1
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No 3325 of 2020
E S Krishnamurthy & Ors. …. Appellants
Versus
M/s Bharath Hi Tech Builders Pvt. Ltd. …. Respondent
J U D G M E N T
Dr Dhananjaya Y Chandrachud, J
1 Admit.
2 The present appeal under Section 62 of the Insolvency and Bankruptcy Code
20161 has arisen from a judgment of the National Company Law Appellate Tribunal2
dated 30 July 2020, which upheld an order dated 28 February 2020 of the National
Company Law Tribunal3 at its Bengaluru Bench.
1 “IBC” 2 “NCLAT”/“Appellate Authority” 3 “NCLT”/“Adjudicating Authority”
2
3 On a petition4 which was instituted by the appellants (and others) 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 appeal6 against the NCLT’s order.
4 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.
5 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
4 C.P(IB)No. 188/BB/2019 5 “CIRP” 6 Company Appeal (AT) (Insolvency) No 649 of 2020 7 “Master Agreement” 8 “Facility Agent”
3
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).
6 Since the requisite funds could not be generated through the Master
Agreement, a Syndicate Loan Agreement 9 was entered into between the
respondent, IDBI Trusteeship Limited and the Facility Agent on 22 November 2014
for availing a term loan of Rs 18 crores from prospective lenders. Such prospective
lenders were to lend moneys by executing a Deed of Adherence. In accordance with
the terms of the Loan Agreement, the respondent had to utilise the funds raised for
developing the proposed residential layout in its project and it was to pay an assured
return at the rate of 20 per cent annum on the principal amount. Further, the tenure
of the loan was to be 24 months from the execution of the Loan Agreement, and in
the event of default, the respondent was liable to pay an additional interest of one
per cent for every month.
7 The case of the appellants is that during the year 2015-2016, the Facility
Agent acting through its sister concern (Karvy Private Wealth) advised its clients to
extend loans to the respondent. The appellants claim that they (with the exception of
the ninth appellant), along with several others, extended term loans to the
respondent acting on the advice of the Facility Agent and its sister concern. Thus,
requisite Deeds of Adherence were signed. It is alleged by the appellants that
through the Loan Agreement, the respondent raised over Rs 15 crores from nearly
300 investors in the first tranche of loans.
9 “Loan Agreement”
4
8 By a letter dated 29 February 2016, addressed to one of the original
petitioners in the petition before the NCLT who was allotted a plot under the Master
Agreement, the respondent sought an extension of time till 31 October 2016 for
conveying the plots. It has been alleged that in its letter, the respondent undertook
that in the event of its failure to convey the plots by 31 October 2016, the entire
amount which was paid would be returned, together with interest as agreed in the
Master Agreement itself.
9 Further, on 30 November 2016, the respondent is stated to have extended the
term of the Loan Agreement, due to its alleged inability to refund the principal
amount along with interest. The respondent is also alleged to have sought an
extension of the loan period by 12 months, with an assurance that the principal
amount would be repaid in three equal instalments in the 13th, 14th and 15th months.
10 However, on 26 April 2019, 11 out of the 17 appellants before this Court
(together with 72 other petitioners) instituted a petition under Section 7 of the IBC
before the Adjudicating Authority, due to the respondent’s default in making the repayment of an amount of Rs 33,84,32,493.
11 On 11 September 2019, the Adjudicating Authority adjourned the proceedings
on the ground that the parties were attempting to resolve the dispute. A further
extension of time for exploring the possibility of a settlement was sought on 24
October 2019 by the respondent, which was granted by the Adjudicating Authority
and the petition was posted for 5 November 2019. On 22 November 2019, the
5
respondent informed the Adjudicating Authority that it was exploring the possibility of
a settlement, following which it was observed that any proposal for settlement
should be furnished to the petitioners well before the next date of hearing. On 20
December 2019, with the respondent having failed to resolve the issue, the
Adjudicating Authority posted the petition for admission on 29 January 2020. On 29
January 2020, on the respondent’s request, the Adjudicating Authority granted a
further opportunity to the respondent to settle the dispute with the petitioners before
it. On 27 February 2020, the respondent filed a memo before the Adjudicating
Authority stating that it had reached a settlement with 140 investors. According to
the appellants, however, out of 83 petitioners who were before the Adjudicating
Authority in the petition, a settlement had been arrived at only with 13 petitioners.
There was, in other words, no settlement with the other 70 petitioners before the
NCLT.
12 Eventually, by its order dated 28 February 2020, the NCLT disposed of the
petition. The Adjudicating Authority noted that “both the learned Counsels have filed
Joint Consent Terms dated 12.02.2020”. Admittedly, however, these consent terms
were arrived at by the respondent with only one of the petitioners before the
Adjudicating Authority, and not with all of the petitioners (including the appellants).
Before the Adjudicating Authority, the respondent submitted that “subsequently they
have settled the claims of about 140 Creditors” and counsel for the respondent also
filed a memo indicating the steps that they had taken to settle the claims of “various
others creditors and clients”. In this backdrop, the Adjudicating Authority observed:
6
“6. It is not in dispute that the Corporate Debtor with bona fide
intention is exploring the possibility of the settlement in
question and the project is in advanced stage of completion,
and if the Company is put under CIRP, interest of all the
Home Buyers as well as other Creditors will be in jeopardy.
He further submits that the Corporate Debtor is taking all
steps to settle the remaining claims of the Petitioners as well
as other Creditors within a time frame. Lists showing the
number of cases settled and those remaining have been filed.
7. It is a settled position of law that this procedure under the
Code is contemplated to be summary in nature, and it cannot
manage or decide upon each and every case of individual
homebuyers. Lists of Individual cases have been placed on
record which show that 140 investors have been fully settled
by the Corporate Debtor and an amount of Rs.27.25 crore
has been paid to them. 13 claims/Petitioners before us have
been settled, 40 are in the process of settlement and 39
pending settlement. Thus the process of settlement appears
to be progressing in all seriousness. Instead of examining all
the individual claims in detail, we would like to dispose of the
instant case by directing the Corporate Debtor to settle all the
remaining claims sincerely within a definite lime frame.”
Thus, the Adjudicating Authority decided to dispose the petition based on the
following factors: (i) that respondent’s efforts to settle the dispute were bona fide, as
evinced by the fact that they had already settled with 140 investors, including 13
petitioners before it; (ii) the settlement process was underway with 40 other
petitioners; (iii) the procedure under the IBC was summary in nature, and could not
be used to individually manage the case of each of the 83 petitioners before it; and
(iv) initiation of CIRP in respect of the respondent would put in jeopardy the interests
of home buyers and creditors, who have invested in the respondent’s project, which
was in advanced stages of completion. In disposing of the petition, the Adjudicating
Authority issued the following directions:
7
“a. The Corporate Debtor is directed to settle the remaining
claims as expeditiously as possible, but not later than 3
months, and communicate this decision to all the concerned
parties.
b. If aggrieved by the settlement process of the Corporate
Debtor, the remaining Petitioners, if any, would be at liberty to
approach this Adjudicating Authority again, in accordance
with law.”
13 The order of the Adjudicating Authority was challenged in appeal before the
NCLAT by 7 of the original petitioners, all of whom are appellants before this Court
as well, along with certain other allottees who were not original petitioners before the
NCLT. By its impugned judgment 30 July 2020, the Appellate Authority dismissed
the appeal, noting thus:
“3. It is manifestly clear that the application under Section 7 of
the l&B Code came to be disposed of at the pre-admission
stage and no order of admission or rejection of application
was passed by the Adjudicating Authority keeping in view the
nature of claims which admittedly were relatable to a Housing
Project. The Adjudicating Authority appears to have been
influenced by the fact that claims of the maximum number of
stakeholders have been settled which included some claims
settled at pre-admission stage before the Adjudicating
Authority. In so far as the remaining claims were concerned,
the Adjudicating Authority allowed a definite time frame viz. 3
months giving liberty to the claimant(s} whose claims would
remain unsettled after expiry of the given time frame, to come
back and re-agitate the matter.
4. Viewed in these circumstances, it cannot be said that the
impugned order is of such a nature which is prejudicial to the
rights and interests of any of the stakeholders. The
claimant(s) who may be dissatisfied or whose claims remain
unsettled during the given time frame can approach the
Adjudicating Authority who has not shut its doors. Assailing of
the impugned order in appeal would not be the appropriate
course.
8
5. It is a fact that the given time frame has already elapsed
but we take judicial notice of the fact that normal business
operations had been adversely affected by the imposition of
lockdown due to outbreak of COVID-19 which has been
declared pandemic. Even after unlocking, the pace of
business operations is far from normal. In these
circumstances, some concession has to be given in
adherence to the timelines set in terms of the impugned
order. Be-that-as-it-may, this situation may also have to be
addressed by the Adjudicating Authority, if approached by a
claimant whose claim has not been settled so far. It is not
disputed that the resolution of disputes relating to claims,
more particularly of Allottees in Housing Projects, has to be
given primacy and pushing the Corporate Debtor into
liquidation would only be the last option.
6. In view of the foregoing discussion and also bearing in
mind that the settlement process set in motion at the preadmission stage is supported by the Consent Terms filed by
some of the stakeholders, though it may not be all
encompassing, this appeal would not lie. We accordingly hold
that the appeal is not maintainable. There being no legal
infirmity in the impugned order, the appeal is dismissed.”
The Appellate Authority’s decision to dismiss the appeal and uphold the Adjudicating
Authority’s order was thus 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 unsettled; (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
9
priority, and the respondent should not be pushed into liquidation, until as the last
resort.
14 The NCLAT’s judgment and order dated 30 July 2020 has now been
challenged before this Court by a variety of individuals – some of whom were
original petitioners before the NCLT and went in appeal before the NCLAT, some
who joined the appeal before the NCLAT directly, some who were original
petitioners before the NCLT but did not join the appeal before the NCLAT and others
who have joined the cause before this Court for the first time. A tabular
representation is provided below:
S.No. Name Position before this
Court
Position before
NCLAT
Position before
NCLT
1 Brig. E.S. Krishnamurthy First Appellant Appellant Petitioner
2 Dhwani Nishith Sanghvi Second Appellant Appellant Petitioner
3 Kriti Milind Ranka Third Appellant Appellant Petitioner
4 Marie Therese Lima
Fernandes
Fourth Appellant Appellant Petitioner
5 Nitin Dinkar Palekar Fifth Appellant Appellant Petitioner
6 Sunil Jain Sixth Appellant Appellant Petitioner
7 Bhupesh Dinger Seventh Appellant Appellant Petitioner
8 Battula Satish Eight Appellant Appellant Not a Party
9 Shashi Arora Ninth Appellant Appellant Not a Party
10 Gangasagar Neminath
Hemade
Tenth Appellant Not a Party Petitioner
11 P.V. Lakshminarayana Eleventh Appellant Not a Party Petitioner
12 Shaila S Kothari Twelfth Appellant Not a Party Not a Party
13 Nemmara Raju Dorai
Mahadevan
Thirteenth Appellant Not a Party Not a Party
14 Mayank Gupta Fourteenth Appellant Not a Party Not a Party
15 Manjushri Basu Fifteenth Appellant Not a Party Petitioner
16 Madhukar V. Limaye Sixteenth Appellant Not a Party Petitioner
17 Dipankar Kanjilal Seventeenth Appellant Not a Party Not a Party
10
During the course of the appeal, there have also been two applications10 seeking
impleadment in the proceedings by ten individuals who are similarly placed to the
appellants. Some of these individuals were also original petitioners before the NCLT.
15 We have heard Mr Srijan Sinha, Counsel for the appellants and Ms
Aakanksha Nehra, Counsel for the respondent.
16 On behalf of the appellants, the principal challenge is on the ground that:
(i) The Appellate Authority as well as the Adjudicating Authority have acted
beyond the scope of their jurisdiction under the IBC, and thus their orders are
liable to be set aside since they were coram non judice. Reliance has been
placed upon the judgment of this Court in Embassy Property Developments
(P) Ltd. v. State of Karnataka11 in support of this proposition;
(ii) The impugned orders are contrary to the mandate of Section 7 of the IBC.
This ground has been sought to be substantiated by urging as follows:
(a) The orders of the Adjudicating Authority and the Appellate Authority are
contrary to the principles enunciated in the judgment of this Court in
Innoventive Industries Ltd. v. ICICI Bank 12 ("Innoventive
Industries”), with respect to the scope and extent of the enquiry which
has to be made in a petition under Section 7 of the IBC. This Court has
held that while entertaining the petition under Section 7, the
Adjudicating Authority has to merely satisfy itself whether a default has
10 IA No 4783 of 2021 and IA No 97193 of 2021 11 (2020) 13 SCC 308 12 (2018) 1 SCC 407, paras 28 and 30
11
occurred. As such, Section 7(5) only provides the Adjudicating
Authority with two options – to pass an admission order under Section
7(5)(a) or reject the petition under Section 7(5)(b). Thus, unless the
debt has not become due or is interdicted by some law, the
Adjudicating Authority must admit a petition under Section 7;
(b) Admittedly, in the present case, the respondent has committed an act
of default as understood in the provisions of Section 3(12) of the IBC.
This is evident from the fact that it is willing to settle the debt owed to
the appellants, which was also noted by the Adjudicating Authority.
Further, the dispute between the respondent and as many as 70
original petitioners had not been settled, at the time when the
Adjudicating Authority passed its order. In spite of this, the Adjudicating
Authority failed to act in accordance with the provisions of Section
7(5)(a) and issue an order admitting the application; and
(c) Further, the Appellate Authority has also erred in observing that the
petition under Section 7 was disposed of at a ‘pre-admission stage’ by
the Adjudicating Authority. Where the Adjudicating Authority is not
satisfied that the financial debt is owed and a default has occurred,
Section 7(5)(b) provides that it shall reject the application. Thus, an
option to dispose at a ‘pre-admission stage’ is not available to the
Adjudicating Authority;
12
(iii) The Adjudicating Authority and Appellate Authority have acted beyond the
scope of their jurisdiction in ‘directing’ the parties to settle with the
respondent. To substantiate this argument, it has been urged:
(a) The Adjudicating Authority as well as the Appellate Authority are
creatures of the statute – the IBC – and are bound by its provisions.
Thus, their jurisdiction is limited by the provisions of the IBC;
(b) Hence, once there is an admitted default by the respondent, the
Adjudicating Authority was statutorily bound to admit the petition and
has acted patently beyond its jurisdiction in not entertaining it on the
ground that there was a possibility of a settlement. The Appellate
Authority has merely placed its stamp of approval on the judgment of
the Adjudicating Authority. In doing so, Adjudicating Authority and
Appellate Authority have acted as courts of equity, which is not
prescribed by the IBC. In support of this proposition, reliance has been
placed upon the judgment of this Court in Pratap Technocrats (P) Ltd.
and Others v. Monitoring Committee of Reliance Infratel Limited
and Another13 (“Pratap Technocrats”);
(c) In any case, out of 83 petitioners before the Adjudicating Authority, only
13 had entered into a settlement. As a result, there was no settlement
with the remaining 70 petitioners. Moreover, even in respect of the
financial creditors with whom the respondent had entered into a
13 2021 SCC OnLine SC 569, paras 37, 47 and 50
13
settlement, the respondent had failed to comply with the settlement
even before the passing of the impugned order;
(d) Further, the direction by the Adjudicating Authority to the respondent to
settle all individual claims is beyond its jurisdiction, as a judicial
authority cannot dispose of a petition with a direction to settle a dispute.
At the highest, a proceeding may be adjourned in order to enable the
parties to explore the possibility of a settlement. In the present case, as
many as four opportunities were granted to the respondent to resolve
the dispute with the petitioners, but to no avail. Hence, once the parties
failed to arrive at a settlement, the judicial authority was duty bound to
decide the case on merits alone; and
(e) Finally, the admission of the petition by the Adjudicating Authority
would not have automatically nullified any potential for settlement. This
Court has held in its judgment in Swiss Ribbons Pvt Ltd and Anr. v.
Union of India and Ors.14 that even after a petition under Section 7 of
the IBC is admitted and before the Committee of Creditors15 is formed,
the parties can settle the dispute. Further, even after the CoC is
formed, Section 12A of the IBC does provide for a mechanism through
which the petition can be withdrawn (if the parties were to reach a
settlement);
14 (2019) 4 SCC 17 15 “CoC”
14
(iv) The IBC envisages two classes of creditors – financial and operational
creditors. Except some differences in their rights and role in the CIRP, the IBC
confers equal rights upon both the classes of creditors. However, through the
impugned judgment, the Appellate Authority has created a sub-class within
the class of financial creditors by observing that in the resolution of disputes
relating to claims of allottees in housing projects, their rights have to be given
primacy and the project entity/corporate debtor should not be sent into
liquidation only at the behest of the other investors; and
(v) The threshold requirement of 10 per cent allotees of a housing project filing a
petition under Section 7 of the IBC has been upheld by this Court in Manish
Kumar v. Union of India16 ("Manish Kumar”). However, in paragraph 181,
this Court has held that such a requirement only needs to be assessed at the
threshold while admitting the petition. Hence, if subsequent to the admission,
withdrawal applications are preferred and the 10 per cent threshold is
reduced, it shall not affect the maintainability of the original petition. Thus, in
the present case, the 83 original petitioners did meet the 10 per cent
threshold and the petition should have been admitted.
Based on the above submissions, the appellants have prayed that the orders of the
NCLAT and NCLT be set aside, and the original petition under Section 7 of the IBC
be restored for a decision on its admissibility under Section 7(5) of the IBC.
16 (2021) 5 SCC 1
15
17 On the other hand, the respondent counters by submitting that:
(i) The present appeal has been filed by the appellants to obviate the procedural
requirements of Section 7 of the IBC. It has been urged:
(a) The petition under Section 7 was instituted by the first appellant on
behalf of himself and 82 other petitioners/proposed purchasers. Out of
these 83 petitioners, only 7 of the original petitioners (including the first
appellant) approached the NCLAT in appeal. The present appeal has
been filed by the first appellant on behalf of the following persons:
i. First to seventh appellants, who were parties before the NCLT and
the NCLAT;
ii. Eight and ninth appellants, who were not parties to the original
petition under Section 7 but had filed an appeal before the
NCLAT;
iii. Tenth, eleventh, fifteenth and sixteenth appellants, who were
parties before the NCLT but not before the NCLAT; and
iv. Twelfth to fourteen and seventeenth appellants, who were neither
parties before the NCLT nor the NCLAT;
The reduced number of litigants establishes that the respondent has
made efforts to settle the disputes with many of the proposed
purchasers;
(b) Further, the Parliament has amended Section 7 with effect from 28
December 2019, which was upheld by the judgment of this Court in
16
Manish Kumar (supra). The amendment has introduced the threshold
requirement (of 10 per cent or 100 home buyers) for filing a petition
under Section 7, with the objective of protecting a corporate debtor
from being dragged into insolvency proceedings by an isolated set of
creditors;
(c) Thus, the present appeal being a continuation of the original
proceedings under Section 7, the threshold requirement would have to
be met. Evidently, with the reduced number of litigants, it is not met;
and
(d) Further, if the appellants have to file a fresh proceeding before the
Adjudicating Authority or if their proceedings are restored before the
Adjudicating Authority at this stage, they would still have to fulfil the
mandatory requirement of bringing together 100 creditors in the same
class or 10 per cent of the total number of such creditors;
(ii) The present proceedings have only been filed by the appellants to arm-twist
the respondent, instead of taking up the settlements offered to them:
(a) The first appellant preferred a petition on behalf of 82 home buyers.
The Adjudicating Authority in its order dated 28 February 2020
recorded that the respondent had fully settled with 140 investors
against a payment of Rs 27.25 crores. Further, it was noted that the
claims of 13 petitioners before the NCLT were settled, 40 were in the
process of settlement and 39 were pending settlements. It was in this
17
backdrop that the NCLT disposed of the petition, with specific
directions that the appellants could approach it if the respondent did not
settle their claims within three months;
(b) Even after the disposal of the proceedings by the NCLT, the
respondent has continued to settle with proposed purchasers.
However, while numerous efforts have been made to arrive at a
settlement with the appellants, none of the options offered were
agreeable to them;
(c) During the pendency of the appeal, agreed amounts have been paid in
full to the eighth, fourteenth and sixteenth appellants in November
2020. With respect to the tenth, twelfth, thirteenth and seventeenth
appellants, a settlement was arrived at and cheques have been handed
over by the respondent to them, which have not been encashed; and
(d) The respondent reiterates its commitment to settle with the proposed
purchasers, despite the real-estate industry being severely affected
due to the COVID-19 pandemic; and
(iii) The respondent should not be pushed to insolvency merely because a few of
its alleged creditors are not willing to settle. In any case, the appellants are
merely speculative investors and are not allottees within the meaning of
Section 5(8)(12) of the IBC, and thus they have no claim under Section 7 of
the IBC.
18
On the above hypothesis, it has been submitted that the appellants are utilising the
process to facilitate recovery whereas the primary focus of IBC is to ensure revival
and continuation of the corporate debtor, and to protect it from corporate death by
liquidation.
18 The rival submissions will now be considered.
19 At the very outset, there is a factual question in relation to the settlements
which have been made by the respondent with the present appellants. The
respondent has alleged that settlements have been reached with the eighth,
fourteenth and sixteenth appellants and agreed amounts have been paid in full.
Further, settlements were arrived at with tenth, twelfth, thirteenth and seventeenth
appellants and cheques have been handed over to them, but they have not been
encashed. However, the appellants note that while a settlement amount was agreed
between the respondent and the fourteenth appellant, it was never actually paid
before the appeal was filed. Further, upon the filing of the present appeal, when the
respondent offered a new settlement amount, it was rejected by the fourteenth
appellant. Similarly, no settlement has been arrived at with the sixteenth appellant.
In respect of the tenth, twelfth, thirteenth and seventeenth appellants, it is submitted
that the cheques were issued in June 2020 but the respondent itself in October 2020
told them not to encash them till the outcome of the present appeal. Presently, the
appellants acknowledge that final settlements have been reached between the
respondent and the eighth, tenth and twelfth appellants. This position has not been
controverted by the respondent.
19
20 The central question in this appeal then is whether the NCLT and the NCLAT
were correct in their approach of rejecting the appellants’ petition under Section 7 of
the IBC at the ‘pre-admission stage’, and directing them to settle with the respondent
within 3 months. Section 7 of the IBC provides for the initiation of CIRP by a financial
creditor or a class of financial creditors. Section 7, as it stood prior to its
amendments in 201917, is reproduced below:
“7. Initiation of corporate insolvency resolution process
by financial creditor.—(1) A financial creditor either by itself
or jointly with other financial creditors, or any other person on
behalf of the financial creditor, as may be notified by the
Central Government, may file an application for initiating
corporate insolvency resolution process against a corporate
debtor before the Adjudicating Authority when a default has
occurred:
Explanation.—For the purposes of this sub-section, a default
includes a default in respect of a financial debt owed not only
to the applicant financial creditor but to any other financial
creditor of the corporate debtor.
(2) The financial creditor shall make an application under subsection (1) in such form and manner and accompanied with
such fee as may be prescribed.
(3) The financial creditor shall, along with the application
furnish—
(a) record of the default recorded with the information utility or
such other record or evidence of default as may be specified;
(b) the name of the resolution professional proposed to act as
an interim resolution professional; and
(c) any other information as may be specified by the Board.
(4) The Adjudicating Authority shall, within fourteen days of
the receipt of the application under sub-section (2), ascertain
the existence of a default from the records of an information
17 Through Act 26 of 2019 and Act 1 of 2020
20
utility or on the basis of other evidence furnished by the
financial creditor under sub-section (3):
(5) Where the Adjudicating Authority is satisfied that—
(a) a default has occurred and the application under subsection (2) is complete, and there is no disciplinary
proceedings pending against the proposed resolution
professional, it may, by order, admit such application; or
(b) default has not occurred or the application under subsection (2) is incomplete or any disciplinary proceeding is
pending against the proposed resolution professional, it may,
by order, reject such application:
Provided that the Adjudicating Authority shall, before rejecting
the application under clause (b) of sub-section (5), give a
notice to the applicant to rectify the defect in his application
within seven days of receipt of such notice from the
Adjudicating Authority.
(6) The corporate insolvency resolution process shall
commence from the date of admission of the application
under sub-section (5).
(7) The Adjudicating Authority shall communicate—
(a) the order under clause (a) of sub-section (5) to the
financial creditor and the corporate debtor;
(b) the order under clause (b) of sub-section (5) to the
financial creditor, within seven days of admission or rejection
of such application, as the case may be.”
21 Sub-Section (1) of Section 7 enables the financial creditor to file an
application for initiation of 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 in the following terms:
“(12) “default” means non-payment of debt when whole or any
part or instalment of the amount of debt has become due and
payable and is not paid by the debtor or the corporate debtor,
as the case may be;”
21
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:
“(11) “debt” means a liability or obligation in respect of a claim
which is due from any person and includes a financial debt
and operational debt;”
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.
22 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. Sub-Section (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
sub-Section (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).
23 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
22
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 subSection (5). Thus, a time limit for the completion of the CIRP within a period of 180
days (under sub-Section (1) of Section 12, subject to a further extension under subSection (3)) commences from the date of the admission of the application to initiate
the process.
24 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.
23
25 In Innoventive Industries (supra), a two-judge Bench of this Court has
explained the ambit of Section 7 of the IBC, and held that the Adjudicating Authority
only has to determine whether a “default” has occurred, i.e., whether the “debt”
(which may still be disputed) was due and remained unpaid. If the Adjudicating
Authority is of the opinion that a “default” has occurred, it has to admit the
application unless it is incomplete. Speaking through Justice Rohinton F Nariman,
the Court has observed:
“28. When it comes to a financial creditor triggering the
process, Section 7 becomes relevant. Under the Explanation
to Section 7(1), a default is in respect of a financial debt owed
to any financial creditor of the corporate debtor — it need not
be a debt owed to the applicant financial creditor. Under
Section 7(2), an application is to be made under sub-section
(1) in such form and manner as is prescribed, which takes us
to the Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016. Under Rule 4, the application is made
by a financial creditor in Form 1 accompanied by documents
and records required therein. Form 1 is a detailed form in 5
parts, which requires particulars of the applicant in Part I,
particulars of the corporate debtor in Part II, particulars of the
proposed interim resolution professional in Part III, particulars
of the financial debt in Part IV and documents, records and
evidence of default in Part V. Under Rule 4(3), the applicant is
to dispatch a copy of the application filed with the adjudicating
authority by registered post or speed post to the registered
office of the corporate debtor. The speed, within which the
adjudicating authority is to ascertain the existence of a default
from the records of the information utility or on the basis of
evidence furnished by the financial creditor, is important. This
it must do within 14 days of the receipt of the application. It is
at the stage of Section 7(5), where the adjudicating
authority is to be satisfied that a default has occurred,
that the corporate debtor is entitled to point out that a
default has not occurred in the sense that the “debt”,
which may also include a disputed claim, is not due. A
debt may not be due if it is not payable in law or in fact.
The moment the adjudicating authority is satisfied that a
default has occurred, the application must be admitted
24
unless it is incomplete, in which case it may give notice
to the applicant to rectify the defect within 7 days of
receipt of a notice from the adjudicating authority. Under
sub-section (7), the adjudicating authority shall then
communicate the order passed to the financial creditor and
corporate debtor within 7 days of admission or rejection of
such application, as the case may be.
[…]
30. On the other hand, as we have seen, in the case of a
corporate debtor who commits a default of a financial
debt, the adjudicating authority has merely to see the
records of the information utility or other evidence
produced by the financial creditor to satisfy itself that a
default has occurred. It is of no matter that the debt is
disputed so long as the debt is “due” i.e. payable unless
interdicted by some law or has not yet become due in the
sense that it is payable at some future date. It is only
when this is proved to the satisfaction of the adjudicating
authority that the adjudicating authority may reject an
application and not otherwise.”
(emphasis supplied)
26 In the present case, 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
25
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, who supported its conclusions.
27 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.
28 Undoubtedly, settlements have to be encouraged because the ultimate
purpose of the IBC is to facilitate the continuance and rehabilitation of a corporate
26
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.
29 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. In Pratap Technocrats (supra), a two-judge Bench of this
Court, speaking through Justice DY Chandrachud, held:
“47. These decisions have laid down that the jurisdiction of
the Adjudicating Authority and the Appellate Authority cannot
extend into entering upon merits of a business decision made
by a requisite majority of the CoC in its commercial wisdom.
Nor is there a residual equity based jurisdiction in the
Adjudicating Authority or the Appellate Authority to
interfere in this decision, so long as it is otherwise in
27
conformity with the provisions of the IBC and the
Regulations under the enactment.
[…]
50. Hence, once the requirements of the IBC have been
fulfilled, the Adjudicating Authority and the Appellate
Authority are duty bound to abide by the discipline of the
statutory provisions. It needs no emphasis that neither
the Adjudicating Authority nor the Appellate Authority
have an uncharted jurisdiction in equity. The jurisdiction
arises within and as a product of a statutory framework.”
(emphasis supplied)
30 In Arun Kumar Jagatramka v. Jindal Steel & Power Ltd.18, a two judge
Bench of this Court issued a note of caution to the Adjudicating Authorities and the
Appellate Authority against judicial interference with the framework created by the
IBC. Speaking through Justice DY Chandrachud, the Court held:
“95…we do take this opportunity to offer a note of caution for
NCLT and NCLAT, functioning as the adjudicatory authority
and appellate authority under the IBC respectively, from
judicially interfering in the framework envisaged under the
IBC. As we have noted earlier in the judgment, the IBC was
introduced in order to overhaul the insolvency and bankruptcy
regime in India. As such, it is a carefully considered and well
thought out piece of legislation which sought to shed away
the practices of the past. The legislature has also been
working hard to ensure that the efficacy of this legislation
remains robust by constantly amending it based on its
experience. Consequently, the need for judicial intervention or
innovation from NCLT and NCLAT should be kept at its bare
minimum and should not disturb the foundational principles of
the IBC…”
18 (2021) 7 SCC 474
28
31 In the synopsis which has been appended to the paper book, a tabulated
statement has been appended for the purpose of indicating the status of the
settlement process. The statement is reproduced below:
Sl.
No.
Name Settlement
Proposed
Date of
Proposal
Accepted/
Rejected
Defaulted
in
Settlement
Date of
Default
1 E.S.
Krishnamurthy
Yes 14.12.2019 Rejected N.A. N.A.
2 Dhwani Sanghvi Yes 14.12.2019 Rejected N.A. N.A.
3 Sunil Jain Yes September
2019
Rejected N.A. N.A.
4 Lakshminarayan
P.V.
Yes May 2019 Accepted
then
subsequently
rejected
N.A. N.A.
5 Milind Raka No N.A. N.A. N.A. N.A.
6 Nitin Palekar No N.A. N.A. N.A. N.A.
7 Marie Therese
Lima Fernandes
No N.A. N.A. N.A. N.A.
8 Shashi Arora Yes 30.08.2019 Rejected N.A. N.A.
9 Bhupesh Dinger Yes December
2019
Rejected N.A. N.A.
10 Shaila S Kothari Yes 13.07.2019 Accepted Yes 31.10.2019
11 Nemmara
Mahadevan
Yes 24.06.2019 Accepted Yes August
2018
12 Satish Battula Yes 06.07.2018 Accepted Yes 31.08.2019
13 Mayank Gupta Yes 08.03.2018 Accepted Yes 30.09.2019
14 Gangasagar
Neminath
Hemade
Yes 02.08.2029 Accepted Yes 2019
15 Manjushri Basu No (not till
the passing
of order by
Adjudicatin
g Authority)
Settlement
received
after
passing of
order by
Adjudicatin
g Authority
however no
cheques
provided.
N.A. N.A. N.A.
16 Madhukar V.
Limaye
No (not till
the passing
of order by
Adjudicatin
g Authority)
Settlement
received
after
passing of
order by
Adjudicatin
N.A. N.A. N.A.
29
g Authority
however no
cheques
provided.
17 Dipankar Kanjilal Yes July 2019 Accepted Yes September
2019
The above statement indicates that a settlement has admittedly not been arrived at
by the respondent with all the appellants. Moreover, in the present appeal,
impleadment applications have also been filed on behalf of an additional set of
individuals claiming non-payment of their dues by the respondent.
32 For the above reasons, 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
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
30
the exercise of jurisdiction in appeal was thus made out, which the Appellate
Authority then failed to exercise.
33 We may note 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.
34 We accordingly allow the appeal and set aside the impugned judgment and
order dated 30 July 2020 of the NCLAT in Company Appeal (AT) (Insolvency) No
649 of 2020 and of the NCLT dated 28 February 2020 in CP (IB) No.188/BB/2019.
The petition under Section 7 of the IBC (i.e., CP (IB) No.188/BB/2019) is accordingly
restored to the NCLT for disposal afresh.
31
35 The impleadment applications shall stand disposed of, with liberty being
granted to the applicants to adopt appropriate proceedings in accordance with law
before the Adjudicating Authority, or before such other forum as they may be
advised.
36 Pending application(s), if any, shall stand disposed of.
…….…………………………...............................J
[Dr Dhananjaya Y Chandrachud]
…….…………………………...............................J.
[A S Bopanna]
New Delhi;
December 14, 2021
