RESEARCH PAPER

Topic : Role of the NCLT in approving or rejecting a resolution plan under

the IBC and Companies Act , 2013.

MEANING OF NCLT & NCLAT

The NCLT or “Tribunal” is a quasi-judicial authority created under the Companies Act, 2013 to
handle corporate civil disputes arising under the Act. It is an entity that has powers and
procedures like those vested in a court of law or judge. NCLT is obliged to objectively determine
facts, decide cases in accordance with the principles of natural justice and draw conclusions
from them in the form of orders. Such orders can remedy a situation, correct a wrong or impose
legal penalties/costs and may affect the legal rights, duties or privileges of the specific parties.
The Tribunal is not bound by the strict judicial rules of evidence and procedure. It can decide
cases by following the principles of natural justice.

BACKGROUND OF NCLT

NCLT was conceptualized by Eradi Committee. It was initially introduced in Companies Act, 1956
in 2002 but the provisions of Companies (Second Amendment) Act, 2002 were never notified as
they got mired in litigation surrounding constitutionality of NCLT. 2013 Act was enacted and the
concept of NCLT was retained. However, the powers and functions of NCLT under 1956 Act and
2013 Act are different. The constitutionality of NCLT related provisions were again challenged
and this case was finally decided in May 2015. The Apex Court upheld the constitutionality of
the concept of NCLT but some of the provisions on constitution and selection process were found
defective and unconstitutional.

QUESTION OF LAW

The Supreme Court had to decide whether the NCLT and NCLAT were correct in
dismissing the appellants' appeal without considering the merits of the petition under
Section 7 of the IBC at the 'pre-affirmation stage,' and directing them to settle with the
respondent within 90 days.

SUPREME COURT'S TAKE ON THE ISSUE

The Supreme Court ruled on December 14, 2021, that while acting as "courts of equity,"
the National Company Law Tribunal (NCLT) and the National Company Law Appellate
Tribunal (NCLAT) cannot compel parties to settle their disputes. The NCLT is only
authorized to verify whether a default has happened, according to a bench led by
Justice D. Y. Chandrachud. The NCLT "must either admit or deny an application,"
according to its ruling. "These are the only two options available to the adjudicating
authority, which cannot compel a party to the proceedings to settle a dispute," the
bench stated. While the NCLT and NCLAT can urge settlements to meet the goals of the
Insolvency and Bankruptcy Code (IBC), they cannot direct any settlement by acting as
courts of equity, according to the top court. It stated that settlements must be
promoted because the ultimate goal of the IBC is to allow a corporate debtor to
continue operating and be rehabilitated, rather than to allow it to go into liquidation.

JURISDICTION OF NCLT AND NCLAT

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 the law. Such a course of action is not
contemplated by the IBC.

In Innoventive Industries Ltd. v. ICICI Bank, a two-judge Bench of this Court

explained the scope of Section 7 of the IBC, holding 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 believes a
"default" has happened, 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.

The Adjudicating Authority has certainly operated outside of its jurisdiction under
Section 7(5) of the IBC in this matter. The Adjudicating Authority's authority is limited to
determining whether or not a default has occurred. The Adjudicating Authority must
then either accept or reject an application based on its determination. These are the
only two options available to the Adjudicating Authority under Section 7(5) of the Act.
The Adjudicating Authority has no authority to compel a party to a dispute to settle it.
The IBC is a self-contained code. The statute has established both the Adjudicating
Authority and the Appellate Authority and their authority is granted by statute (IBC)
itself. The act that grants jurisdiction also shapes, channels, and limits the scope of that
authority. As a result, while the Adjudicating Authority and the Appellate Authority can
encourage settlements, they cannot direct them as courts of equity.

A two-judge Bench of this Court, speaking through Justice D.Y. Chandrachud, held in the
case of Pratap Technocrats (P) Ltd. and Others v. Monitoring Committee of
Reliance Infratel Limited and Others:

"The Adjudicating Authority's and Appellate Authority's jurisdictions do not extend to deciding
the merits of a business decision reached by a majority of the CoC in its commercial wisdom.
The Adjudicating Authority or the Appellate Authority has no residual equity-based
jurisdiction to intervene in this decision if it is otherwise in accordance with the terms of the
IBC and the Regulations promulgated under the law. As a result, after the IBC's requirements
have been met, the Adjudicating Authority and the Appellate Authority are obligated to follow
the statutory provisions' discipline. It goes without saying that neither the Adjudicating
Authority nor the Appellate Authority has uncharted equity jurisdiction. "Jurisdiction
originates from and is a result of a legal framework."

HELD:

As a result, the Supreme Court decided in this instance that the Adjudicating Authority's
order, as well as the instructions that were finally issued, amounted to an abdication of
jurisdiction. The Appellate Authority's conclusion that the appeal could not be
maintained was incorrect. Clearly, the Adjudicating Authority did not carry out the
authority that had been entrusted to it. Thus, a strong case was presented for the
exercise of the appellate authority, which the Appellate Authority then neglected to
exercise. As a result, the Supreme Court granted the appeal and set aside the NCLAT in
Company Appeal and the NCLT's impugned judgment and order dated 30 July 2020. As
a result, the petition under Section 7 of the IBC was returned to the NCLT for a new
hearing.

CONCLUSION

In evaluating whether the Adjudicating Authority and Appellate Authority acted outside
of their jurisdiction in 'directing' the parties to settle with the respondent, this decision
gave a strong interpretation of Section 7 of the IBC. When examining a Section 7
application, the Adjudicating Authority is simply obligated to determine the presence of
a default – nothing more and nothing less. And it must establish this default using the
evidence given under Section 7 (3) clause (a). To achieve a quick resolution, the
Adjudicating Authority must issue its decision within 14 days of receiving the
application, as required by sub-section (4). The adjudicating body's jurisdiction to
compel parties to resolve disputes is not mentioned anywhere in the clause. The section
nowhere mentions the adjudicating body's authority to compel parties to settle
disputes. While the NCLT and NCLAT can initiate settlements to achieve the objectives of
the indebtedness and chapter 11 code (IBC), they cannot demand repayment by acting
as courts of equity. As a result, it was rightly put, the NCLT and NCLAT are legal
manifestations, and are thus limited to the legal settlement powers contained in the
Statute, which in this case is the IBC.

BIBLIOGRAPHY

https://nclt.gov.in
https://www.icsi.edu/media/portals/72/year%202017/presentation/Role%20of%20N
CLT%20-%20PK%20Mittal.pdf
https://cleartax.in/s/national-company-law-tribunal