SC scrutinizes NCLT’s Powers conferred under

Section 7(5) of IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) is a complete code in itself. Both the National
Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT)
derive their powers from the IBC itself while their jurisdiction is statutorily conferred. Therefore,
while these Adjudicating Authority and the Appellate Authority can encourage settlements but
cannot direct the same acting as courts of equity. Section 7(5) of the IBC confers powers to the
NCLT to decide whether a default has occurred or not and based on this observation, the NCLT
may decide whether to allow the Corporate Insolvency Resolution Process (CIRP) or not and
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 was
made but also directed the parties to settle the dispute within three months and this order was
upheld by the NCLAT, the Appellate Authority. Recently, the Hon’ble Supreme Court in the
case E S Krishnamurthy & Ors. v. M/s Bharath Hi Tech Builders Pvt. Ltd. dated 14 December,
2021 had set aside the aforementioned orders of both the authorities and cleared its stance
regarding powers conferred to them under sections 7 of the IBC.

Facts of the Case

M/s Bharath Hi Tech Builders Pvt. Ltd., the corporate debtor, has entered into a “Master
Agreement to sell” followed by a “Syndicate Loan Agreement” with IDBI Trusteeship Limited
and Karvy Realty (India) Limited (Facility Agent) to secure funds for the development of an
agricultural land by selling plots of land to prospective buyers and acquiring loans from the
prospective lenders. Owing to the inability of the corporate debtor to settle the claims, even after
being provided with said extensions, both for the conveying of the plots followed by term of the
Loan Agreement, of the aggrieved under the Master Agreement, CIRP was initiated against the
corporate debtor under section 7(5) of the IBC at the Bengaluru branch of the NCLT.
NCLT, by its order, declined to admit the petition based on the grounds that the Corporate
Debtor was undertaking settlements seriously and in turn ordered the Corporate Debtor to settle
the claims within three months. Upon appeal at the NCLAT against the impugned order of the
NCLT, the appellate tribunal dismissed the appeal citing that the NCLT had dismissed the
petition at the ‘pre-admission stage’ during the settlement process was underway, furthermore,
due to harsh effects of covid-19 pandemic on businesses, some leniency must be shown to the
Corporate Debtor and pushing them into liquidation must be the last resort and the claims of the
home buyers had to be given priority. Thus, the aggreived challenged the aforementioned ruling
by the NCLAT before the Hon’ble Supreme Court.

Issues In Question

The central question in the appeal made before the Hon’ble Supreme Court was that:

● Whether the NCLT and the NCLAT were correct in their approach of rejecting the
appellant’s petition under section 7 of the IBC citing ‘pre-admission stage’, while
directing them to settle with the Corporate Debtor within 3 months.

Judgment

In the pronounced judgement of ES Krishnamurthy, the Supreme Court, vide literal

interpretation of the section 7 of the IBC, had set aside the order given by NCLT and the
NCLAT. The court cleared the stance in this regard stating that NCLT has no power under
section 7(5) of IBC to compel parties before it to settle disputes, the only power it has been
conferred under the statute is evaluating whether a default has occurred or not, and accordingly
admitting or dismissing the petition for CIRP respectively.

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 the bare reading of
the provision, the Hon’ble 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 has placed reliance on the case Innoventive Industries Ltd. v. ICICI Bank
while explaining the scope of section 7 of the IBC and held, at the moment the NCLT is satisfied
and is of the viewpoint that a default has occurred, it shall admit the application unless the
application is incomplete. There is no such issue of incomplete application in the present case
and subsequently, the NCLT is duty bound to admit the case.

Clearly, the NCLT has acted erroneously by stepping outside the jurisdiction conferred to it
under section 7(5), since it failed to exercise its jurisdiction and abdicated it. 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 (P) Ltd. vs Monitoring Committee Of Reliance. Significantly, in the case Arun
Kumar Jagatramka v. Jindal steel & power limited, the NCLT and NCLAT were issued a note of
caution against the 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 such a course of action which is not contemplated by the IBC.

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’ by the Adjudicating
Authority. The said 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 their jurisdiction under section 7 by directing the Corporate Debtor to
settle remaining claim within the tenure of 3 months and leaving it open to the petitioner, who
are 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 and thus, such powers are not conferred by the IBC
and thus, cannot be interpreted so.

The NCLT and the NCLAT channelises its jurisdictional power, conferred by the statue itself. As
mentioned in the case Pratap Technocrats (supra), 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 NCLT has created prejudice while observing disputes pertaining to claims of
allottees in the housing project by observing that their rights must be given primacy. Further, the
NCLT also emphasizes that the project entity/corporate debtor should not be sent into
liquidation only at the behest of the other investors. This observation has created a subclass
within the class of financial creditors.

The Supreme Court in the present case has rightly pinpointed the power and also has 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.

Keywords: Insolvency, Covid-19