Case: E S Krishnamurthy &amp; Ors Vs. M/s Bharath Hi Tech Builders Pvt. Ltd

5. The genesis of the case arises from a Master Agreement to Sell (Master Agreement) which was entered into between the respondent, IDBI Trusteeship Limited and Karvy Realty (India) Limited (Facility Agent) on 22 June 2014, in order 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 cent per annum compounded annually to the purchaser, under the Master Agreement. It has been stated that in furtherance of the Master Agreement, the ninth appellant was allotted a plot in the project being developed by the respondent on the payment of a sum of Rs 12,50,000. Thus, the respondent was obligated to convey and register the plots to the ninth appellant within 21 months from the date of execution of the Master Agreement (i.e., by 21 March 2016).6. Since the requisite funds could not be generated through the Master Agreement, a Syndicate Loan Agreement (Loan Agreement) was entered into between the respondent, IDBI Trusteeship Limited and the Facility Agent on 22 November 2014 for availing a term loan of Rs 18 crores from prospective lenders. Such prospective lenders were to lend moneys by executing a Deed of Adherence. In accordance with the terms of the Loan Agreement, the respondent had to utilise the funds raised for developing the proposed residential layout in its project and it was to pay an assured return at the rate of 20 per cent annum on the principal amount. Further, the tenure of the loan was to be 24 months from the execution of the Loan Agreement, and in the event of default, the respondent was liable to pay an additional interest of one per cent for every month.7. The case of the appellants is that during the year 2015-2016, the Facility Agent acting through its sister concern (Karvy Private Wealth) advised its clients to extend loans to the respondent. The appellants claim that they (with the exception of the ninth appellant), along with several others, extended term loans to the respondent acting on the advice of the Facility Agent and its sister concern. Thus, requisite Deeds of Adherence were signed. It is alleged by the appellants that through the Loan Agreement, the respondent raised over Rs 15 crores from nearly 300 investors in the first tranche of loans.8. By a letter dated 29 February 2016, addressed to one of the original petitioners in the petition before the NCLT who was allotted a plot under the Master Agreement, the respondent sought an extension of time till 31 October 2016 for conveying the plots. It has been alleged that in its letter, the respondent undertook that in the event of its failure to convey the plots by 31 October 2016, the entire amount which was paid would be returned, together with interest as agreed in the Master Agreement itself.9. Further, on 30 November 2016, the respondent is stated to have extended the term of the Loan Agreement, due to its alleged inability to refund the principal amount along with interest. The respondent is also alleged to have sought an extension of the loan period by 12 months, with an assurance that the principal amount would be repaid in three equal instalments in the 13th, 14th and 15th months.10. However, on 26 April 2019, 11 out of the 17 appellants before this Court (together with 72 other petitioners) instituted a petition under Section 7 of the IBC before the Adjudicating Authority, due to the respondents default in making the re- payment of an amount of Rs 33,84,32,493.11. On 11 September 2019, the Adjudicating Authority adjourned the proceedings on the ground that the parties were attempting to resolve the dispute. A further extension of time for exploring the possibility of a settlement was sought on 24 October 2019 by the respondent, which was granted by the Adjudicating Authority and the petition was posted for 5 November 2019. On 22 November 2019, the respondent informed the Adjudicating Authority that it was exploring the possibility of a settlement, following which it was observed that any proposal for settlement should be furnished to the petitioners well before the next date of hearing. On 20 December 2019, with the respondent having failed to resolve the issue, the Adjudicating Authority posted the petition for admission on 29 January 2020. On 29 January 2020, on the respondents request, the Adjudicating Authority granted a further opportunity to the respondent to settle the dispute with the petitioners before it. On 27 February 2020, the respondent filed a memo before the Adjudicating Authority stating that it had reached a settlement with 140 investors. According to the appellants, however, out of 83 petitioners who were before the Adjudicating Authority in the petition, a settlement had been arrived at only with 13 petitioners. There was, in other words, no settlement with the other 70 petitioners before the NCLT.12. Eventually, by its order dated 28 February 2020, the NCLT disposed of the petition. The Adjudicating Authority noted that both the learned Counsels have filed Joint Consent Terms dated 12.02.2020. Admittedly, however, these consent terms were arrived at by the respondent with only one of the petitioners before the Adjudicating Authority, and not with all of the petitioners (including the appellants). Before the Adjudicating Authority, the respondent submitted that subsequently they have settled the claims of about 140 Creditors and counsel for the respondent also filed a memo indicating the steps that they had taken to settle the claims of various others creditors and clients. In this backdrop, the Adjudicating Authority observed:6. It is not in dispute that the Corporate Debtor with bona fide intention is exploring the possibility of the settlement in question and the project is in advanced stage of completion, and if the Company is put under CIRP, interest of all the Home Buyers as well as other Creditors will be in jeopardy. He further submits that the Corporate Debtor is taking all steps to settle the remaining claims of the Petitioners as well as other Creditors within a time frame. Lists showing the number of cases settled and those remaining have been filed.7. It is a settled position of law that this procedure under the Code is contemplated to be summary in nature, and it cannot manage or decide upon each and every case of individual homebuyers. Lists of Individual cases have been placed on record which show that 140 investors have been fully settled by the Corporate Debtor and an amount of Rs.27.25 crore has been paid to them. 13 claims/Petitioners before us have been settled, 40 are in the process of settlement and 39 pending settlement. Thus the process of settlement appears to be progressing in all seriousness. Instead of examining all the individual claims in detail, we would like to dispose of the instant case by directing the Corporate Debtor to settle all the remaining claims sincerely within a definite lime frame.Thus, the Adjudicating Authority decided to dispose the petition based on the following factors: (i) that respondents efforts to settle the dispute were bona fide, as evinced by the fact that they had already settled with 140 investors, including 13 petitioners before it; (ii) the settlement process was underway with 40 other petitioners; (iii) 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; and (iv) initiation of CIRP in respect of the respondent would put in jeopardy the interests of home buyers and creditors, who have invested in the respondents project, which was in advanced stages of completion. In disposing of the petition, the Adjudicating Authority issued the following directions:a. The Corporate Debtor is directed to settle the remaining claims as expeditiously as possible, but not later than 3 months, and communicate this decision to all the concerned parties.b. If aggrieved by the settlement process of the Corporate Debtor, the remaining Petitioners, if any, would be at liberty to approach this Adjudicating Authority again, in accordance with law.13. The order of the Adjudicating Authority was challenged in appeal before the NCLAT by 7 of the original petitioners, all of whom are appellants before this Court as well, along with certain other allottees who were not original petitioners before the NCLT. By its impugned judgment 30 July 2020, the Appellate Authority dismissed the appeal, noting thus:3. It is manifestly clear that the application under Section 7 of the l&B Code came to be disposed of at the pre-admission stage and no order of admission or rejection of application was passed by the Adjudicating Authority keeping in view the nature of claims which admittedly were relatable to a Housing Project. The Adjudicating Authority appears to have been influenced by the fact that claims of the maximum number of stakeholders have been settled which included some claims settled at pre-admission stage before the Adjudicating Authority. In so far as the remaining claims were concerned, the Adjudicating Authority allowed a definite time frame viz. 3 months giving liberty to the claimant(s whose claims would remain unsettled after expiry of the given time frame, to come back and re-agitate the matter.4. Viewed in these circumstances, it cannot be said that the impugned order is of such a nature which is prejudicial to the rights and interests of any of the stakeholders. The claimant(s) who may be dissatisfied or whose claims remain unsettled during the given time frame can approach the Adjudicating Authority who has not shut its doors. Assailing of the impugned order in appeal would not be the appropriate course.5. It is a fact that the given time frame has already elapsed but we take judicial notice of the fact that normal business operations had been adversely affected by the imposition of lockdown due to outbreak of COVID-19 which has been declared pandemic. Even after unlocking, the pace of business operations is far from normal. In these circumstances, some concession has to be given in adherence to the timelines set in terms of the impugned order. Be-that-as-it-may, this situation may also have to be addressed by the Adjudicating Authority, if approached by a claimant whose claim has not been settled so far. It is not disputed that the resolution of disputes relating to claims, more particularly of Allottees in Housing Projects, has to be given primacy and pushing the Corporate Debtor into liquidation would only be the last option.6. In view of the foregoing discussion and also bearing in mind that the settlement process set in motion at the pre- admission stage is supported by the Consent Terms filed by some of the stakeholders, though it may not be all encompassing, this appeal would not lie. We accordingly hold that the appeal is not maintainable. There being no legal infirmity in the impugned order, the appeal is dismissed.The Appellate Authoritys decision to dismiss the appeal and uphold the Adjudicating Authoritys order was thus based upon the following considerations: (i) the NCLT decided to dismiss the petition under Section 7 at the pre-admission stage itself, since the settlement process was underway; (ii) the NCLT protected the rights of all the appellants/petitioners by setting a time-frame for settlement by the respondent, and leaving them open the option of approaching it in case their claims remained un- settled; (iii) while the timeframe for settlement had elapsed, the respondent had to be shown leniency due to the effects of the COVID-19 pandemic on businesses; and (iv) in disputes of this nature, the claims of the home buyers have to be given priority, and the respondent should not be pushed into liquidation, until as the last resort.14. The NCLATs judgment and order dated 30 July 2020 has now been challenged before this Court by a variety of individuals – some of whom were original petitioners before the NCLT and went in appeal before the NCLAT, some who joined the appeal before the NCLAT directly, some who were original petitioners before the NCLT but did not join the appeal before the NCLAT and others who have joined the cause before this Court for the first time. A tabular representation is provided below:									S.No.            									Name            									Position before   this            			Court            									Position before            			NCLAT            									Position     before            			NCLT            													1            									Brig. E.S. Krishnamurthy            									First Appellant            									Appellant            									Petitioner            													2            									Dhwani Nishith Sanghvi            									Second Appellant            									Appellant            									Petitioner            													3            									Kriti Milind Ranka            									Third Appellant            									Appellant            									Petitioner            													4            									Marie       Therese       Lima Fernandes            									Fourth Appellant            									Appellant            									Petitioner            													5            									Nitin Dinkar Palekar            									Fifth Appellant            									Appellant            									Petitioner            													6            									Sunil Jain            									Sixth Appellant            									Appellant            									Petitioner            													7            									Bhupesh Dinger            									Seventh Appellant            									Appellant            									Petitioner            													8            									Battula Satish            									Eight Appellant            									Appellant            									Not a Party            													9            									Shashi Arora            									Ninth Appellant            									Appellant            									Not a Party            													10            									Gangasagar        Neminath Hemade            									Tenth Appellant            									Not a Party            									Petitioner            													11            									P.V. Lakshminarayana            									Eleventh Appellant            									Not a Party            									Petitioner            													12            									Shaila S Kothari            									Twelfth Appellant            									Not a Party            									Not a Party            													13            									Nemmara      Raju      Dorai Mahadevan            									Thirteenth Appellant            									Not a Party            									Not a Party            													14            									Mayank Gupta            									Fourteenth Appellant            									Not a Party            									Not a Party            													15            									Manjushri Basu            									Fifteenth Appellant            									Not a Party            									Petitioner            													16            									Madhukar V. Limaye            									Sixteenth Appellant            									Not a Party            									Petitioner            													17            									Dipankar Kanjilal            									Seventeenth Appellant            									Not a Party            									Not a Party            						During the course of the appeal, there have also been two applications (IA No 4783 of 2021 and IA No 97193 of 2021) seeking impleadment in the proceedings by ten individuals who are similarly placed to the appellants. Some of these individuals were also original petitioners before the NCLT.Therese Lima Fernandes

Reasoning:
24. 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.25. In Innoventive Industries (supra), 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. Speaking through Justice Rohinton F Nariman, the Court has observed:28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor — it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the debt, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.30. On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is due i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.26. 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 was apprised of the fact that the claims of 140 investors had been fully settled by the respondent. The respondent also noted that of the claims of the original petitioners who have moved the Adjudicating Authority, only 13 have been settled while, according to it 40 are in the process of settlement and 39 are pending settlements. Eventually, 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 Authoritys decision was also upheld by the Appellate Authority, who supported its conclusions.27. The Adjudicating Authority has clearly acted outside the terms of its jurisdiction under Section 7(5) of the IBC. 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.28. Undoubtedly, settlements have to be encouraged because the ultimate purpose of the IBC is to facilitate the continuance and rehabilitation of a corporate debtor, as distinct from allowing it to go into liquidation. As the Statement of Objects and Reasons accompanying the introduction of the Bill indicates, the objective of the IBC is to facilitate insolvency resolution in a time bound manner for maximisation of the value of assets, promotion of entrepreneurship, ensuring the availability of credit and balancing the interest of all stakeholders. What the Adjudicating Authority and Appellate Authority, however, have proceeded to do in the present case is to abdicate their jurisdiction to decide a petition under Section 7 by directing the respondent to settle the remaining claims within three months and leaving it open to the original petitioners, who are aggrieved by the settlement process, to move fresh proceedings in accordance with law. Such a course of action is not contemplated by the IBC.30. In Arun Kumar Jagatramka v. Jindal Steel & Power Ltd. (2021) 7 SCC 474, a two judge Bench of this Court issued a note of caution to the Adjudicating Authorities and the Appellate Authority against judicial interference with the framework created by the IBC. Speaking through Justice DY Chandrachud, the Court held:95…we do take this opportunity to offer a note of caution for NCLT and NCLAT, functioning as the adjudicatory authority and appellate authority under the IBC respectively, from judicially interfering in the framework envisaged under the IBC. As we have noted earlier in the judgment, the IBC was introduced in order to overhaul the insolvency and bankruptcy regime in India. As such, it is a carefully considered and well thought out piece of legislation which sought to shed away the practices of the past. The legislature has also been working hard to ensure that the efficacy of this legislation remains robust by constantly amending it based on its experience. Consequently, the need for judicial intervention or innovation from NCLT and NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the IBC…The above statement indicates that a settlement has admittedly not been arrived at by the respondent with all the appellants. Moreover, in the present appeal, impleadment applications have also been filed on behalf of an additional set of individuals claiming non-payment of their dues by the respondent.32. For the above reasons, we have come to the conclusion that 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 Appellate Authority was cognizant of the fact that even the time schedule for settlement which had been indicated by the Adjudicating Authority had elapsed, but then noted the impact of the outbreak of COVID-19 pandemic on the real estate market, including on the respondent. While acknowledging that the consent terms were filed by some of the stake holders though may not be all encompassing, the Appellate Authority nonetheless proceeded to dismiss the appeal as not maintainable. The observation that the appeal was not maintainable is erroneous. Plainly, 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.33. We may note at this stage that the provisions of Section 7 of the IBC have been amended with retrospective effect from 28 December 2019 by Act 1 of 2020. These provisions have been construed in the judgment of this Court in Manish Kumar (supra). Since we are inclined to restore the proceedings back to the Adjudicating Authority for a fresh consideration, it is not necessary for this Court to dwell on any other aspect, save and except for what weighed with the Adjudicating Authority in disposing of the petition without adjudicating on other issues of maintainability or merits. We leave open all the rights and contentions of the parties to be urged before and decided by the Adjudicating Authority.