The Supreme Court held that the National Company Law Tribunal (NCLT) cannot compel a party to the proceedings before it to settle a dispute.
On a petition which was instituted by the appellants, E S Krishnamurthy under Section 7 of the IBC for initiating the Corporate Insolvency Resolution Process5 in respect of the respondent, the NCLT declined to admit the petition and instead directed the respondent to settle the claims within three months. The NCLAT found no merit in the appeal against the NCLT’s order.
The issue which arises for adjudication before this Court is whether, in terms of the provisions of the IBC, the Adjudicating Authority can without applying its mind to the merits of the petition under Section 7, simply dismiss the petition on the basis that the corporate debtor has initiated the process of settlement with the financial creditors.
The genesis of the case arises from a Master Agreement to Sell7 which was entered into between the respondent, IDBI Trusteeship Limited and Karvy Realty (India) Limited8 on 22 June 2014, in order to raise an amount of Rs 50 crores for the development of 100 acres of agricultural land. Under the terms of the Master Agreement, the Facility Agent was to sell the plots to prospective purchasers against the payment of a lumpsum amount. The respondent was then required to pay interest at the rate of 25 per cent per annum compounded annually to the purchaser, under the Master Agreement. It has been stated that in furtherance of the Master Agreement, the ninth appellant was allotted a plot in the project being developed by the respondent on the payment of a sum of Rs 12,50,000. Thus, the respondent was obligated to convey and register the plots to the ninth appellant within 21 months from the date of execution of the Master Agreement (i.e., by 21 March 2016).
The division bench of Justice Dr Dhananjaya Y Chandrachud and Justice A S Bopanna held that at this stage that the provisions of Section 7 of the IBC have been amended with retrospective effect from 28 December 2019 by Act 1 of 2020. These provisions have been construed in the judgment of this Court in Manish Kumar (supra). Since we are inclined 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. “We leave open all the rights and contentions of the parties to be urged before and decided by the Adjudicating Authority,” the court added.
“We have come to the conclusion that 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 outbreak of COVID-19 pandemic on the real estate market, including on the respondent. While acknowledging that the consent terms were “filed by some of the stakeholders 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,” th court observed.
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