Case Note & Summary
The present appeal under Section 62 of the Insolvency and Bankruptcy Code, 2016 (IBC) arises from a judgment of the National Company Law Appellate Tribunal (NCLAT) dated 30 July 2020, which upheld an order dated 28 February 2020 of the National Company Law Tribunal (NCLT) at its Bengaluru Bench. The appellants, E S Krishnamurthy and others, had filed a petition under Section 7 of the IBC for initiating the Corporate Insolvency Resolution Process (CIRP) against the respondent, M/s Bharath Hi Tech Builders Pvt. Ltd., a corporate debtor. The dispute originated from a Master Agreement to Sell dated 22 June 2014 between the respondent, IDBI Trusteeship Limited, and Karvy Realty (India) Limited to raise Rs 50 crores for development of agricultural land. Under the Master Agreement, the Facility Agent was to sell plots to prospective purchasers, and the respondent was to pay 25% interest compounded annually. The ninth appellant was allotted a plot for Rs 12,50,000, with conveyance due by 21 March 2016. Subsequently, a Syndicate Loan Agreement dated 22 November 2014 was entered into for a term loan of Rs 18 crores, with an assured return of 20% per annum. The appellants, except the ninth appellant, extended term loans under this agreement. The respondent defaulted on repayment, leading to a petition under Section 7 for an alleged default of Rs 33,84,32,493. The NCLT, at the pre-admission stage, instead of admitting or rejecting the petition, directed the respondent to settle the claims within three months, noting that the respondent had settled with 140 investors and the project was in advanced stage. The NCLAT dismissed the appeal, holding that the order was not prejudicial and that claimants could approach the NCLT again if claims remained unsettled. The Supreme Court framed the issue as whether the Adjudicating Authority can, without applying its mind to the merits of a Section 7 petition, dismiss it on the basis that the corporate debtor is exploring settlement. The Court held that the NCLT's order was without jurisdiction and contrary to the scheme of the IBC. The Court emphasized that under Section 7, the Adjudicating Authority must ascertain the existence of a default and, if satisfied, admit the petition; it cannot direct a settlement without considering individual claims. The Court set aside the orders of the NCLT and NCLAT and remanded the matter to the NCLT for fresh consideration of the Section 7 petition in accordance with law.
Headnote
A) Insolvency and Bankruptcy Code - Section 7 Petition - Adjudicating Authority's Duty - The Adjudicating Authority must apply its mind to the merits of a Section 7 petition and determine whether there is a default, and if satisfied, admit the petition or reject it; it cannot dismiss the petition merely because the corporate debtor is exploring settlement without considering the individual claims of the financial creditors. (Paras 4, 14-18) B) Insolvency and Bankruptcy Code - Settlement at Pre-Admission Stage - Jurisdiction - The NCLT has no jurisdiction to direct a corporate debtor to settle claims within a time frame without admitting or rejecting the Section 7 petition; such an order is without authority of law and cannot be sustained. (Paras 14-18) C) Insolvency and Bankruptcy Code - Summary Procedure - Individual Claims - The summary nature of proceedings under the IBC does not permit the Adjudicating Authority to avoid examining individual claims of financial creditors; each creditor's right to seek initiation of CIRP must be considered on its own merits. (Paras 7, 14-18)
Issue of Consideration
Whether the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 can, without applying its mind to the merits of a 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.
Final Decision
The Supreme Court allowed the appeal, set aside the orders of the NCLT dated 28 February 2020 and the NCLAT dated 30 July 2020, and remanded the matter to the NCLT for fresh consideration of the Section 7 petition in accordance with law. The Court held that the NCLT's order directing settlement without admitting or rejecting the petition was without jurisdiction and contrary to the scheme of the IBC.
Law Points
- Adjudicating Authority must apply mind to merits of Section 7 petition
- cannot dismiss petition merely because corporate debtor is exploring settlement
- Section 7 IBC requires determination of default and admission or rejection
- settlement cannot be directed without considering individual claims
- NCLT's order directing settlement without admission or rejection is without jurisdiction
