Supreme Court Stays Project-Wise Insolvency, Allows CIRP to Continue with Modifications: Indiabulls vs. Ram Kishore Arora (2023)

Date of the Judgment: May 11, 2023

Citation: 2023 INSC 429

Judges: Justice Dinesh Maheshwari and Justice Sanjay Kumar

Can a corporate insolvency resolution process (CIRP) be limited to a single project of a company, or should it encompass the entire company? The Supreme Court of India recently addressed this critical question in a case involving Supertech Ltd., a real estate company. The court considered appeals against an order by the National Company Law Appellate Tribunal (NCLAT) that had directed a project-specific CIRP. The Supreme Court, in this judgment, has allowed the CIRP to continue with modifications.

The Supreme Court bench consisted of Justice Dinesh Maheshwari and Justice Sanjay Kumar. The judgment was authored by Justice Dinesh Maheshwari.

Case Background

Supertech Ltd., a real estate company, had taken credit facilities from Union Bank of India for its “Eco Village-II Project”. The bank sanctioned ₹150 crore on October 19, 2013, and December 16, 2013. Subsequently, Union Bank of India and Bank of Baroda extended a second credit facility of ₹200 crore, with Union Bank of India’s share being ₹100 crore, sanctioned on November 21, 2015.

These credit facilities were secured by mortgages, corporate guarantees, and personal guarantees. Due to defaults in loan repayment, the account was declared a Non-Performing Asset (NPA) on June 20, 2018.

Union Bank of India filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) on March 20, 2021, claiming ₹431,92,53,302 as of January 31, 2021, plus interest. The National Company Law Tribunal (NCLT) admitted the application on March 25, 2022, and initiated the CIRP, appointing Mr. Hitesh Goel as the Interim Resolution Professional (IRP).

The promoter/suspended director of Supertech Ltd. appealed to NCLAT, which initially ordered that the Committee of Creditors (CoC) not be formed. Later, NCLAT modified its order on June 10, 2022, directing that the CoC be formed only for the “Eco Village-II” project, and other projects would continue as ongoing projects under the supervision of the IRP and ex-management.

Timeline

Arguments

The financial creditors, including Union Bank of India and Indiabulls Asset Reconstruction Company Ltd., argued that the NCLAT’s order for a project-wise CIRP was not permissible under the IBC. They contended that the CIRP should encompass the entire corporate entity, not just one project. They also opposed the involvement of the ex-management in the resolution process, citing potential conflicts of interest and violations of Section 29A of the IBC.

The promoter of Supertech Ltd. argued for the inclusion of the “Eco Village-II” project within the interim arrangement and sought permission for the ex-management to execute the interim funding plan under the supervision of the IRP and a Monitoring Committee. They also requested a stay on coercive actions against the company’s assets.

The IRP supported the NCLAT’s order and suggested a steering committee to monitor construction. They also proposed efforts to secure interim financing for all projects, including “Eco Village-II” and other projects.

Homebuyers of “Eco Village-II” requested the completion of the project under the supervision of the IRP and with the assistance of the ex-management, similar to other projects where no CoC was constituted.

Other homebuyers supported the NCLAT’s order and requested the completion of the approval process and infusion of funds from proposed investors. They also sought a Monitoring Committee and a stay on coercive actions.

Issues Framed by the Supreme Court

The primary issue framed by the Supreme Court was:

1. Whether the proposition of “project-wise resolution” as adopted by the Appellate Tribunal is tenable under the Insolvency and Bankruptcy Code, 2016.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court referred to Union of India and Ors. v. M/s Raj Grow Impex LLP and Ors. [2021 SCC OnLine SC 429]* to emphasize the principles for granting interim relief, including the need to consider the balance of convenience and the risk of injustice.
• The Court cited Films Rover International Ltd. v. Cannon Film Sales Ltd. [(1986) 3 All ER 772]* to highlight the principle that the court should take the course that carries the lower risk of injustice when granting interim injunctions.
• The Court referred to Dorab Cawasji Warden v. Coomi Sorab Warden [(1990) 2 SCC 117]* for guidelines on granting interlocutory mandatory injunctions, emphasizing the need for a strong case, prevention of irreparable injury, and balance of convenience.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to balance the interests of all stakeholders, especially the homebuyers. The court was also concerned about the potential disruption to ongoing projects if a company-wide CoC was immediately constituted. The court’s reasoning emphasized the following points:

• The court was wary of disrupting ongoing projects and causing hardship to homebuyers.
• The court acknowledged the arguments against project-wise resolution but did not want to cause further uncertainty by completely reversing the NCLAT’s order at the interim stage.
• The court emphasized that the interim arrangement should carry the lower risk of injustice.
• The court decided to maintain the status quo for projects other than Eco Village-II, which were already being supervised by the IRP with the assistance of the ex-management.
• The court also stayed any process beyond voting on the resolution plan for Eco Village-II, indicating its reservations about the project-wise approach.

Logical Reasoning

Key Takeaways

• The Supreme Court has expressed reservations about the concept of project-wise insolvency resolution under the IBC.
• The CIRP for Supertech Ltd. will continue, but the constitution of the CoC is limited to the “Eco Village-II” project, with the process beyond voting on the resolution plan stayed.
• Other projects of Supertech Ltd. will continue as ongoing projects under the supervision of the IRP and ex-management.
• The court has prioritized the interests of homebuyers and the need to avoid disruption to ongoing projects.
• The final decision on the tenability of project-wise CIRP will be determined in the final hearing.

Directions

No specific directions were given by the Supreme Court in this order.

Specific Amendments Analysis

There was no specific amendment analysis in this judgment.

Development of Law

The ratio decidendi of this case is that the Supreme Court has expressed reservations about the tenability of project-wise resolution under the Insolvency and Bankruptcy Code, 2016. The court has not outrightly rejected the concept but has indicated that it requires further consideration. This case highlights the complexities of applying the IBC to real estate companies with multiple projects and the need to balance the interests of various stakeholders.

Conclusion

The Supreme Court’s order in the Indiabulls vs. Ram Kishore Arora case addresses the issue of project-wise insolvency resolution under the IBC. While the court did not fully overturn the NCLAT’s order, it expressed significant reservations about the tenability of project-wise CIRP. The court allowed the CIRP to continue with modifications, prioritizing the interests of homebuyers and the need to avoid disruption to ongoing projects. The final decision on the legality of project-wise CIRP will be made during the final hearing of the appeals.