SC: NCLT can't force settlement in insolvency cases

A real estate company owed money to hundreds of investors. The tribunal kept adjourning the case to let them settle. The Supreme Court just shut that down.

The National Company Law Tribunal (NCLT) — the special court that handles insolvency cases — did not decide whether the company had defaulted. It kept pushing the hearing back, hoping the builder would pay. When the tribunal finally passed an order, it did not admit the insolvency petition or reject it. It told the company to settle the remaining claims within three months. The Supreme Court ruled this was illegal. The law, it said, gives the tribunal only two choices: admit or reject. There is no third option called "go settle."

The promise of 25% returns

Bharath Hi Tech Builders Pvt. Ltd. had a plan. It would develop a housing project on 100 acres. It signed a Master Agreement and a Syndicate Loan Agreement with hundreds of investors. The company promised them assured returns of 20 to 25 per cent per annum. It also promised to convey plots of land within specific timelines. The investors clutched their agreements — the promised returns printed in bold — as they handed over their money.

The company did not keep its word. It neither paid the promised returns nor transferred the plots. When the defaults piled up, 83 investors filed a petition under Section 7 of the Insolvency and Bankruptcy Code (IBC) — the provision that allows a financial creditor to ask the NCLT to start insolvency proceedings against a company that has defaulted.

The tribunal that refused to decide

The NCLT's Bengaluru bench received the petition on 26 April 2019. The file — CP(IB) No.188/BB/2019 — sat in a silent room, untouched for months as the case was repeatedly adjourned. The tribunal did not do what the law requires — check whether a default had occurred and then admit or reject. Instead, it kept pushing the hearing back. The reason: the company was trying to settle with the investors.

This went on for months. Eventually, on 28 February 2020, the NCLT passed an order. It noted that out of roughly 300 investors, about 140 had been settled. Then it directed the company to settle the remaining claims within three months. The petition was disposed of — not admitted, not rejected, but disposed of on the basis of a settlement timeline.

The investors appealed to the National Company Law Appellate Tribunal (NCLAT). On 30 July 2020, the NCLAT upheld the order. It called this a "pre-admission stage" disposal — the case was closed before the tribunal had formally decided whether to admit it. The investors then approached the Supreme Court.

Two options. Nothing else.

The Supreme Court bench — Justice Dr Dhananjaya Y Chandrachud and Justice A S Bopanna — looked at Section 7(5) of the IBC. This provision tells the NCLT exactly what to do when a financial creditor files a petition claiming a default has occurred.

Under clause (a), if the tribunal is satisfied that a default has happened and the application is complete, it must admit the petition. This triggers the Corporate Insolvency Resolution Process (CIRP) — a structured legal process where a resolution professional takes over the company's management and tries to find a buyer or a repayment plan.

Under clause (b), if the tribunal finds that no default has occurred or the application is incomplete, it must reject the petition.

That is it. Two options. No third path. The statute does not say: "If the company is trying to settle, keep the case pending indefinitely." It does not say: "Dispose of the petition by directing the company to pay within three months."

"Abdication of statutory jurisdiction"

The court was blunt. In its judgment in E S Krishnamurthy & Ors. v. M/s Bharath Hi Tech Builders Pvt. Ltd. (Civil Appeal No. 3325 of 2020, decided on 14 December 2021, reported at 2021 SCC OnLine SC 1222), the Supreme Court held that the NCLT and the NCLAT had acted beyond their jurisdiction. Both tribunals are creatures of statute — they exist only because the IBC created them. Their powers are limited to what the law gives them. They do not have what the court called "residual equity-based jurisdiction" — the power to do whatever seems fair in a particular case.

The court held that by disposing of the petition without determining whether a default had occurred, the NCLT had abdicated its statutory duty. "This constitutes abdication of the statutory jurisdiction entrusted to it under the IBC," the court said, the word "abdication" hanging in the air of the courtroom. It means the tribunal walked away from the job the law gave it.

The bench also clarified something important: tribunals can encourage settlements. They can ask parties to talk. But they cannot direct settlements as a way of disposing of a petition. If the law gave tribunals the power to do that, it would have said so. It did not.

The precedents that sealed it

The court relied on its own earlier judgments. In Innoventive Industries Ltd. v. ICICI Bank — (2018) 1 SCC 407 — the Supreme Court had already laid down that the NCLT's role at the admission stage is limited to checking whether a default exists. In Swiss Ribbons Pvt. Ltd. v. Union of India — (2019) 4 SCC 17 — the court had upheld the constitutional validity of the IBC and emphasised that the code is designed to be a time-bound process. In Arun Kumar Jagatramka v. Jindal Steel & Power Ltd. — (2021) 7 SCC 474 — the court had warned tribunals against reading equitable considerations into the code where the statute does not provide for them.

The court also cited Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Limited — 2021 SCC OnLine SC 569 — Embassy Property Developments (P) Ltd. v. State of Karnataka — (2020) 13 SCC 308 — and Manish Kumar v. Union of India — (2021) 5 SCC 1 — all reinforcing the same principle: the IBC is a complete code that leaves no room for tribunals to invent remedies.

These cases together establish a clear principle: the IBC is not a debt recovery mechanism. It is not a tool for tribunals to supervise settlements between companies and their creditors. It is a law designed to either revive a company through a resolution process or send it into liquidation — and that decision must be made quickly.

The order

The Supreme Court allowed the appeal. It set aside both the NCLT order dated 28 February 2020 and the NCLAT order dated 30 July 2020. It restored the original petition — CP(IB) No.188/BB/2019 — to the NCLT for fresh consideration. The tribunal must now do what it should have done in the first place: decide whether a default occurred, and then either admit the petition or reject it.

THE PLAY: If you are a financial creditor filing a Section 7 petition, and the NCLT tries to dispose of your case by directing the debtor to settle, appeal immediately — the tribunal has no power to do that, and the Supreme Court will set it aside.

What this means

For tribunals, the message is clear. The NCLT and NCLAT are not courts of equity. They cannot invent remedies the statute does not provide. If a company wants to settle with its creditors, it can do so outside the insolvency process — or it can use Section 12A of the IBC (the provision that allows withdrawal of a petition after it has been admitted, provided the creditors agree). But the tribunal cannot force a settlement at the admission stage by simply refusing to decide.

For creditors, this judgment is a shield. If a debtor tries to delay insolvency proceedings by promising to settle, and the tribunal goes along with it, the creditor now has a clear Supreme Court ruling to cite. The tribunal must decide. It cannot adjourn indefinitely. It cannot pass a settlement-directed order. It must admit or reject.

For corporate debtors, the judgment removes a tactic. Companies that default on debts can no longer rely on the tribunal's patience to keep the case alive while they negotiate. The law demands a binary answer: did you default, or did you not? There is no middle ground.

The Supreme Court ended where it began: with two options, and nothing else.