Supreme Court order: NCLT cannot coerce allottees into settlements

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By Fiona Mehta

 

The Hon’ble Supreme Court’s recent decision in E. S. Krishnamurthy & Others v. Bharath Hi Tech Builders Pvt. Ltd. defined and limited the jurisdiction of the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) as well as the courses of action available to these authorities under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

 

Facts of the case: A agreement was made for the M/s Bharath Hi Tech Builders Pvt. Ltd. (Respondent) to raise money for the development of some agricultural property. The Respondent was required to transmit and register the plots to the allottees within the specified timeframe after a Facility Agent of the Respondent was designated to market the plots to potential buyers (Allottees) in exchange for the payment of a lump sum price.

The Respondent took out a term loan after failing to gather the necessary funds. The Respondent also asked the allottees for extensions on when they needed to transmit the plot, promising to pay back the full amount plus interest if they didn’t succeed. The Respondent requested additional extensions and provided additional assurances in response to its subsequent inability to fulfil its responsibilities.

The Respondent’s failure to make reparation, however, prompted the Appellants to file a petition before the NCLT, Bengaluru Bench under Section 7 of the IBC. The NCLT dismissed the petition on the grounds that the Respondent was making sincere attempts to seek a settlement, had already made settlements with some of the petitioners, and was still in the process of obtaining settlements with more petitioners. It gave the Respondent a deadline by which to reach a settlement with the additional claimants.

This NCLT order was appealed to the NCLAT, which dismissed the appeal on the grounds that the NCLT had already dismissed the petition at the pre-admission stage because a settlement process was in progress and the rights of all the appellants were protected because the NCLT had set a deadline for settlement and granted leave to appeal to the NCLT if the claims were not resolved.

Aggrieved by this order of the NCLAT, the Appellants filed a Civil Appeal before the Supreme Court under Section 62 of the IBC.

Court findings: When ruling that the NCLT had violated Section 7(5) of the IBC by acting outside of its authority, the Court noted that the NCLT has only two options when filing a petition under Section 7. It must accept the application in accordance with Section 7(5)’s Clause (a) or reject it in accordance with Clause (b). The Act does not give the NCLT any other options.

The NCLT may admit the application when:

  1. A default has occurred;
  2. The application under Section 7(2) is complete; and
  3. No disciplinary proceeding is pending against the proposed resolution professional.

In the event that any of the above conditions are not met, the NCLT may reject the application.

The Supreme Court has limited the NCLT’s authority at that stage and its possibilities by strictly interpreting Section 7 to limit the NCLT’s jurisdiction there. This has increased predictability, certainty, and clarity by limiting the NCLT’s options and setting boundaries on its power.

The Supreme Court correctly viewed that the NCLT may only support settlements in a period when they are fashionable and preferred to litigation. Settlements may be a quick and effective way to resolve disputes, but they may also aggravate one or more parties. As a result, they cannot be forced onto a party in order to achieve the goal of the corporate debtor’s rehabilitation in a timely manner.

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