NCLT Cannot Direct Parties To Settle A Dispute While Considering A Petition U/Sec 7 IBC: Supreme Court

The Supreme Court observed that Adjudicating Authority and Appellate Authority under Insolvency and Bankruptcy Code cannot compel a party to the proceedings before it to settle a dispute.

While they Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity, the bench of Justices DY Chandrachud and AS Bopanna observed.

"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.", the bench noted.

In this case, the adjudicating authority under IBC (NCLT) declined to admit a petition filed under Section 7 of the IBC for initiating the Corporate Insolvency Resolution Process and instead directed the Corporate Debtor to settle the claims within three months. The appellate authority (NCLAT) upheld this order.

Before the Apex Court bench, it was contended that, once there is an admitted default by the Corporate Debtor, 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. 

In appeal, the legal issue considered by the Apex Court bench was 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.

Referring to the provisions of IBC, the bench observed 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.", the court said.

The bench, while allowing the appeal, further observed that though the authorities could encourage settlements, they cannot direct the parties to settle. While allowing the appeal, the court observed:

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. 

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