SC says company law tribunal can't compel parties to settle dispute in insolvency proceedings under IBC

New Delhi: In a significant verdict, the Supreme Court on Tuesday held that the National Company Law Tribunal (NCLT) cannot compel a party to settle a dispute under the Insolvency and Bankruptcy Code (IBC) as it is empowered “only to verify whether a default has occurred or not”. The top court referred to the provisions of the IBC and said that the NCLT and its appellate body, NCLAT, had only two options available to either allow or reject the insolvency proceedings against the firm. A bench comprising Justices D Y Chandrachud and A S Bopanna set aside the verdicts of NCLT and NCLAT which had asked the company to try to settle the claims of homebuyers within a time frame and had dismissed the pleas for initiation of insolvency proceedings against Bharath Hi Tech Builders Pvt. Ltd. “We accordingly allow the appeal and set aside the impugned judgment and order dated 30 July 2020 of the NCLAT…and of the NCLT…. The petition (of homebuyers) under Section 7 of the IBC is accordingly restored to the NCLT for disposal afresh,” the verdict said. “The IBC is a complete code in itself. The Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT) are creatures of the statute. Their jurisdiction is statutorily conferred. The statute which confers jurisdiction also structures, channelises and circumscribes the ambit of such jurisdiction. Thus, while the Adjudicating Authority and the Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity,” Justice Chandrachud, writing the judgment for the bench, said. The 31-page verdict was critical of the decisions of the NCLT and the NCLAT saying that the panels are empowered only to verify whether a default has occurred or not. “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). The Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute,” it said. Undoubtedly, 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, it said. “What the Adjudicating Authority and Appellate Authority (NCLAT), however, have proceeded to do in the present case is to abdicate their jurisdiction to decide a petition under Section 7 by directing the respondent to settle the remaining claims within three months and leaving it open to the original petitioners, who are aggrieved by the settlement process, to move fresh proceedings in accordance with law. Such a course of action is not contemplated by the IBC,” it held. The bench then concluded that the directions of the NCLT asking the company to settle claims of homebuyers “suffered from an abdication of jurisdiction” and ordered restoration of pleas of homebuyers and afresh adjudication by NCLT. E S Krishnamurthy and several others had moved the top court against the verdict of the NCLAT endorsing the judgment of the NCLT, Bengaluru. On a petition, which was instituted under Section 7 of the IBC for initiating the Corporate Insolvency Resolution Process against the company, the NCLT had declined to admit the petition and instead directed the respondent to settle the claims within three months. The NCLAT had found no merit in the appeal against the NCLT’s order. The apex court adjudicated upon the issue whether the NCLT, in terms of the provisions of the IBC, can without considering the merits simply dismiss the petition on the basis that the corporate debtor has initiated the process of settlement with the financial creditors.