2022 (9) TMI 1161 - Tri - Insolvency and Bankruptcy

Tribunal Prioritizes Section 7 Over PPIRP Application: Adherence to Insolvency Code

Shailendra Kumar Agarwal and Ors. Versus CHD Developers Ltd.

The Tribunal concluded that the Pre-Packaged Insolvency Resolution Process (PPIRP) application filed could not take precedence over the pending Section 7 ... Pre-Packaged Insolvency Resolution Process - new procedure for resolving cases of Micro, Small and Medium Enterprises (MSME) under IBC - Section 54C of IBC (Pre-Packaged) - what is the role of the Adjudicating Authority when there is a Section 7 IBC petition filed and pending long before the present PPIRP application is filed? - HELD THAT:- This Adjudicating Authority is a creature of the statute and has to work within the framework of the IBC. It is seen from the objects and reasons of the amendment to the IBC which came into effect on 04.04.2021, the Parliament in its wisdom after having enacted the IBC Code, 2016 thought it fit to have an alternative mechanism by bringing in the concept of pre-package by way of an Amendment on 04.04.2021. On a reading of the objects and reasons, one factor is clearly discernible that the Government wanted a hybrid method of Insolvency Resolution Process which includes creditors in control (Section 7, 9 or 10) as well as debtors in control (PPIRP). The Government opted for the hybrid method by bringing this Ordinance. How the hybrid method should work? - HELD THAT:- While bringing the amendment into force the Parliament in its wisdom perceived a situation where the Adjudicating Authority will be faced with the dilemma as to how the matter should be resolved if there are applications are filed or pending under IBC & Chapter IIIA as the case may be. It is a situation of FC in control versus the CD in control - In order to ensure that the Adjudicating Authority does not face a logjam and to resolve the overlap, Section 11A was brought into force laying down the parameters as to how the Adjudicating Authority will deal with the cases of this nature. The pre-package application under Chapter III-A which has been filed on 12.07.2022, cannot take precedence over the Section 7 of IBC application which was filed on 21.10.2020, and remained pending though heard and reserved and re-heard on a number of occasions. The Section 7 IBC application filed and pending in the case will have to be given precedence over the pre-package application - Merely because there was a delay in the admission of CIRP proceedings in the Section 7 IBC application, this Tribunal finds no justification to allow the pre-package to take precedence. We are bound by the mandate of Section 11A(4). Further our view is fortified by reading the paragraph 3.16 (c) of Insolvency Law Committee Report which is already extracted earlier. It clarifies the object and intent behind Section 11A(4). The object of Section 11A is to guide the Adjudicating Authority to deal with applications of IBC-vs. Pre pack based on relevant dates as between them (Section 11A(1) (2) & (3) and to ensure that there is no clash between the applications filed prior to the Amendment dated 04.04.2021 and application filed after coming into force of the Amendment dated 04.04.2021 Various scenarios have been identified under Section 11A and the guiding principle has been given to the Adjudicating Authority. The guiding principle enjoined in Section 11A (1), (2), (3) & (4) is binding on this Adjudicating Authority. Therefore, there cannot be any deviation, however, much the real estate allottees' plead that it will be in their best interest. The PPIRP i.e. (IBPP)-02(PB)/2022 cannot be entertained in view of the pending Section 7 IBC petitions C.P. No. (IB)-1081(PB)/2020 & C.P. No. (IB)-1775(PB)/2018. Since the CD has already given the consent for admission of CIRP in the earlier proceedings as recorded and that, the debt and default is already admitted and recorded by this Tribunal in the earlier order dated 07.06.2021 recorded in para 10 above, which has not been modified or altered. The CD has also admitted debt and default as it is a pre condition for Chapter III-A petition. Therefore, there is no further enquiry needed on debt and default. The CD having conceded to debt and default both in terms of operational creditor earlier and real estate allottee presently, no further enquiry on debt and default is required. Petition dismissed. Issues Involved:1. Eligibility and applicability of Pre-Packaged Insolvency Resolution Process (PPIRP) under Section 54C of IBC.2. Interpretation of Section 11A of IBC regarding the precedence of PPIRP applications over Section 7, 9, or 10 applications.3. The impact of pending Section 7 applications filed prior to the IBC Amendment Ordinance dated 04.04.2021 on the admission of PPIRP applications.4. The role and discretion of the Adjudicating Authority in handling simultaneous applications under different sections of IBC.5. The effect of the COVID-19 pandemic on the insolvency resolution process and the introduction of PPIRP as a remedial measure.Issue-wise Detailed Analysis:1. Eligibility and Applicability of PPIRP under Section 54C of IBC:The petition C.P. No. (IBPP)-02(PB)/2022 was filed under Section 54C of the IBC, which introduces the Pre-Packaged Insolvency Resolution Process (PPIRP) for Micro, Small, and Medium Enterprises (MSMEs) following the IBC (Amendment) Ordinance dated 04.04.2021. The eligibility criteria for PPIRP are outlined in Section 54A, and the duties of the Resolution Professional before initiating PPIRP are specified in Section 54B. The manner of application initiation is provided in Section 54C, with a time limit for completion under Section 54D, and the duties and powers of the Resolution Professional during PPIRP under Section 54F.2. Interpretation of Section 11A of IBC:Section 11A of IBC outlines the procedure for handling simultaneous applications under Section 54C and Sections 7, 9, or 10. Specifically:- Section 11A(1) mandates that if a PPIRP application is pending, it must be considered before any subsequent Section 7, 9, or 10 applications.- Section 11A(2) stipulates that if a Section 54C application is filed within 14 days of a Section 7, 9, or 10 application, the PPIRP application should be prioritized.- Section 11A(3) states that if a Section 54C application is filed after 14 days of a Section 7, 9, or 10 application, the latter should be considered first.- Section 11A(4) clarifies that the provisions of Section 11A do not apply to applications under Sections 7, 9, or 10 that were pending as of the commencement of the Amendment Ordinance on 04.04.2021.3. Impact of Pending Section 7 Applications:The Tribunal noted that a Section 7 application filed by home buyers on 21.10.2020 was pending long before the PPIRP application was filed on 12.07.2022. The Tribunal emphasized that Section 11A(4) explicitly states that the provisions of Section 11A do not apply to applications under Sections 7, 9, or 10 that were pending as of the commencement of the Amendment Ordinance. Therefore, the pending Section 7 application takes precedence over the PPIRP application.4. Role and Discretion of the Adjudicating Authority:The Tribunal highlighted that it must operate within the framework of the IBC and adhere to the guiding principles laid out in Section 11A. The Tribunal must prioritize applications based on the timelines and scenarios outlined in Section 11A(1), (2), and (3), while Section 11A(4) mandates that pending applications under Sections 7, 9, or 10 as of 04.04.2021 must be considered independently of the new PPIRP provisions.5. Effect of COVID-19 and Introduction of PPIRP:The introduction of PPIRP was a response to the financial distress caused by the COVID-19 pandemic, particularly affecting MSMEs. The Government aimed to provide a quicker, cost-effective, and less disruptive insolvency resolution process through PPIRP. However, the Tribunal noted that the PPIRP provisions do not override the rights and processes already in place for applications filed under Sections 7, 9, or 10 before the Amendment Ordinance.Conclusion:The Tribunal concluded that the PPIRP application filed on 12.07.2022 cannot take precedence over the pending Section 7 application filed on 21.10.2020. The Tribunal dismissed the PPIRP application and admitted the Section 7 applications, appointing an Interim Resolution Professional and directing the necessary procedural steps to be taken for the insolvency resolution process. The Tribunal emphasized adherence to the statutory framework and the guiding principles of Section 11A in its decision-making process.