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of <h1>Section 7 petition cannot be dismissed solely because debtor initiated settlement talks with creditors</h1> The SC held that the Adjudicating Authority cannot dismiss a Section 7 petition merely because the corporate debtor initiated settlement processes with ... Initiation 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. The core legal issue considered is whether, under the Insolvency and Bankruptcy Code, 2016 ('IBC'), the Adjudicating Authority can dismiss a petition filed under Section 7 for initiation of the Corporate Insolvency Resolution Process ('CIRP') on the ground that the corporate debtor is in the process of settling claims with financial creditors, without applying its mind to the merits of the petition and without either admitting or rejecting it as mandated by the statute.Another significant issue is the scope of the jurisdiction of the Adjudicating Authority and the Appellate Authority under Section 7 of the IBC, specifically whether they possess the power to direct parties to settle disputes or to dispose of petitions at a so-called 'pre-admission stage' without formal admission or rejection.Additionally, the Court examined the applicability and interpretation of the threshold requirement introduced by amendment to Section 7, mandating that a minimum of 10% of financial creditors or 100 creditors in the same class must file a petition for it to be maintainable, particularly in the context of multiple appellants and petitioners involved in the case.Further, the Court considered the interplay between the statutory mandate of the IBC and the equitable considerations related to settlements, especially in the context of real estate projects involving homebuyers as financial creditors.Issue-wise Detailed Analysis:1. Whether the Adjudicating Authority can dismiss a Section 7 petition on the ground of ongoing settlement without admitting or rejecting it:The relevant legal framework is Section 7 of the IBC, which provides that when a financial creditor files an application for initiation of CIRP against a corporate debtor upon occurrence of a default, the Adjudicating Authority must, within 14 days, ascertain the existence of default and either admit the application under Section 7(5)(a) or reject it under Section 7(5)(b). The statute explicitly provides only these two options and does not contemplate any other form of disposal, such as dismissal on the basis of settlement efforts.In Innoventive Industries Ltd. v. ICICI Bank, the Supreme Court clarified that the Adjudicating Authority's role under Section 7(5) is limited to determining whether a default has occurred. If satisfied, the application must be admitted unless incomplete. The Court emphasized that the Adjudicating Authority cannot delve into merits or disputes beyond the threshold of default.In the present case, the Adjudicating Authority declined to admit the petition filed by the appellants, instead directing the corporate debtor to settle claims within three months and disposing of the petition at what was termed a 'pre-admission stage'. The Adjudicating Authority's order was based on several factors: bona fide efforts by the respondent to settle with a majority of creditors, the advanced stage of the project, the summary nature of the IBC procedure, and the potential jeopardy to homebuyers' interests if CIRP were initiated.The Appellate Authority upheld this approach, reasoning that the Adjudicating Authority's order was not prejudicial to stakeholders and that dissatisfied petitioners could approach the Adjudicating Authority afresh if settlements failed. The Appellate Authority also noted the impact of the COVID-19 pandemic on business operations as a mitigating factor for delays in settlement.The Court rejected this approach, holding that the Adjudicating Authority acted beyond its jurisdiction by not exercising the statutory option to admit or reject the petition. The Court emphasized that the IBC is a complete code, and the Adjudicating Authority and Appellate Authority are creatures of statute bound by its provisions. They cannot abdicate their statutory functions or act as courts of equity by directing settlements or disposing of petitions without formal admission or rejection.The Court cited Pratap Technocrats, which held that the Adjudicating Authority and Appellate Authority do not have residual equity jurisdiction and must act within the statutory framework of the IBC. The Court also referred to Arun Kumar Jagatramka v. Jindal Steel & Power Ltd., cautioning against judicial interference with the statutory framework of the IBC.2. Jurisdictional limits on directing settlements and disposing petitions at 'pre-admission stage':The Court analyzed the powers of the Adjudicating Authority and Appellate Authority under the IBC and concluded that neither has jurisdiction to direct parties to settle disputes or to dispose of petitions without admission or rejection. While settlements are encouraged to facilitate revival and avoid liquidation, such settlements must be voluntary and cannot be compelled by the adjudicatory bodies.The Court noted that the Adjudicating Authority granted multiple adjournments to explore settlement but ultimately failed to admit or reject the petition when no comprehensive settlement was reached. The direction to settle the remaining claims within three months and the disposal of the petition on this basis amounted to an abdication of jurisdiction.The Court further observed that the statutory scheme allows for settlement even after admission of a petition, including withdrawal under Section 12A, and thus admission does not preclude settlements. Therefore, the Adjudicating Authority's refusal to admit the petition on the ground of ongoing settlement was misplaced.3. Threshold requirement under amended Section 7 and maintainability of the petition:The Court acknowledged the amendment to Section 7 effective 28 December 2019, introducing a threshold requirement that at least 10% of financial creditors or 100 creditors in the same class must file the petition. This amendment aims to protect corporate debtors from being dragged into insolvency proceedings by isolated creditors.The Court noted that the threshold is to be assessed at the admission stage, as clarified in Manish Kumar v. Union of India. The original petition met this threshold at the time of filing. The Court left open the question of maintainability and other merits to be decided afresh by the Adjudicating Authority upon restoration of the petition.4. Treatment of competing arguments regarding the appellants' status and nature of claims:The respondent argued that some appellants were speculative investors and not allottees within the meaning of the IBC, and thus had no claim under Section 7. The respondent also emphasized ongoing settlements and payments made to several appellants, contending that the appellants were using the insolvency process as a recovery mechanism rather than for genuine insolvency resolution.The appellants disputed the respondent's claims of settlement, pointing out instances where settlements were not completed or were rejected. The Court noted factual disputes regarding settlements and held that these issues are to be decided by the Adjudicating Authority upon fresh consideration.5. Application of law to facts and final conclusions:The Court found that the Adjudicating Authority and Appellate Authority erred in dismissing the petition without admitting or rejecting it as required by Section 7(5) of the IBC. The statutory scheme does not permit disposal of petitions at a 'pre-admission stage' on the basis of ongoing settlements. The Adjudicating Authority's direction to settle claims within three months and dismissal of the petition was an abdication of jurisdiction.The Court emphasized that while settlements are to be encouraged, the statutory mandate must be followed. The adjudicatory bodies cannot act as courts of equity or direct settlements. The Court restored the petition to the Adjudicating Authority for fresh disposal in accordance with law, leaving all rights and contentions open.Significant Holdings:'The Adjudicating Authority is empowered only to verify whether a default has occurred or if a default has not occurred. Based upon its decision, the Adjudicating Authority must then either admit or reject an application respectively. 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.''The IBC is a complete code in itself. The Adjudicating Authority and Appellate Authority are creatures of the statute. Their jurisdiction is statutorily conferred. The statute which confers jurisdiction also structures, channelises and circumscribes the ambit of such jurisdiction. Thus, while the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.''Once the requirements of the IBC have been fulfilled, the Adjudicating Authority and the Appellate Authority are duty bound to abide by the discipline of the statutory provisions. It needs no emphasis that neither the Adjudicating Authority nor the Appellate Authority have an uncharted jurisdiction in equity. The jurisdiction arises within and as a product of a statutory framework.''The Adjudicating Authority's refusal to admit the petition on the ground of ongoing settlement was misplaced. The statutory scheme allows for settlement even after admission of a petition, including withdrawal under Section 12A, and thus admission does not preclude settlements.''The threshold requirement under amended Section 7 is to be assessed at the admission stage. The original petition met this threshold at the time of filing. The question of maintainability and other merits are to be decided afresh by the Adjudicating Authority.''The Adjudicating Authority and Appellate Authority erred in dismissing the petition without admitting or rejecting it as required by Section 7(5) of the IBC. The statutory scheme does not permit disposal of petitions at a 'pre-admission stage' on the basis of ongoing settlements.'Accordingly, the Court set aside the impugned judgments of the Adjudicating Authority and the Appellate Authority and restored the petition under Section 7 of the IBC to the Adjudicating Authority for fresh disposal in accordance with law.
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