In the Supreme Court of India, Civil Appellate Jurisdiction

Civil Appeal No. 3325 of 2020

E. KRISHNAMURTHY & Ors …………………Appellants 

Vs

M/s BHARTHI HI TECH BUILDERS PRIVATE LIMITED ………………. Respondent  

In December 2021, a division bench of the Supreme Court comprising Dr. DY Chandrachud and A.S Bopanna ruled that the NCLT has power only to verify whether a default has occurred or not. The Apex court held that in accordance with provisions of IBC, the NCLT and NCLAT had the option of only allowing or rejecting insolvency proceedings.
A look at the facts, submissions and judgment in the case:

Facts

1. In June 2014, M/s Bharthi Hi Tech builders (“BHTB”) entered into a Master Agreement with IDBI Trusteeship Limited and Karvy Realty (India) Limited to raise funds for development of 100 acres of agricultural land into residential plots in accordance with terms and conditions of the Master Agreement. Such plots were to be allotted to prospective purchasers / home buyers.
2. Mr. E. Krishnamurthy (“Krishnamurthy”) was an allottee who was promised to convey and register plots within 21 months (i.e, by March 2016). However, the conveyance was not completed. The plots were not handed over to appellants including Krishnamurthy even in November 2016-17. Neither was the amount refunded.
3. In April 2019, Krishnamurthy along with other appellants / petitioners filed a petition u/s 7 of the IBC for default of repayment of collective money of Rs. 33.84 crores paid to them.
4. The NCLT adjourned the petition several times between September 2019 to February 2020. In February 2020, BHTB submitted that a settlement was reached even as the appellants claimed that actual settlement was reached only with a few appellants.
5. Based on this, the NCLT in February 2020 disposed of the petition filed by Krishnamurthy and other appellants on the grounds that the BHTB’s efforts to settle disputes were bona fide; several investors were settled and settlement with others was underway and that initiation of CIRP against the BHTB would jeopardise the interests of homebuyers and creditors. An order was passed to this effect by NCLT.
6. Krishnamurthy and few other appellants filed an appeal against the order of the NCLT. The NCLAT, in July 2020 upheld the order passed by the NCLT on the grounds that the NCLT disposed of the case in the “pre-admission” stage itself since the settlement process was underway with a view to protect the rights of all appellants by setting a time frame for settlement.
7. Mr. Krishnamurthy and others filed an appeal against the NCLAT / NCLT order in the Supreme Court.   

Submissions

Appellant

1. The NCLT and the NCLAT have acted beyond the scope of their jurisdiction under the IBC. Reliance was placed on the Embassy Property Developments Vs State of Karnataka [(2020) 13 SCC 308]
2. The orders passed by NCLAT and NCLT are contrary to the mandate of Section 7 of the IBC. The judgement in this case is contrary to the judgment pronounced by the Apex court in the Innoventive case [(2018) 1 SCC 407, paras 28 and 30] with respect to the scope and extent of inquiry to be made in a petition u/s 7 of the IBC. The Adjudicating authority has to merely satisfy itself whether a default has occurred or not. As such, it has only two options – admit or reject the petition u/s 7. Thus, unless the debt is not due or interdicted by some other law, the petition u/s 7 must be admitted.
3. The NCLAT has erred in disposing of the petition in the “pre-admission” stage itself. Where the Adjudicating authority is not satisfied that the debt is owed and default has occurred, in such case the petition shall be rejected u/s 7 of the IBC. Therefore, to dispose it off at “pre- admission” stage is not available to the Adjudicating authority.
4. The NCLAT and the NCLT have acted beyond the scope of their jurisdiction in directing parties to settle with respondent. Except for some difference, the IBC confers equal rights on financial and operational creditors. The NCLAT / NCLT order seems to have created a sub class within the class of creditors by insisting that home buyers / allottees rights have to be given primacy and the respondent should not be subjected to IBC at the behest of other investors.

Respondent

1. Of the total number of home buyers, only a restricted number preferred the appeal before the Hon’ble Apex court. This in itself establishes that BHTB made efforts to settle with majority of the home purchasers.
2. Section 7 was amended in December 2019 which introduced the minimum threshold requirement (minimum 10% or 100 home buyers) for filing a petition u/s 7 of the IBC. This was done to protect debtors from being dragged into cases by a small set of creditors. The present appeal (before Apex court) being a continuation of the original petition, the minimum threshold limit has not been satisfied.
3. The present petition has been filed only by a few homebuyers with an intention to arm twist the debtor instead of accepting the settlement offered.
4. The respondents should not be pushed to insolvency merely because few creditors are unwilling to accept settlement.

Issue

The core issue was whether the NCLT / NCLAT was correct in rejecting the petition u/s 7 in the “pre- admission” stage and directing appellants to settle with the respondents within a certain time frame.

Judgment

1. Section 7(1) of the IBC enables the financial creditor to file an application for initiation of CIRP against the Corporate debtor “when a default has occurred”. “Default” is defined u/s 3(12) to mean non-payment of debt when whole or part of the instalment amount becomes due and payable and is not paid by the corporate debtor.
2. Section 7(5) consists of two parts:
   sub section (a): empowers the Adjudicating authority to admit the application subject to satisfaction of few conditions such as occurrence of default, application being complete and no disciplinary proceedings against the resolution professional.
   sub section (b): empowers the Adjudicating authority to reject the application if the above conditions are not satisfied.
3. The Adjudicating authority must either admit or reject the petition u/s 7 of the IBC by way of an order. The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available.
   In Innoventive Industries case (supra) the Supreme Court held that the Adjudicating authority should only determine if “default” has occurred or not – i.e whether debt was due and remained unpaid. If it was so, then the Adjudicating authority must admit the application unless it was incomplete.
4. In the present case, the petition was disposed of by the NCLT (and upheld by the NCLAT) directing the respondent to settle the remaining claims no later than within 3 months, and that if any of the remaining original petitioners were aggrieved by the settlement process, they would be at liberty to approach the Adjudicating Authority again in accordance with law.
   The Apex court was of the view that the Adjudicating Authority has clearly acted outside the terms of its jurisdiction under Section 7(5) of the IBC. The Adjudicating Authority is empowered only to verify whether a default has occurred or if a default has not occurred. Based upon its decision, the Adjudicating Authority 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).
5. The core objective of the IBC is to facilitate insolvency resolution in an effective and time bound manner. Settlements have to be encouraged because the ultimate purpose of the IBC is to facilitate the continuance and rehabilitation of a corporate. While the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.

Accordingly, the Supreme Court allowed the appeal and set aside the impugned judgment of the NCLAT and the NCLT.

Full text of the Judgment:

https://main.sci.gov.in/supremecourt/2020/18599/18599_2020_4_1502_32125_Judgement_14-Dec-2021.pdf