Supreme Court Stays Project-Wise Insolvency Resolution: Indiabulls vs. Ram Kishore (2023)

Date of the Judgment: 11 May 2023
Citation: 2023 INSC 523
Judges: Dinesh Maheshwari, J. and Sanjay Kumar, J.
Can a corporate insolvency resolution process (CIRP) be limited to a single project of a real estate company? The Supreme Court of India recently addressed this critical question in a case involving Supertech Ltd., a real estate company with multiple ongoing projects. The Court considered whether the National Company Law Appellate Tribunal (NCLAT) could restrict the CIRP and the constitution of the Committee of Creditors (CoC) to only one project, “Eco Village-II,” or if the CIRP should encompass the entire company. The judgment was delivered by a two-judge bench comprising Justices Dinesh Maheshwari and Sanjay Kumar.

Case Background

Supertech Ltd., a real estate company, had taken credit facilities from Union Bank of India for its “Eco Village-II” project. Later, Union Bank of India and Bank of Baroda extended further credit. Due to Supertech’s failure to repay the loans, the account was declared a Non-Performing Asset (NPA) on 20 June 2018. Union Bank of India filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) on 20 March 2021, claiming a total amount of ₹431,92,53,302. The National Company Law Tribunal (NCLT) admitted the application on 25 March 2022, initiating the CIRP and appointing Mr. Hitesh Goel as the Interim Resolution Professional (IRP).

The promoter of Supertech Ltd. appealed the NCLT order to the NCLAT. On 12 April 2022, the NCLAT issued an interim order staying the constitution of the CoC. On 10 June 2022, the NCLAT modified its earlier order, directing that the CoC be constituted only for the “Eco Village-II” project. It also ordered that the project be completed with the assistance of the ex-management, while other projects were to continue as ongoing projects under the IRP’s supervision.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) admitted the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), initiating the Corporate Insolvency Resolution Process (CIRP) for Supertech Ltd. The promoter of Supertech Ltd. appealed this order to the National Company Law Appellate Tribunal (NCLAT). The NCLAT initially stayed the formation of the Committee of Creditors (CoC). Later, the NCLAT modified its order, directing that the CoC be constituted only for the “Eco Village-II” project, effectively initiating a project-wise insolvency resolution. This order was challenged by the financial creditors in the Supreme Court.

Legal Framework

The core of this case revolves around the interpretation of the Insolvency and Bankruptcy Code, 2016 (IBC), specifically Section 7, which deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor. The IBC aims to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. The code envisages a process where a Committee of Creditors (CoC) is formed to oversee the resolution process. The key question is whether the CIRP can be limited to a single project of a corporate debtor or if it must encompass the entire company.

Section 7 of the IBC states:

“7. Initiation of corporate insolvency resolution process by financial creditor.—(1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. (2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed. (3) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (2). (4) The Adjudicating Authority may, by order, admit the application under sub-section (2) if it is satisfied that— (a) a default has occurred and the application under sub-section (2) is complete, and (b) there is no disciplinary proceeding pending against the resolution professional proposed under sub-section (4) of section 22. (5) The Adjudicating Authority shall, within seven days of admission of the application under sub-section (5), communicate the order of admission to the financial creditor and the corporate debtor. ”

Arguments

Arguments of the Appellants (Union Bank of India and Indiabulls Asset Reconstruction Company Ltd.):

• The financial institutions funded the corporate debtor as a single entity, not for individual projects. Therefore, the credit facility should not be treated as project finance, and the resolution should not be project-based.
• The Insolvency and Bankruptcy Code, 2016 (IBC) envisages a CIRP for the entire corporate entity, not just one project. The Committee of Creditors (CoC) should be constituted for the entire corporate debtor, not just for one project.
• Allowing the erstwhile management to participate in the resolution process would defeat the purpose of the IBC, as it violates Section 29-A of the Code and various judgments of the Supreme Court. The ex-management is the reason for the projects being suspended.
• The appellants favored investment by a third party, provided the ex-management is excluded from the resolution process.
• The order restricting the CoC to only “Eco Village-II” should be modified to include the entire company.

Arguments of the Respondent No. 1 (Promoter of Supertech Ltd.):

• The interim directions issued by the Appellate Tribunal should be modified to include the “Eco Village-II” project within the interim arrangement.
• The ex-management should be allowed to execute the interim funding and settlement plan under the supervision of the IRP, monitored by a committee designated by the Court.
• No coercive action should be taken against the assets of the corporate debtor, its promoters, directors, and management, as this would delay project completion.

Arguments of the IRP:

• The interim directions issued by the Appellate Tribunal should not be interfered with.
• A steering committee should monitor the construction and file quarterly reports.
• Efforts should be initiated to procure interim financing for all projects of the corporate debtor, including both “Eco Village-II” and non-“Eco Village-II” projects.

Arguments of Home Buyers of Eco Village-II:

• Construction of the “Eco Village-II” project should be completed under the supervision of the IRP with the assistance of the ex-management.

Arguments of Other Home Buyers:

• The order should not be interfered with, and the NCLAT should complete the process of approval and infusion of funds from the proposed investor.
• A monitoring committee should be formed for the interim arrangement and settlement plan.
• No coercive action should be taken against the assets of the corporate debtor.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues in this interim order. However, the primary issue before the court was:

1. Whether the interim order of the NCLAT directing a “project-wise resolution” is tenable under the Insolvency and Bankruptcy Code, 2016 (IBC).

Treatment of the Issue by the Court

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

Authorities

The Supreme Court referred to the following case while considering the matter of interim relief:

Judgment

The Supreme Court, while not fully deciding on the legality of project-wise insolvency resolution, decided to maintain the interim arrangement as directed by the NCLAT. The Court noted that the NCLAT’s order directed the constitution of the Committee of Creditors (CoC) only for the “Eco Village-II” project, while other projects were to continue as ongoing projects under the supervision of the Interim Resolution Professional (IRP) with the assistance of the ex-management. The Court observed that if it were to order the constitution of a CoC for the entire corporate debtor at this stage, it could disrupt ongoing projects and cause hardship to home buyers. The Court also noted that the other projects were being continued by the IRP and that efforts were being made for infusion of funds.

The Court modified the NCLAT order only to the extent that any process beyond voting on the resolution plan for the “Eco Village-II” project would require specific orders from the Supreme Court. The Court also clarified that the NCLAT could deal with the offers received and pass appropriate orders, but the entire process would be subject to the orders passed in these appeals.

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

How each authority was viewed by the Court?

• Union of India and Ors. v. M/s Raj Grow Impex LLP and Ors. [2021 SCC OnLine SC 429]: The Court relied on this case to reiterate the principles for granting interim relief, emphasizing the need to consider the balance of convenience and the risk of irreparable injury.
• Films Rover International Ltd. v. Cannon Film Sales Ltd. [(1986) 3 All ER 772]: This case was cited to support the principle that the court should adopt the course that carries the lower risk of injustice when granting interim injunctions.
• Dorab Cawasji Warden v. Coomi Sorab Warden [(1990) 2 SCC 117]: The Court referred to this case for the guidelines on granting interlocutory mandatory injunctions, including the need for a strong case for trial, 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, particularly the home buyers. The Court was wary of disrupting the ongoing projects and causing further hardship to home buyers by ordering a full-fledged CIRP for the entire corporate debtor at this stage. The Court also considered the fact that the NCLAT had already initiated a project-wise resolution process, and altering that at this stage could cause more harm than good. The Court also took into account the principle of balance of convenience, noting that the inconvenience caused by maintaining the status quo was less than the inconvenience that would be caused by disrupting the ongoing projects.

The court’s reasoning was influenced more by the factual aspects of the case, particularly the need to protect the home buyers and the ongoing projects. The legal considerations were also important, but the practical implications of the decision weighed more heavily in the court’s mind.

Key Takeaways

• The Supreme Court has not yet ruled on the legality of project-wise insolvency resolution under the IBC.
• The Court is inclined to maintain the status quo to protect the interests of home buyers and avoid disrupting ongoing projects.
• The interim order of the NCLAT directing a project-wise resolution for “Eco Village-II” will continue, but any process beyond voting on the resolution plan will require specific orders from the Supreme Court.
• The NCLAT can deal with offers received and pass appropriate orders, but the entire process will be subject to the final orders of the Supreme Court.

Directions

The Supreme Court directed that the process beyond voting on the resolution plan for the “Eco Village-II” project shall await further orders of the Court. The NCLAT may deal with the offers received and pass appropriate orders, but the entire process shall remain subject to the orders to be passed in these appeals.

Development of Law

The ratio decidendi of this case is that the Supreme Court has temporarily upheld the project-wise insolvency resolution process initiated by NCLAT, but has kept the question of its validity open for final determination. This case does not change the previous position of law but rather underscores the need for a balanced approach in insolvency proceedings, especially in the context of real estate projects with multiple stakeholders.

Conclusion

The Supreme Court’s interim order in the Indiabulls vs. Ram Kishore case reflects a cautious approach to the complex issue of project-wise insolvency resolution. While the Court has not explicitly endorsed the concept, it has chosen to maintain the status quo to avoid disrupting ongoing projects and causing further hardship to home buyers. The final decision on the legality of project-wise resolution under the IBC remains to be seen, and this case highlights the challenges in balancing the interests of various stakeholders in insolvency proceedings.