Law tribunals cannot act as courts of equity: Supreme Court

Law tribunals cannot act as courts of equity: Supreme Court

NCLAT and NCLT cannot direct the warring parties to settle disputes before it

The Supreme Court has held that while the National Company Law Appellate Tribunal (NCLAT) and National Company Law Tribunal (NCLT) can encourage settlements to achieve the objectives of the Insolvency and Bankruptcy Code (IBC), "they cannot direct the warring parties by acting as courts of equity."

The bench of Justice DY Chandrachud and Justice AS Bopanna set aside the order passed by the tribunals and dismissed the petition for initiating the Corporate Insolvency Resolution Process (CIRP) in a case.

The judges ruled, "The Adjudicating Authority (AA) is empowered only to verify whether a default has occurred or not. Based upon its decision, the AA must either admit or reject an application. These are the only two courses of action open to AA, which cannot compel a party to settle a dispute."

The case arose out of an agreement to sell between IDBI Trusteeship Limited and Karvy Realty (India) Limited in 2014. The matter was to raise an amount of Rs.50 crores for the development of 100 acres of agricultural land. In 2019, a number of appellants filed applications before the NCLT, Bengaluru, because the respondent defaulted in making the repayment of over Rs.33 crores.

In 2020, the NCLT disposed of the petition after noting that both parties had filed joint consent terms. However, the respondent arrived at these terms before the NCLT with not all, but only one of the petitioners.

The NCLT noted that the respondent had settled with 140 investors and was in the process of settlement with 40 other investors. It was also held that the procedure under the IBC was summary in nature and could not be used to individually manage the case of each of the 83 petitioners before it. The Tribunal thus directed the respondent to settle the matter within three months and allowed the original petitioners to approach it if they were still aggrieved.

On appeal, NCLAT supported NCLT's conclusion and upheld its decision. Aggrieved by this decision, the appellants moved to the Supreme Court.

The question before the apex court was whether the NCLT could, without considering the merits, dismiss the petition on the basis that the corporate debtor had initiated the process of settlement with the financial creditors.

The top court found that NCLAT and NCLT had abdicated their jurisdiction to decide a petition by directing the respondent to settle the remaining claims. It noted that such an action was not contemplated under IBC.

"The observation that the appeal was not maintainable is erroneous. The Adjudicating Authority failed to exercise the jurisdiction, which was entrusted to it. A clear case for the exercise of jurisdiction in the appeal was thus made out, which the Appellate Authority then failed to exercise," the court said.