RECENT JUDGMENTS

E S Krishnamurthy & Ors v. M/s Bharath Hi Tech Builders Pvt Ltd

Supreme Court of India | Judgment dated December 14, 2021 [Civil Appeal No. 3325 of 2020]

Background facts

  • On June 22, 2014, a Master Agreement to Sell (Master Agreement) was entered into between IDBI Trusteeship Ltd and Karvy Realty (India) Ltd which aimed to raise an amount of INR 50 crore for the development of 100 acres of agricultural land. Since the required funds could not be generated through the Master Agreement, a Syndicate Loan Agreement was entered into for availing a term loan of INR 18 crore from prospective lenders. However, due to the default on the part of M/s Bharath Hi Tech Builders Pvt Ltd (Respondent) to make the repayment of an amount of INR 33,84,32,493, 11 out of the 17 financial creditors including E S Krishnamurthy (Appellants) filed an Application under Section 7 of the IBC on April 26, 2019, before the NCLT, Bengaluru.
  • In the proceedings before the NCLT, the proceedings were initially on the ground that the parties were attempting to resolve the dispute. The NCLT further granted requests of extension of time to the Respondent to settle the dispute with the Appellants. Thereafter, the Respondent filed a memo before the NCLT stating that it had reached a settlement with 140 investors.
  • Thereafter, NCLT vide Order dated February 28, 2020, disposed of the petition on the grounds that the Respondent's efforts to settle the dispute were bona fide and that the initiation of CIRP in respect of the Respondent would put in jeopardy the interests of home buyers and creditors who had invested in the Respondent's project. NCLT also issued directions requiring the Respondent to settle the remaining claims within 3 months and where any of the Petitioners were aggrieved by the settlement process, they would be at a liberty to again approach the NCLT in accordance with the law.
  • Aggrieved by the same, the Appellants preferred an Appeal before the NCLAT. The NCLAT vide Order dated July 30, 2020 (Impugned Order) dismissed the Appeal and upheld the Order passed by NCLT. The NCLAT held that the Section 7 Application had been disposed of at the 'preadmission stage' by the NCLT because it recognized that the settlement process was underway wherein the claims of maximum number of stakeholders had been settled. The NCLAT also observed that the NCLT had protected the rights of all the Appellants by setting a time frame for settlement by the Respondent and also providing them with the option of approaching the NCLT if their claims remained unsettled. It also held that in disputes of such a nature, the claims of the homebuyers must be given priority and the Respondent should only be pushed into liquidation as a last resort.
  • Aggrieved by the Impugned Order of NCLAT, the Appellants filed the present Appeal before the SC.

Issue at hand?

  • Whether the NCLT and the NCLAT were correct in dismissing the Appellants Application under Section 7 of the IBC at the pre-admission stage and directing them to settle with the Respondent within 3 months?

Decision of the Tribunal

  • At the outset, SC expounded upon the scope of Section 7 of the IBC and observed that Section 7(5) comprises of two parts i.e., clause (a) which empowers the NCLT to admit an application and clause (b) which empowers the NCLT to reject the Application filed under Section 7 of IBC. Therefore, the IBC provides for only two courses of action to the NCLT in an Applicant under Section 7. In this regard, SC placed reliance on the decision of Innoventive Industries Ltd. v ICICI Bank1 , wherein it was held that within the ambit of Section 7 of IBC, the NCLT has to only determine whether a default has occurred and if the NCLT is satisfied that a default has occurred, it must admit the application unless the same is incomplete.
  • Accordingly, SC held that the NCLT in disposing the Application had acted outside the terms of its jurisdiction under Section 7(5) of IBC as it is only empowered to ascertain whether a default has occurred or not. Based on its determination, the NCLT is empowered to either admit or reject an Application and since only two courses of action are available to the NCLT within the ambit of Section 7(5) of IBC, it cannot compel a party before it to settle a dispute.
  • SC further observed that while settlements must be encouraged as the purpose of IBC is to facilitate the continuance and rehabilitation of a Corporate Debtor, the NCLT and NCLAT cannot abdicate their jurisdiction to decide an Application under Section 7 by directing the Respondent to settle the claims. The SC further was of the view that their jurisdiction is statutorily conferred and while they can encourage settlements, they cannot direct them by acting as courts of equity.
  • In reaching the findings, SC reinforced its earlier decision in Pratap Techocrats Ltd. v Monitioring Committee of Reliance Infratel Ltd2 , which held that there is no residual equity-based jurisdiction in NCLT or NCLAT unless it is in conformity with the provisions of the IBC and the two authorities are duty bound to abide by the discipline of the statutory provisions.
  • In view of the above, SC held that the Orders passed by the NCLT and the NCLAT suffered from an abdication of jurisdiction and therefore, allowed the appeal and set aside the Impugned Judgment and the Order of NCLT. SC directed restoration of Application filed under Section 7 of IBC to the NCLT for fresh disposal.

HSA Viewpoint

The present judgment has established the scope of jurisdiction of the NCLT and NCLAT under Section 7 of the IBC and has cautioned NCLT and NCLAT that while deciding case under the IBC, they are bound by the framework of IBC. SC has laid down in clear terms that the NCLT and NCLT have no equitable or residual jurisdiction to direct the parties to attempt and settle the dispute and must maintain judicial discipline and follow the well determined precedents considering that CIRP process is time sensitive.

Krrish Realtech Private Ltd

NCLAT, New Delhi | Judgment dated December 21, 2022 [Company Appeal (AT) (Insolvency) Nos. 1008, 1009 & 1010 of 2021]

Background facts

  • Krrish Realtech Private Ltd (Corporate Debtor), instituted an Application for pre-packaged insolvency resolution process under Section 54C of the IBC.
  • In terms of Section 54A of the IBC, prior to filing an Application for initiation of pre-packaged insolvency resolution process, the Corporate Debtor needs to convene a meeting of its Financial Creditors to seek an approval of at least 66% of the Financial Creditor for filing such application. In lieu of the same, a notice of at least 5 days is required to be given to all the creditors, informing them of such meeting.
  • In the present case, when the matter was listed for the first before the Adjudicating Authority for consideration of the Application for initiation of pre-packaged insolvency resolution process, various objectors filed several Applications objecting the Application filed by the Corporate Debtor for initiation of resolution process.
  • The Adjudicating Authority vide order dated November 23, 2021 (Impugned Order), issued notice on such Applications filed by the Objectors, and directed the Appellant to file a reply.
  • Aggrieved by the same, the Appellant filed the present Appeal before the NCLAT on the ground that Adjudicating Authority has no power to grant an opportunity to any objector raising objections on an Application filed by a Corporate Debtor to initiate the resolution process under Part-III(A).

Footnotes

1 (2018) 1 SCC 407

2 2021 SCC OnLine SC 569

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