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NCLT cannot coerce allottees in real estate projects to enter into settlements with the Developer-Corporate Debtor, rules Supreme Court

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The issue which arose for adjudication before the Division bench of the Hon’ble Supreme Court of India (SC), comprising of Dr. Justice DY Chandrachud and Mr. Justice AS Bopanna, in ES Krishnamurthy & Ors. v. Bharath Hi Tech Builders Pvt. Ltd. was whether the Adjudicating Authority can, in terms of the provisions of the IBC, dismiss the insolvency petition filed under Section 7, without even considering the merits of the case, on the basis that the corporate debtor has initiated the process of settlement with the financial creditors.

The SC held, in their judgment dated 14.12.2021, that as the Adjudicating Authority (AA) cannot compel a party to the proceedings before it to settle a dispute in terms of Section 7(5) of IBC, since such a course of action has not been contemplated thereunder, the directions issued by the AA suffered from an abdication of jurisdiction. The SC further observed that while the AA and NCLAT can encourage settlements, they cannot direct them by acting as courts of equity, especially when the AA has been empowered to verify whether a default has occurred or not. The SC accordingly restored the Section 7 insolvency petition to AA (NCLT, Bangalore) for fresh disposal on merits.

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