Insolvency Courts Cannot Compel Parties To Settle, Says Supreme Court
NCLT, NCLAT can only encourage parties for dispute settlement under IBC and not compel them, reiterated the Supreme Court
The Supreme Court has reiterated that insolvency courts can only encourage parties to settle disputes but cannot compel them to do so.
In Bharath Hi Tech Builders Pvt.'s case, the Bengaluru bench of the National Company Law Tribunal and subsequently the appellate tribunal had directed the company to settle its claims within three months. The tribunal was prompted to pass this direction after noting that the company had already initiated settlement with its creditors.
The financial creditors approached the apex court questioning the validity of both the orders. They argued that once there is an admitted default by a corporate debtor, under the IBC, the adjudicating authority is statutorily bound to admit the petition.
But here, the creditors argued, the tribunal acted beyond its jurisdiction in not entertaining the application as it viewed that there was a possibility of settlement between the debtor and the creditors. The orders of the NCLT and the NCLAT are bad in law and require to be set aside, contended the financial creditors.
A division bench of Justice DY Chandrachud and Justice AS Bopanna agreed with the creditors.
The adjudicatory authority can verify whether a default has occurred or not. Based on this decision, it must either admit or reject an insolvency application, said the top court, adding that these are the only two options available to tribunals.
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.Supreme Court
Pointing to its decision in Reliance Infratel Ltd.'s case, the Supreme Court said that adjudicatory authorities under the IBC are not 'equity' courts. And that their jurisdiction cannot extend to looking at the merits of a business decision made by a requisite majority of the creditors' committee.
...Nor is there a residual equity based jurisdiction in the adjudicating authority or the appellate authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of the IBC and the regulations under the enactment.Supreme Court in Reliance Infratel Ltd.'s case
The division bench observed that the NCLT had clearly acted outside the scope of its jurisdiction and consequently remitted the matter back to it for fresh disposal.