Analysing Section 7 of the IBC in light of ES Krishnaswamy vs. M/s Bharath Hi-Tech Builders Ltd. – By Ashish Dash

Analysing Section 7 of the IBC in light of ES Krishnaswamy vs. M/s Bharath Hi-Tech Builders Ltd.

By- Ashish Dash

Introduction

The Supreme court in the case of Swiss Ribbons Pvt. Ltd. and Anr. V. Union of India & Ors. pronounced that the parties can settle the dispute even after admission of application on Section 7 of the Insolvency and Bankruptcy Code, 2016. Parties can invoke the mechanism prescribed under section 12A of the IBC to withdraw the petition even after the formation of the  Committee of Creditors, if the parties were to settle. However, recently in the case of ES Krishnamurthy & Ors v. M/s Bharath Hi-Tech Builders Pvt. Ltd. (2021) ibclaw.in 173 SC, on a petition instituted under section 7 of the IBC for initiating Corporate Insolvency Resolution Process, NCLT rejected the petition and directed the corporate debtor to first settle the dispute within 3 months. Further, NCLAT also exercised its powers mechanically and upheld the NCLT order. Against the backdrop, this article analyses how the Supreme Court on an appeal in ES Krishnamurthy & Ors v. M/s Bharath Hi-Tech Builders Pvt. Ltd. (2021) ibclaw.in 173 SC has provided much-needed clarification on the powers of NCLT under section 7 of the IBC.

Core Facts

Bharath Hi-Tech Builders, IDBI Trusteeship Limited, and Karvy Realty (India) Limited entered into a Master Agreement to Sell, 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 annum compounded annually to the purchaser, under the Master Agreement. Due to failing in generating the required funds, Bharath Hi-Tech Builders, IDBI Trusteeship Limited, and Facility Agent signed a Syndicate Loan Agreement to avail a term loan of Rs. 18 crores for 2 years. In case of any default of the repayment of syndicate loan, an additional 1% interest will be payable per month. Due to the alleged inability of the respondent to repay Rs. 33,84,32,493/- several appellants together with the number of petitioners applied to initiate CIRP Under section 7 of the IBC.

The Section 7 application was dismissed by the NCLT bench on the ground that parties were attempting to settle the dispute. Further NCLT provided the time frame of 3 months to resolve

the dispute and petitioners may approach the present court in case they are dissatisfied with the settlement. However, the settlement had not been approved by all of the petitioners. Meanwhile, the petitioners appealed to NCLAT, which upheld the order delivered by NCLT. Therefore, the present appeal is presented before the Supreme Court of India.

The Issue

 Upon considering the appeal before the Supreme Court, the court framed the following central issue –

Whether NCLT and NCLAT were correct in their approach of rejecting the application under section 7 of the IBC at the ‘pre-admission stage’, and direct corporate debtor to settle the dispute with creditors within a time frame?

The Investigation and Judgment

The Supreme Court in the present case gave the literal interpretation of section 7(5) and stated that statute conferred power with the NCLT & NCLAT merely to adjudicate whether a default has occurred or not and accordingly accept or reject any application for CIRP of the debtor. The statute doesn’t empower NCLT to refer the dispute to a settlement. Therefore, the NCLT in the present case overstepped its powers while ordering parties to settle disputes within 3 months.

Existing jurisprudence

 The Supreme Court in the case of Innoventive Industries Ltd. v. ICICI Bank [2017] ibclaw.in 02 SC, observed the scope and extent of the powers conferred with the Adjudicating Authority under Section 7. The court held that in an application under section 7 of the IBC, the Adjudicating Authority has to merely satisfy whether a default has occurred or not. Section 7(5) empowers Adjudicating Authority either to accept the application in lieu of section 7(5)(a) or to reject under section 7(5)(b). Therefore, no other order can be passed by the adjudicating authority in a petition under section 7.

In another instance in the case of Pratap Technocrats Ltd and Ors. v. Monitoring Committee of Reliance Infratel Limited and Anr. (2021) ibclaw.in 148 SC, Supreme Court ruled out that once Adjudicating Authority identify a default by the corporate debtor, then it is bounded by the statute (as per IBC) to admit the CIRP application under section 7. The Adjudicating Authority cannot pass any other order at this instance.

Moreover, the bare interpretation arising out of section 7(5)(a) states that, while admitting the CIRP application, Adjudicating Authority should satisfy that a default has occurred and no disciplinary proceedings are going on against the proposed resolution professional. Furthering Section 7(5)(b) states grounds for rejecting CIRP proceeding as, no default has occurred and the disciplinary proceeding is pending against the proposed resolution professional.

Therefore, the adjudicating authority is not empowered to pass any other order except accepting or rejecting the CIRP application under section 7 of the IBC.

Analysis

The very object of the IBC is to keep the business of a corporate debtor as a going concern by maximization of the value of assets, promotion of entrepreneurship, ensuring the availability of credit, and balancing the interest of the entire stakeholders. The essence of proceedings under IBC is that it provides a solution in a time-bound manner. However, in the present case, the adjudicating authority failed to comply with the underlining objective of the IBC by ordering a settlement between the parties within 3 months. Such a course of action is not contemplated under IBC.

Further, as per the Pratap Technocrats case, Adjudicating Authorities can only encourage settlement but cannot direct the parties to settle the dispute first and then approach the adjudicating authority. In the present case, NCLT & NCLAT acting as a court of equity failed to comply with the set precedent and erroneously directed parties to settle the dispute first and if not satisfied only then parties can approach NCLT.

The NCLT & NCLAT in the present case has overstepped the Supreme Court judgment in the Innoventive Industries case by not acknowledging the fact that default has been made by the Bharat Hi-Tech Builders in repayment, which fulfills the ground to accept CIRP Application under section 7(5). This very fact also stands in the absolute violation of the statutory powers conferred upon the Adjudicating Authority by the virtue of section 7(5).

Notably, by the virtue of Supreme Court decision in Arun Kumar v. Jindal Steel & Power Ltd. (2021) ibclaw.in 46 SC the judicial intervention disturbing the foundational principle of IBC is strongly condemned, and in the present case, NCLT intervened in the framework of IBC by passing a settlement order which is outside the scope of Section 7.

In a nutshell, the Supreme Court rightly redefined the jurisdictional powers conferred with Adjudicating and Appellant Authority as per IBC. The Adjudicating Authority must act well within the powers and should not overstep its powers disturbing the whole mechanism set out under the Code.