The NCLT cannot force real estate project allocators into settlements holds SC

On a petition filed under section 7 of the IBC to begin the Corporate Insolvency Resolution Process, the NCLT recently rejected the petition and ordered the corporate debtor to first settle the dispute within 3 months in the case of ES Krishnamurthy & Ors v. M/s Bharath Hi-Tech Builders Pvt. Ltd. (2021) Additionally, the NCLAT mechanically used its authority and upheld the NCLT order.

In the instant case titled E S Krishnamurthy & Ors. Vs. M/s Bharath Hi Tech Builders Pvt. Ltd. the issues raised for clarification before the Supreme Court was:

Whether it was right for NCLT and NCLAT to reject the application under Section 7 of the IBC at the "pre-admission stage" and order the corporate debtor to resolve the conflict with creditors within a certain amount of time?

With regard to this issue, in the current case, the Supreme Court interpreted section 7(5) literally, holding that it granted the NCLT and NCLAT the only authority to determine whether a default has happened or not and, in turn, accept or deny any application for CIRP from the debtor. The Act does not give NCLT the authority to refer the matter for resolution. Therefore, by requiring parties to resolve disagreements within 3 months in the current instance, the NCLT exceeded its authority.

The plain meaning of section 7(5)(a) is that the adjudicating authority must be satisfied that a default has occurred and that no disciplinary action is being taken against the suggested resolution professional before admitting the CIRP application. Furthermore, Section 7(5)(b) outlines reasons for rejecting CIRP proceedings since no default has occurred and the recommended resolution professional is still the subject of an ongoing disciplinary investigation.

As a result, under section 7 of the IBC, the adjudicating body is only authorised to accept or reject the CIRP application.

The Court categorically stated that,

"In view of the foregoing discussion and also bearing in mind that the settlement process set in motion at the pre- admission 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."

Moreover, the judgement restrains the topics of inquiry open to an NCLT in an application under Section 7 of the Code and reiterates the idea of time-bound resolution in insolvency proceedings. The judgement aims to provide clarity regarding the strategy an NCLT should adopt during the admission phase of insolvency proceedings.