Insolvency and Bankruptcy Code, 2016: s. 7 – Initiation of Corporate Insolvency Resolution Process by financial creditor – On facts, respondent defaulted in making re-payment of an amount of Rs 33 crores to the appellants – Petition u/s. 7 instituted by the appellants against respondents – Adjudicating Authority-NCLT declined to admit the petition and directed the respondent to settle all the remaining claims within three months – Appeal there against dismissed by the Appellate Authority-National Company Law Appellate Tribunal – On appeal, held: Order of the Adjudicating Authority, and the directions issued, suffered from an abdication of jurisdiction – Adjudicating Authority acted outside the terms of its jurisdiction u/s. 7(5) – Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute – Such a course of action is not contemplated by the IBC – While, adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity – Adjudicating Authority is empowered only to verify whether a default has occurred or not – Based thereupon, the Adjudicating Authority must then either admit or reject an application – These are the only two courses of action which are open to the Adjudicating Authority in accordance with s. 7(5) – Furthermore, the Appellate Authority sought to make a distinction by observing that the directions of the Adjudicating Authority 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 – Also, settlement has not been arrived at by the respondents with the appellants – Observation that the appeal was not maintainable is erroneous – Order passed by the NCLAT and NCLT set aside – Proceedings to be restored back to the adjudicating authority for afresh consideration.
s. 7 – Corporate Insolvency Resolution Process under – Scope and jurisdiction of the powers of the Adjudicating authority – Discussed.
Allowing the appeal, the Court
HELD: 1.1 Sub-Section (1) of Section 7 of the Insolvency and Bankruptcy Code, 2016 enables the financial creditor to file an application for initiation of Corporate Insolvency Resolution Process-CIRP against the corporate debtor before the Adjudicating Authority “when a default has occurred”. The expression ‘default’ is defined in Section 3(12) of the IBC. The definition of default adverts to the non-payment of a debt, when it has become due and payable in whole or in part, by the debtor or the corporate debtor. Since the definition of “default” incorporates the expression “debt”, it is necessary to advert to the definition of the latter expression under Section 3(11) of the IBC. Thus, a “debt” is defined to be a liability or an obligation in respect of a claim due from any person. This includes a financial debt and an operational debt. If the above criteria are met, the financial creditor can make an application under sub-Section (2) of Section 7, in the manner prescribed, along with the necessary fees. SubSection (3) requires the financial creditor, inter alia, to furnish a record of the default with the information utility or such other record or evidence of default as may be specified along with the application. Under sub-Section (4), the Adjudicating Authority must, within 14 days of the receipt of the application under subSection (2), ascertain the existence of a default from the record of an information utility or on the basis of other information furnished by the financial creditor under sub-Section (3). [Para 21, 22][49-B-H]
1.2 Sub-Section (5) of Section 7 is comprised in two parts: Clause (a), which is the first part, empowers the Adjudicating Authority to admit the application where it is satisfied that: (i) a default has occurred; (ii) the application under sub-Section (2) is complete; and (iii) no disciplinary proceeding is pending against the proposed resolution professional; Clause (b), which is the second part, empowers the Adjudicating Authority to reject the application where it is satisfied that: (i) default has not occurred; or (ii) the application under sub-Section (2) is incomplete; or (iii) a disciplinary proceeding is pending against the proposed resolution professional. Under sub-Section (7), the Adjudicating Authority has to communicate its order of acceptance or rejection to the financial creditor and the corporate debtor or the financial creditor, as the case may be. In accordance with sub-Section (6), the CIRP process commences from the date of the admission of the application under sub-Section (5). Thus, a time limit for the completion of the CIRP within a period of 180 days (under subSection (1) of Section 12, subject to a further extension under sub-Section (3)) commences from the date of the admission of the application to initiate the process. [Para 23][50-A-D]
1.3 On a bare reading of the provision, it is clear that both, Clauses (a) and (b) of sub-Section (5) of Section 7, use the expression “it may, by order” while referring to the power of the Adjudicating Authority. In Clause (a) of sub-Section (5), the Adjudicating Authority may, by order, admit the application or in Clause (b) it may, by order, reject such an application. Thus, two courses of action are available to the Adjudicating Authority in a petition under Section 7. The Adjudicating Authority must either admit the application under Clause (a) of sub-Section (5) or it must reject the application under Clause (b) of sub-Section (5). The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available. [Para 24][50-E-F]
1.4 The Adjudicating Authority noted that it had listed the petition for admission on diverse dates and had adjourned it, inter alia, to allow the parties to explore the possibility of a settlement. Evidently, no settlement was arrived at by all the original petitioners who had instituted the proceedings. The Adjudicating Authority noticed that joint consent terms had been filed before it. But it is common ground that these consent terms did not cover all the original petitioners who were before the Adjudicating Authority. The Adjudicating Authority was apprised of the fact that the claims of 140 investors had been fully settled by the respondent. The respondent also noted that of the claims of the original petitioners who have moved the Adjudicating Authority, only 13 have been settled while, according to it “40 are in the process of settlement and 39 are pending settlements”. Eventually, the Adjudicating Authority did not entertain the petition on the ground that the procedure under the IBC is summary, and it cannot manage or decide upon each and every claim of the individual home buyers. The Adjudicating Authority also held that since the process of settlement was progressing “in all seriousness”, instead of examining all the individual claims, it would dispose of the petition by directing the respondent to settle all the remaining claims “seriously” within a definite time frame. The petition was accordingly disposed of by directing the respondent to settle the remaining claims no later than within three 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 Adjudicating Authority’s decision was also upheld by the Appellate Authority. [Para 26][52-D-H]
1.5 The Adjudicating Authority has acted outside the terms of its jurisdiction under Section 7(5). 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). The Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute. [Para 27] [53-A-B]
1.6 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. 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. What the Adjudicating Authority and Appellate Authority, however, have proceeded to do in the instant 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. [Para 28][53-C-E]
1.7 The IBC is a complete code in itself. The Adjudicating Authority and the Appellate Authority 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 Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity. [Para 29][53-F]
1.8 The statement indicating the settlement process shows that a settlement has admittedly not been arrived at by the respondent with all the appellants. Moreover, impleadment applications have also been filed on behalf of an additional set of individuals claiming non-payment of their dues by the respondent. [Para 31][55-F-G]
1.9 The order of the Adjudicating Authority, and the directions which eventually came to be issued, suffered from an abdication of jurisdiction. The Appellate Authority sought to make a distinction by observing that the directions of the Adjudicating Authority 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 Appellate Authority was cognizant of the fact that even the time schedule for settlement which had been indicated by the Adjudicating Authority had elapsed, but then noted the impact of the COVID-19 pandemic on the real estate market, including on the respondent. While acknowledging that the consent terms were “filed by some of the stake holders though may not be all encompassing”, the Appellate Authority nonetheless proceeded to dismiss the appeal as not maintainable. The observation that the appeal was not maintainable is erroneous. Plainly, the Adjudicating Authority 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 Appellate Authority then failed to exercise. [Para 32][55-G-H; 56-A-C]
1.10 Since there is inclination to restore the proceedings back to the Adjudicating Authority for a fresh consideration, it is not necessary for this Court to dwell on any other aspect, save and except for what weighed with the Adjudicating Authority in disposing of the petition without adjudicating on other issues of maintainability or merits. It is left open all the rights and contentions of the parties to be submitted before and decided by the Adjudicating Authority. The impugned judgment and order of the NCLAT and of the NCLT is set aside. The petition under Section 7 is restored to the NCLT for disposal afresh. [Para 33, 34][56-D-F]
Manish Kumar v. Union of India (2021) 5 SCC 1; Embassy Property Developments (P) Ltd. v. State of Karnataka (2020) 13 SCC 308 : [2019] 17 SCR 559; Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC
407 : [2017] 8 SCR 33; Pratap Technocrats (P) Ltd. and Others v. Monitoring Committee of Reliance Infratel Limited and Another 2021 SCC OnLine SC 569; Swiss Ribbons Pvt Ltd and Anr. v. Union of India and Ors. (2019) 4 SCC 17 : [2019] 3 SCR 535; Arun Kumar Jagatramka v. Jindal Steel & Power Ltd. (2021) 7 SCC
474 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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