Delve into the intricate legal analysis of court jurisdiction in dismissing Insolvency and Bankruptcy Code petitions. This summary examines how the Adjudicating Authority’s powers under the IBC were challenged and analyzed by the higher courts. Understanding these jurisdictional limits is crucial for interpreting and implementing insolvency laws effectively.
Facts
- The genesis of the case is a Master Agreement to Sell between the respondent and Karvy Realty (India) Limited.
- Petition under Section 7 of the IBC filed due to respondent’s default in repayment of Rs 33,84,32,493.
- Attempts at dispute resolution were made with limited success, settling with only a portion of the petitioners.
- Facility Agent selling plots to raise funds, lenders executing Deeds of Adherence.
- Respondent seeking loan extension and failing to repay as per agreement.
- Allegations of raising funds and extending loans from multiple investors.
- Petition repeatedly adjourned for settlement efforts, limited success in reaching settlements.
- Adjudicating Authority issuing directions based on settlement progress with some investors.
- Appeal challenged NCLAT’s decision upholding NCLT’s order, based on settlement attempts and potential jeopardy to home buyers and creditors.
- The NCLT dismissed the petition under Section 7 at the ‘pre-admission stage’ due to the ongoing settlement process.
- All appellants/petitioners were protected by the NCLT which set a time-frame for settlement by the respondent and left open the option to approach it if claims remained unsettled.
- Despite the settlement timeframe elapsing, leniency was shown to the respondent due to the impact of the COVID-19 pandemic on businesses.
- In cases like these, priority was given to the claims of home buyers, and pushing the respondent into liquidation was viewed as a last resort.
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Issue
- The issue before the Court is whether the Adjudicating Authority can dismiss a petition under Section 7 of the IBC without considering its merits.
- The specific context is when the corporate debtor has initiated a settlement process with financial creditors.
- The key question is whether the Adjudicating Authority can solely rely on this initiation of settlement to dismiss the petition.
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Arguments
- The principal challenge on behalf of the appellants is that the Appellate Authority and the Adjudicating Authority exceeded their jurisdiction under the IBC, rendering their orders void for being coram non judice.
- Citing the judgment in Embassy Property Developments (P) Ltd. v. State of Karnataka for support.
- The impugned orders are alleged to be against the mandate of Section 7 of the IBC.
- It is argued that the orders deviate from the principles outlined in the Innoventive Industries Ltd. v. ICICI Bank case regarding the scope of enquiry in a Section 7 petition.
- According to the Innoventive Industries case, the Adjudicating Authority is only required to ascertain the occurrence of a default when considering a Section 7 petition.
- During the proceedings, there were applications for impleadment by individuals similarly situated to the appellants, some of whom were original petitioners before the NCLT.
- Counsel for the appellants is Mr. Srijan Sinha, and counsel for the respondent is Ms. Aakanksha Nehra.
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Analysis
- The Adjudicating Authority and the Appellate Authority are bound by the provisions of the IBC, acting as courts of equity, which is not prescribed by the IBC.
- The Adjudicating Authority is empowered only to verify whether a default has occurred or not, and cannot compel parties to settle a dispute.
- The Adjudicating Authority did not act in accordance with the provisions of Section 7(5)(a) by not issuing an order admitting the application.
- The Adjudicating Authority and Appellate Authority have acted beyond their jurisdiction by directing parties to settle with the respondent.
- Settlements under IBC need to be encouraged for rehabilitation of the corporate debtor.
- The court concluded that the order of the Adjudicating Authority suffered from an abdication of jurisdiction.
- The Adjudicating Authority can either admit or reject an application under Section 7(5), with no option to dispose of it at a ‘pre-admission stage’.
- The Adjudicating Authority has to admit the application if a ‘default’ has occurred, unless it is incomplete.
- In the present case, multiple opportunities were granted to the respondent to resolve the dispute, but no settlement was reached.
- Both the Adjudicating Authority and Appellate Authority can encourage settlements but cannot direct them as courts of equity.
- The court cautioned against judicial interference with the framework created by the Insolvency and Bankruptcy Code (IBC).
- Settlements can still be reached even after a petition under Section 7 of the IBC is admitted but before the Committee of Creditors is formed.
- The proceedings are to be restored back to the Adjudicating Authority for a fresh consideration.
- No need to delve into any other aspect, except for what influenced the decision.
- A clear case for exercising jurisdiction in appeal was established, which the Appellate Authority failed to do.
- Section 7 of the IBC has been retrospectively amended from 28 December 2019 by Act 1 of 2020.
- The Adjudicating Authority did not exercise the jurisdiction entrusted to it.
Decision
- All rights and contentions of the parties left open to be urged before the Adjudicating Authority
- Pending applications disposed of
- Impleadment applications disposed of with liberty granted to applicants to adopt appropriate proceedings
- Petition under Section 7 of the IBC restored to NCLT for disposal afresh
- Appeal allowed, impugned judgments and orders set aside
Case Title: E.S. KRISHNAMURTHY Vs. M/S BHARATH HI TECH BUILDERS PVT. LTD. (2021 INSC 884)
Case Number: C.A. No.-003325 / 2020
