Adjudicating & Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity

In E S Krishnamurthy & Ors v. M/s Bharath Hi Tech Builders Pvt. Ltd, on a petition  instituted by the appellants (and others) under Section 7 of the IBC for initiating the Corporate Insolvency Resolution Process (CIRP) 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 NCLTs order. 

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 dated 12 February 2020 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 Authoritys decision was also upheld by the Appellate Authority, who supported its conclusions. The Appellate Authority based upon the following considerations: (i) the NCLT decided to dismiss the petition under Section 7 at the pre-admission stage itself, since the settlement process was underway; (ii) the NCLT protected the rights of all the appellants/petitioners by setting a time-frame for settlement by the respondent, and leaving them open the option of approaching it in case their claims remained un- settled; (iii) while the timeframe for settlement had elapsed, the respondent had to be shown leniency due to the effects of the COVID-19 pandemic on businesses; and (iv) in disputes of this nature, the claims of the home buyers have to be given priority, and the respondent should not be pushed into liquidation, until as the last resort.

On appeal, the Supreme Court held 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). The Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute. 

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 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. 

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.

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.