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JC - Legal Updates - Ongoing settlement cannot be a basis to reject petition under IBC - Supreme Court

Legal Updates

20 Dec 2021

Ongoing settlement cannot be a basis to reject petition under IBC - Supreme Court

The Adjudicating Authority (“AA”) cannot simply dismiss a petition under section 7 of the Insolvency & Bankruptcy Code, 2016 (“IBC”),on the basis that the corporate debtor has initiated the process of settlement with the financial creditors, held by the Hon’ble Supreme Court of India, in the matter of E S Krishnamurthy & Ors. Vs. M/s Bharath Hi Tech Builders Pvt. Ltd. Civil Appeal No. 3325 of 2020 on 14th December 2021.

The Appellant filed a petition under section 7 of the IBC for initiating the Corporate Insolvency Resolution Process (“CIRP”) in respect of the respondent, the National Company Law Tribunal (‘NCLT’) declined to admit the petition and instead directed the respondent to settle the claims, The National Company Law Appellate Tribunal (“NCLAT”) also confirmed the order of the NCLT in appeal.

Overturning the decisions of AA and NCLAT, the Supreme Court propounded that “27. 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.”

Supreme Court held that AA and NCLAT have proceeded 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.


For any further information, please contact Mr. Shubhabrata Chakraborti (shubhabrata.chakraborti@jclex.com) or Mr. Dhruv Malik (dhruv.malik@jclex.com).