facility Agent and IDBI Trusteeship Limited for availing a term loan of INR 18 Crores from prospective lenders who would have to sign separate Deed(s) of Adherence. In terms of the Loan Agreement, the Corporate Debtor was obligated to repay the loans to each of the lenders within a period of twenty-four (24) months from the date of execution of the Loan Agreement. In 2015-16, certain clients of the Facility Agent signed the requisite Deed of Adherence and advanced loans aggregating to over INR 15 Crores to the Corporate Debtor..The Corporate Debtor defaulted in repaying the loans within the time stipulated under the Loan Agreement and requested for an extension of twelve (12) months. In view of such default on the part of the Corporate Debtor, eighty-three (83) lenders (Petitioning Creditors) collectively instituted an application under Section 7 of the Code (Insolvency Application) before the NCLT, Bengaluru Bench..On 27 February 2020, the Corporate Debtor informed the NCLT that a settlement had been arrived at with thirteen (13) petitioners and negotiations for settlement with the remaining seventy (70) petitioners were in process. By way of its order dated 28 February 2020 (NCLT Order), the NCLT disposed-off the Insolvency application while directing the Corporate Debtor to settle the claims made by seventy (70) petitioners within three (3) months and granting liberty to the Petitioners to approach the NCLT, if they were aggrieved by the settlement process..Aggrieved by the NCLT Order, seven (7) petitioners out of the Petitioning Creditors, preferred an appeal under Section 61 of the Code before the National Company Law Appellate Tribunal (NCLAT). The NCLAT, vide its judgment dated 30 July 2020 (NCLAT Judgment), dismissed the appeal based on the reasons that a) the NCLT ensured that the rights of all the Petitioning Creditors remain protected as it stipulated a fixed time-frame for the Corporate Debtor to arrive at a settlement with them and also granted them the option to approach the NCLT in the event their claims remain unsettled on expiry of the said time-frame; b) even if the time-frame for settlement had elapsed, the Corporate Debtor must be shown leniency as it had been severely impacted due to the financial implications of the Covid-19 pandemic; and c) allowing the Corporate Debtor to go into CIRP/liquidation would adversely impact the interests of homebuyers and hence, ought to be avoided..In view thereof, a civil appeal was filed before the Supreme Court by seventeen (17) appellants (eleven (11) of whom were from amongst the Petitioning Creditors), challenging the legality and validity of the NCLT Order as well as the NCLAT Judgment..The issue which arose for the consideration of the Supreme Court was whether the NCLT, in exercise of its powers under the Code, was correct in disposing-off the Insolvency Application merely on the basis that the Corporate Debtor had initiated the process of settlement with the Petitioning Creditors..The Supreme Court delved into the reasons which were considered by the NCLT as well as the NCLAT while passing the NCLT Order and the NCLAT Judgment respectively. However, it did not subscribe to the views and reasoning adopted by either..The Supreme Court observed that the powers of the NCLT, while considering an application under Section 7 of the Code, are circumscribed by sub-section (5) of the said provision. Upon examination of the provisions of the Code, the Supreme Court took the view that in an application under Section 7 of the Code, only two courses of action are available to the NCLT i.e. a) it may either admit the application under Section 7(5)(a) of the Code; or b) it may either reject the application under Section 7(5)(b) of the Code..The Supreme Court further laid emphasis on the fact that though settlements ought to be encouraged by the NCLT since it falls in line with the scope and purpose of the Code i.e. to facilitate the continuance and rehabilitation of the corporate debtor, however, the NCLT cannot compel or direct the corporate debtor or its creditors to settle their claims while acting as a ‘court of equity’, as was done in this case. In this regard, the Supreme Court relied upon one of its recent judgments in Pratap Technocrats (P) Ltd. and Ors. vs. Monitoring Committee of Reliance Infratel Limited and Anr..On the basis of the above, the Supreme Court concluded that the NCLT had travelled beyond the scope of its jurisdiction under the Code as the course of action adopted by it, is not contemplated under Section 7(5) of the Code or any other provision of the Code. In view of the above, the Supreme Court set aside the NCLT Order and the NCLAT Judgment and remanded the matter to the NCLT for fresh consideration..The judgment is a positive development as it clarifies the scope and ambit of the NCLT’s jurisdiction and powers at the pre-admission stage of an application under Section 7 of the Code and rightly distinguishes NCLT/NCLAT (which are statutory tribunals) from ‘courts of equity’. Moreover, the judgment is a much-needed rectification to the insolvency regime in the country, as the disposal of an application merely on the possibility of a settlement being arrived at between the corporate debtor and its creditors is repugnant to the very letter and spirit of the Code..On the other hand, the Judgment leaves a grey area as it does not test the legality of the NCLT Order and the NCLAT Judgment on the anvil of the NCLT’s inherent powers under Rule 11 of the NCLT Rules of 2016 which empowers it to pass any orders as may be necessary for meeting the ends of justice or to prevent abuse of its process..In this regard, it may be pertinent to note that the NCLAT in NUI Pulp and Paper Industries Private Limited vs. Roxcel Trading GMBH4, specifically upheld the inherent powers of the NCLT under Rule 11 of the NCLT Rules, which was further, affirmed by the Supreme Court. Thus, the Supreme Court appears to have overlooked the aforesaid decision which might further complicate the aforesaid issue and lead to further litigation regarding the same.

Supreme Court: NCLT cannot direct parties to settle a dispute

Introduction