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Limited Jurisdiction of NCLT

A Reminder by the Supreme Court

When the Insolvency & Bankruptcy Code, 2016 (“IBC”) was notified in 2016, one of its most talked about provisions was the limited scope of adjudication and consequently narrow jurisdiction conferred upon the National Company Law Tribunal (“NCLT”) in deciding insolvency cases. In fact, the provisions of the Code in respect of financial creditors were viewed by many as draconian and unconstitutional as the NCLT, prior to commencement of insolvency process, is required to only examine a debt and default and nothing else.

The jurisdiction of NCLT in cases of financial creditors is a heightened summary jurisdiction which often results in applications by financial creditors being open and shut, to the utter dismay of the ‘Indian Debtors’ who were otherwise, under the previous regime, adept at prolonging recovery actions with creative defences.

While the NCLTs and National Company Law Appellate Tribunal (“NCLAT”) have repeatedly demonstrated the scope of their jurisdiction which has been clarified a number of times by the Supreme Court as well, the trend of “settlement” compelled the Supreme Court to once again remind the NCLTs of the limited jurisdiction that has been vested in them under IBC.

A recent trend that has emerged before the NCLT is that a debtor when taken to NCLT by a creditor, pleads for time before the NCLT based on assurances of settling the claim of the creditor. When a settlement succeeds, it is often beneficial for all concerned, as the debtor is saved from the rigours of insolvency, and the claim of the creditor also stands satisfied. In this process, perhaps innocently, NCLT, in a recent case, appears to have overstepped its jurisdiction. What transpired was that a financial creditor had filed an insolvency application which was rejected by the NCLT on the ground that there was a possibility of settlement, given the debtor in question had already settled claims of several other creditors in respect of the same transaction. The NCLT directed the parties to settle the remaining claims within 3 months and provided that in the event of failure to settle, the creditor can once again approach the NCLT. This Order of the NCLT was even upheld by the NCLAT.

Upon analysing the Order of the NCLT and NCLAT, the Supreme Court found it fit to reiterate that in cases of an insolvency application by a financial creditor under IBC, the jurisdiction of the NCLT is limited only to verifying whether a default has occurred, based on which the NCLT can either admit or reject an application before it. The Supreme Court has categorically clarified that the NCLT is not empowered to compel a party to settle a dispute while expounding that the NCLT and NCLAT are creatures of the statute, and the powers conferred upon them are limited to what the statute structures, channelises and circumscribes within the ambit of their jurisdiction and any act not prescribed within the statute is beyond their jurisdiction.

While, the Supreme Court has cautioned that the NCLT and NCLAT can encourage settlements, as the purpose of IBC is facilitating the continuance and rehabilitation of a company and to facilitate insolvency resolution in a time bound manner for maximization of value of assets, the decision of NCLT and NCLAT in so much as the NCLT directed the parties to undertake settlement amounted to abdication of their jurisdiction as the NCLT / NCLAT cannot act as courts of equity.

The judgment of the Supreme Court in the given facts of the case is appropriate as directing parties to settle disputes clearly falls outside the jurisdiction vested in NCLT. However, the findings to the effect that NCLT / NCLAT can only do what is provided for under IBC and not act as a court of equity, does make the waters murky in respect of the inherent jurisdiction of NCLT, to pass orders in the interest of justice as contemplated under Rule 11 of the National Company Law Tribunal Rules, 2016. This judgment of the Supreme Court would also make NCLTs very cautious going forward when dismissing an insolvency application on account of settlement between the parties.

Smiti Tewari

Associate Partner

Tanushri Kejriwal

Associate

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