This case analysis has been done by Shivam Chaturvedi (a second-year law student pursuing BBA.LLB(Hons) at The University Of Petroleum and Energy Studies, Dehradun.)
Table of Contents
It is a well known validated fact that the goal of civil proceedings is to provide a remedy to the disputes, which might be commonly performed with the aid of the positive intervention of the judiciary, and now and again with the aid of parties reaching out to the courts for the settlement of disputes.
Discussing the object of the Insolvency and Bankruptcy Code, 2016 (IBC), the code was enacted to amalgamate the existing framework and bring everything under a single umbrella to further amend legal guidelines relating to insolvency and bankruptcy further providing for a speedy resolution for the same under the code. Under the Insolvency Code, Part II deals with the resolution process of insolvency and liquidation for financial creditors and corporate debtors defined under section 7(3) of the code, as the ultimate motive of the IBC is to facilitate the continuance and rehabilitation of a company debtor
In a significant case of E S Krishnamurthy v. Bharath Hi-Tech Builders (P.) Ltd. the apex court on December 14th, 2021 reiterated and held that the National Law Company Law Tribunal (NCLT) cannot direct or compel a party to directly settle its dispute under the Insolvency and Bankruptcy Code, 2016 while considering a petition under section 7 of the code. This judgement by the Supreme Court was pronounced taking into consideration that the NCLT is only empowered to verify and state whether a default has taken place or not. The court further referred to the provisions of the IBC and stated that the NCLT and its appellate body i.e. National Company Law Appellate Tribunal (NCLAT), had two options available that was either to permit or to either reject the proceeding under the Insolvency and Bankruptcy Code, 2016.
CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER IBC, 2016
Corporate Insolvency Resolution Process under IBC, 2016 is a state of affairs wherein a corporate entity is not able to fulfil/pay off its debt liabilities. This state is an expedient devised to guard a seemingly insolvent however probably possible entity from liquidation. The Code affords a mechanism to make the numerous creditors act in unison by way of bringing them beneath an overarching, obligatory, and collective method. This kind of obligatory and collective technique towards the corporate debtor has been envisaged underneath Section 7 of the Code.
FACTS OF THE CASE
In the present case, the NCLT declined to accept a petition filed under Section 7 of the IBC, 2016. This petition was filed for initiating the Corporate Insolvency Resolution Process. Instead of admitting in the petition, the NCLT directed the Corporate Debtor to settle the claims within the period of three months of the homebuyers, further dismissing the plea of settling the dispute under the insolvency regime. The NCLAT further upheld the order. The issue which arose for adjudication earlier than the Supreme Court turned into whether or not, in phrases of the provisions of the IBC, the NCLT can without making use of its thoughts to the merits of the petition under Section 7 of the code, actually push aside the petition on the idea that the company debtor has initiated the system of settlement with the financial lenders on the directions of the NCLT?
ISSUE UNDER THE PRESENT CASE
The issue that arose before Supreme Court for adjudication was in relation to Section 7 of the IBC. The question is to determine the power of NCLAT to dismiss a petition without application of mind and merit. Can the only ground for dismissal of the petition be the initiation of the process of settlement with financial creditors by the debtors? The issue is to determine the grounds and also the applicability that is necessary to be imposed before dismissal.
SECTION 7 OF THE IBC CODE, 2016 – AN ANALYSIS CONCERNING THE PRESENT CASE
In the present case, it was observed that the NCLT denied the acceptance of a petition which was filed under section 7 of the code for initiation of the insolvency resolution process. Instead of this, the NCLT ended up advising the debtor to fulfil the claims within the period of three months. Now is the adjudicating body has the right to do so? Can the NCLT deny the acceptance of such a petition? Let’s understand the same with the detailed analysis of section 7 of the Code.
Section 7 of the IBC code lays down the procedure specifically meant for financial creditors. By the virtue of this section, a financial creditor can apply to initiate Corporate Insolvency Resolution Process. This can be done by the financial creditor either jointly with other creditors or by themselves before the NCLT. This can be done under section 7(1) of the code further providing a right to the financial creditors to initiate a corporate insolvency resolution process against the corporate debtors under this code.
Further, as per section 7(5) of the code, the adjudicating authority has the availability of two options that is either to accept or to reject the application under insolvency. Hence making only two courses of action that are open to the Adjudicating Authority in accordance with Section 7(5), hence, the adjudicating authority can not compel a party to the court cases before it to settle a dispute of insolvency which was the case in the present case.
The Adjudicating Authority may additionally either admit or reject the utility, as according to Section 7(5). The admittance of an application under the insolvency regime rests upon the completion of 3 requirements by the NCLT attorney discussed below –
1. There should be an existence of a default, as made out by way of the Adjudicating Authority primarily based on the evidence provided to him
2. Application filed must be complete in nature
3. No disciplinary proceedings need to be pending in opposition to the decision professional.
If all three requirements are satisfied, it is then only the application that may be admitted with the aid of the NCLT below Section 7(5)(a).
In case of the three requirements being unfulfilled, the NCLT holds the power to reject the application under Section 7(5)(b) of the code. The rejection can be made but there is the involvement of two more procedural requirements for doing the same –
1. There should be the presence of recording of motives in writing through the Adjudicating Authority.
2. Notice to the monetary creditor/candidates earlier than the said rejection.
The note is meant to provide seven days to the candidates to rectify any mistakes on their part, which can be the cause of stated rejection. If the same is duly rectified to the pride of the Adjudicating Authority, an order of admittance may be exceeded beneath clause 7(5)(a).
OBSERVATION AND CONCLUSION
In the present case of E S Krishnamurthy v. Bharath Hi-Tech Builders (P.) Ltd. A bench comprising Justices D Y Chandrachud and A S Bopanna gave its ruling stating that the Adjudicating Body i.e the NCLT cannot compel a party that is in proceeding to an insolvency dispute to settle up disputes before it. The jurisdiction of NCLT and NCLAT are statutory in nature. Hence by this, it can be concluded that while the NCLT and NCLAT have the statutory power to encourage settlements related to insolvency under the code but they do not have the option to direct disputes of insolvency by acting as a court of equity. From the decision of the Supreme Court, it can be analysed that the power of the authorities has been restricted under the IBC. It has been conferred by the virtue of the court that the appellate authorities have their powers restricted to the extent mentioned in the statute. The powers cannot be accessed out of the viewpoint stated by the act. Also, this gives an understanding between reviewing a case wholly and a part of it. The positioning of IBC has also been strengthened as it states the completeness of the code.
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