NCLT, NCLAT cannot direct settlement by acting as courts of equity: Supreme Court

The Supreme Court has held that the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) cannot act as courts of equity by directing parties to settle the dispute before it [ES Krishnamurthy v. M/S Bharath Hi Tech Builders Pvt Ltd]..While setting aside orders passed by the NCLT and NCLAT dismissing a petition filed under Section 7 of the Insolvency and Bankruptcy Code (IBC) for initiating the Corporate Insolvency Resolution Process (CIRP) in a case, the Bench of Justices DY Chandrachud and AS Bopanna held,"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.".The Bench opined that while settlements can be encouraged by the NCLT and NCLAT to achieve the objectives of the IBC, "they cannot direct them by acting as courts of equity." .The case arose out of a master agreement to sell which was entered into between IDBI Trusteeship Limited and Karvy Realty (India) Limited in 2014, in order to raise an amount of ₹50 crores for the development of 100 acres of agricultural land. In 2019, a number of appellants before the Court filed a Section 7 application before the NCLT, Bengaluru due to the respondent’s default in making the repayment of over ₹33 crore..In its order passed in February 2020, the NCLT disposed of the petition after noting that both parties had filed joint consent terms. However, these consent terms were arrived at by the respondent with only one of the petitioners before the NCLT, and not with all of the petitioners.The NCLT noted that the respondent had settled with 140 investors and was in the process of settlement with 40 other investors. It was also held that 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. The Tribunal thus directed the respondent to settle the matter within three months and allowed the original petitioners to approach it if they are still aggrieved.On appeal, the NCLAT supported the NCLT's conclusion and upheld its decision. Aggrieved by this decision, the appellants moved the Supreme Court..The primary question before the apex court was whether the NCLT 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. The Court found that the NCLT and NCLAT had abdicated their jurisdiction to decide a petition under Section 7 by directing the respondent to settle the remaining claims within three months, noting that such a course of action is not contemplated under the IBC."The observation that the appeal was not maintainable is erroneous. Plainly, the Adjudicating Authority 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," the Court added..The Court thus set aside the orders of the NCLT and the NCLAT and reinstated the Section 7 petition before the NCLT for fresh disposal..Advocate Srijan Sinha appeared for the appellants while Advocate Aakanksha Nehra argued for the respondent..[Read judgment]