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2021 (12) TMI 683 - SC - Insolvency and BankruptcyInitiation of CIRP - pre-admission stage - home buyers and creditors - corporate debtor has initiated the process of settlement with the financial creditors - 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? - HELD THAT - On a bare reading of the provision, it is clear that both, Clauses (a) and (b) of sub-Section (5) of Section 7, use the expression it may, by order while referring to the power of the Adjudicating Authority. In Clause (a) of sub-Section (5), the Adjudicating Authority may, by order, admit the application or in Clause (b) it may, by order, reject such an application. Thus, two courses of action are available to the Adjudicating Authority in a petition under Section 7. 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. In Innoventive Industries 2017 (9) TMI 58 - SUPREME COURT , a two-judge Bench of this Court has explained the ambit of Section 7 of the IBC, and held that the Adjudicating Authority only has to determine whether a default has occurred, i.e., whether the debt (which may still be disputed) was due and remained unpaid. If the Adjudicating Authority is of the opinion that a default has occurred, it has to admit the application unless it is incomplete. In the present case, the Adjudicating Authority noted that it had listed the petition for admission on diverse dates and had adjourned it, inter alia, to allow the parties to explore the possibility of a settlement. Evidently, no settlement was arrived at by all the original petitioners who had instituted the proceedings. The Adjudicating Authority noticed that joint consent terms dated 12 February 2020 had been filed before it. But it is common ground that these consent terms did not cover all the original petitioners who were before the Adjudicating Authority - the Adjudicating Authority did not entertain the petition on the ground that the procedure under the IBC is summary, and it cannot manage or decide upon each and every claim of the individual home buyers. The Adjudicating Authority also held that since the process of settlement was progressing in all seriousness , instead of examining all the individual claims, it would dispose of the petition by directing the respondent to settle all the remaining claims seriously within a definite time frame. The petition was accordingly disposed of by directing the respondent to settle the remaining claims no later than within three months, and that if any of the remaining original petitioners were aggrieved by the settlement process, they would be at liberty to approach the Adjudicating Authority again in accordance with law. The Adjudicating Authority s decision was also upheld by the Appellate Authority, who supported its conclusions. The order of the Adjudicating Authority, and the directions which eventually came to be issued, suffered from an abdication of jurisdiction. The Appellate Authority sought to make a distinction by observing that the directions of the Adjudicating Authority were at the pre-admission stage , and that the order was not of such a nature which was prejudicial to the rights and interest of the stakeholders - the Adjudicating Authority failed to exercise the jurisdiction which was entrusted to it. A clear case for the exercise of jurisdiction in appeal was thus made out, which the Appellate Authority then failed to exercise. Appeal allowed - decided in favor of appellant.
Issues Involved:
1. Jurisdiction of the Adjudicating Authority under Section 7 of the Insolvency and Bankruptcy Code (IBC). 2. Admissibility of the petition under Section 7 of the IBC. 3. The impact of settlements on the insolvency proceedings. 4. Compliance with the threshold requirement under Section 7 of the IBC post-amendment. 5. The role of the COVID-19 pandemic in affecting business operations and settlements. Issue-wise Detailed Analysis: 1. Jurisdiction of the Adjudicating Authority under Section 7 of the IBC: The core issue before the Supreme Court was whether the Adjudicating Authority (NCLT) could dismiss a petition under Section 7 of the IBC without applying its mind to the merits, solely based on the corporate debtor's initiation of settlement with financial creditors. The Court held that the NCLT acted beyond its jurisdiction by directing the parties to settle and not deciding the petition on its merits. The IBC mandates that the Adjudicating Authority must either admit or reject the application based on whether a default has occurred, as per Section 7(5). The NCLT cannot compel settlements and must adhere to the statutory framework. 2. Admissibility of the Petition under Section 7 of the IBC: The appellants argued that the orders of the NCLT and NCLAT were contrary to Section 7 of the IBC, which requires the Adjudicating Authority to admit the petition if a default has occurred. The Supreme Court emphasized that the Adjudicating Authority's role is to determine whether a default has occurred and then either admit or reject the application. The NCLT's decision to dismiss the petition at the 'pre-admission stage' was incorrect, as it failed to follow the statutory mandate. 3. The Impact of Settlements on the Insolvency Proceedings: The NCLT had noted that settlements were underway and directed the respondent to settle remaining claims within three months. However, the Supreme Court clarified that while settlements are encouraged, the Adjudicating Authority cannot abdicate its jurisdiction by directing settlements. The IBC aims to facilitate insolvency resolution in a time-bound manner, and the Adjudicating Authority must adhere to the statutory provisions without acting as a court of equity. 4. Compliance with the Threshold Requirement under Section 7 of the IBC Post-Amendment: The respondent argued that the appeal did not meet the threshold requirement of 10% or 100 home buyers for filing a petition under Section 7, as amended by the Parliament. The Supreme Court did not delve into this issue in detail but restored the proceedings to the NCLT for fresh consideration, leaving all rights and contentions open for adjudication by the Adjudicating Authority. 5. The Role of the COVID-19 Pandemic in Affecting Business Operations and Settlements: The NCLAT had noted the impact of the COVID-19 pandemic on business operations, which affected the respondent's ability to settle claims within the stipulated time frame. The Supreme Court acknowledged this factor but emphasized that the statutory framework of the IBC must be followed, and the Adjudicating Authority must decide the petition based on the occurrence of default, irrespective of external factors like the pandemic. Conclusion: The Supreme Court allowed the appeal, set aside the judgments of the NCLT and NCLAT, and restored the petition under Section 7 of the IBC to the NCLT for fresh disposal. The Court reiterated that the Adjudicating Authority must adhere to the statutory mandate of the IBC and cannot compel settlements or act beyond its jurisdiction. The rights and contentions of the parties were left open for adjudication by the NCLT.
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