SC Scrutinizes NCLT’s Powers Conferred under Section 7(5) of IBC

[Govind Gupta and Roshi Surele are 3rd Year BA. LL.B. students at the Institute of Law, Nirma University, Ahmedabad]

The Insolvency and Bankruptcy Code, 2016 (“IBC”) is a complete code in itself. Both the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) derive their powers in insolvency matters from the IBC itself while their jurisdiction is statutorily conferred. Therefore, the NCLT and NCLAT can encourage settlements but cannot direct the same by acting as courts of equity. Section 7(5) of the IBC confers powers to the NCLT to decide whether a default has occurred and based on this observation, the NCLT may decide whether to allow the Corporate Insolvency Resolution Process (“CIRP”). There is no other course of action available apart from these two. However, in an order dated 28 February, 2020, the NCLT, at its Bengaluru branch, not only ignored the fact that a default had occurred but also directed the parties to settle the dispute within three months. This order was upheld by the NCLAT, acting as the Appellate Authority. Recently, the Supreme Court, in E S Krishnamurthy v. Bharath Hi Tech Builders, set aside the aforementioned order and clarified the position regarding powers conferred to the authorities under section 7 of the IBC.

Facts of the Case

Bharath Hi Tech Builders, the Corporate Debtor, had entered into a “Master Agreement to Sell” followed by a “Syndicate Loan Agreement” with IDBI Trusteeship Limited and Karvy Realty (acting as the Facility Agent) to secure funds for the development of an agricultural land by selling plots to prospective buyers and acquiring loans from prospective lenders. Owing to the Corporate Debtor’s inability to settle the claims, even after being provided with extensions, CIRP was initiated against the Corporate Debtor under section 7(5) of the IBC at the Bengaluru branch of the NCLT.

NCLT, through its order, declined to admit the petition based on the grounds that Bharat Hi-Tech  was undertaking settlements seriously and in turn ordered it to settle the claims within three months. The NCLAT dismissed the appeal against this order citing that the NCLT had dismissed the petition at the “pre-admission stage” when the settlement process was underway. Furthermore, it observed that some leniency must be shown to the Corporate Debtor due to harsh effects of the covid-19 pandemic on businesses, that pushing them into liquidation must be the last resort, and that the claims of the home buyers had to be given priority. This ruling was challenged before the Supreme Court.

Issue in Question

The central question in the appeal before the Supreme Court was whether the NCLT and the NCLAT were correct in their approach of rejecting the appellant’s petition under section 7 of the IBC citing the “pre-admission stage”, while directing them to settle with the Corporate Debtor within 3 months.

Judgment

In its judgment, the Supreme Court, vide literal interpretation of the section 7 of the IBC, set aside the order given by the NCLT and the NCLAT. The court clarified that the NCLT has no power under section 7(5) of IBC to compel parties before it to settle disputes, and that the only power it has been conferred under the statute is to evaluate whether a default has occurred or not and accordingly admitting or dismissing the petition for CIRP.

Critical Analysis

In the present case the Supreme Court streamlined its focus in answering whether the NCLT can dispose of the case under section 7 of the IBC at the pre-admission stage. On a bare reading of the provision, the Court enunciated that the two courses available to the NCLT are either to admit the application under section 7(5)(a) or to reject the application under section 7(5)(b). The Court placed reliance on the case Innoventive Industries v. ICICI Bank while explaining the scope of section 7 of the IBC and held that the NCLT shall admit the application at the moment the NCLT is satisfied that a default has occurred, unless the application is incomplete. There was no such issue of incomplete application in the present case and subsequently, the NCLT was duty bound to admit the case.

Clearly, the NCLT has acted erroneously by overstepping the jurisdiction conferred to it under section 7(5). The NCLT and the NCLAT are creatures of the statute itself, and therefore they are duty bound to abide by the discipline of the provisions of the same statute, as enunciated and upheld in the case Pratap Technocrats vs Monitoring Committee of Reliance. Significantly, in the case Arun Kumar Jagatramka  v. Jindal Steel & Power, the NCLT and NCLAT were issued a note of caution against judicial interference with the framework formulated by the IBC. In contrast to the aforementioned judgment, the NCLT in the present case interfered with the established framework of IBC by opting for a course of action which is not contemplated by the IBC.

The NCLAT failed to duly take into the notice that the NCLT has erred in observing that the petition submitted under section 7 was disposed of at a ‘pre-admission stage’. This course of action is neither envisaged nor contemplated by the IBC.

Conclusion

The IBC is a complete code in itself which facilitates the CIRP in a “time bound” manner ensuring that the rights of the stakeholders and the creditors are well protected. In the present case the NCLT abdicated its jurisdiction under section 7 by directing the Corporate Debtor to settle remaining claims within the tenure of 3 months and leaving it open to the persons aggrieved by the settlement process undertook by the Corporate Debtor to file a fresh proceeding pursuant to law. The action taken by the authorities exhibits a complete failure to exercise jurisdictional power to serve justice. Such powers are not conferred by the IBC and cannot be interpreted so.

The NCLT and the NCLAT jurisdictional power conferred by the statue itself. As mentioned in Pratap Technocrats, the NCLT and the NCLAT can encourage settlements, but they cannot direct them to do the same, by acting as a court of equity. Moreover, in the present case, the NCLT  created prejudice by observing that the rights of allottees in the housing project must be given primacy. The NCLT also emphasized that the project entity/corporate debtor should not be sent into liquidation solely at the behest of the other investors. This observation has created a subclass within the class of financial creditors.

The Supreme Court has rightly pinpointed the powers of the NCLT and the NCLAT and highlighted that the statute which confers jurisdiction, also structures and circumscribes the ambit of such jurisdiction. Therefore, the NCLT and the NCLAT must act within the conferred jurisdiction in accordance with the law.

Govind Gupta & Roshi Surele

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