Insolvency resolution: Company law tribunals can’t force parties to settle disputes, says Supreme Court

The apex court said that settlements have to be encouraged because the ultimate purpose of the IBC is to facilitate the continuance and rehabilitation of a corporate debtor, as distinct from allowing it to go into liquidation.

The apex court said that settlements have to be encouraged because the ultimate purpose of the IBC is to facilitate the continuance and rehabilitation of a corporate debtor, as distinct from allowing it to go into liquidation
A Bench led by Justice DY Chandrachud said that the NCLT is empowered only to verify whether a default has occurred or not.

The Supreme Court on Tuesday held that the National Company Law Tribunal and the National Company Law Appellate Tribunal cannot act as “courts of equity” and compel parties to settle their disputes during the insolvency resolution process.A Bench led by Justice DY Chandrachud said that the NCLT is empowered only to verify whether a default has occurred or not.

Based upon its decision, the NCLT “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.”While settlements can be encouraged by the NCLT and NCLAT to achieve the objectives of the insolvency and bankruptcy code (IBC), they cannot direct them any settlement by acting as courts of equity.

The apex court said that settlements have to be encouraged because the ultimate purpose of the IBC is to facilitate the continuance and rehabilitation of a corporate debtor, as distinct from allowing it to go into liquidation. As the Statement of Objects and Reasons accompanying the introduction of the Bill indicates, the objective of the IBC is to facilitate insolvency resolution “in a time bound manner” for maximisation of the value of assets, promotion of entrepreneurship, ensuring the availability of credit and balancing the interest of all stakeholders, the judgment stated.

The clarification came in the case, ES Krishnamurthy vs M/S Bharath Hi Tech Builders, where both NCLT and NCLAT had rejected plea for initiating the insolvency proceedings.The issue before the SC was whether the NCLT and the NCLAT were correct in their approach of rejecting the appellants’ petition under Section 7 of the IBC at the ‘pre-admission stage’, and directing them to settle with the respondent within three months. Section 7 of the IBC provides for the initiation of CIRP by a financial creditor or a class of financial creditors.

Welcoming the decision, counsel Srijan Sinha, who appeared for some homebuyers, said that “the NCLT and NCLAT are statutory creations, and, therefore, are limited to the adjudicatory powers contained in the Statute, which in this case is IBC. IBC is a mechanism to either start insolvency or dismiss, it does not provide for any scope for NCLT to direct parties to settle, as NCLT is not a court of equity.”

The NCLAT sought to make a distinction by observing that its directions were at the ‘pre-admission stage’, and that the order was not of such a nature which was prejudicial to the rights and interest of the stakeholders, the judgment stated.

 “The NCLAT was cognizant of the fact that even the time schedule for settlement which had been indicated by the NCLT had elapsed, but then noted the impact of the outbreak of Covid pandemic on the real estate market, including on the respondent… the observation that the appeal was not maintainable is erroneous. Plainly, the NCLT 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 NCLAT then failed to exercise,” the top court said.

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