2024 (10) TMI 508 - AT - IBC

Precedence/priority of consideration and decision filed by application u/s 54(C) of IBC, over and above the application filed under Section 7 of IB, against the same Corporate Debtor - application under Section 7 is filed much prior of enforcement of the amendment of the Act, 2021 i.e. w.e.f. 04.04.2021 and is hit by Section 11A(4) of the Code - HELD THAT - Section 11A(2) says that precedence is to be given to an application if the application under Section 54C already pending and application under Section 7, 9 or 10 is filed or if the application under Section 7, 9 or 10 is pending and the application under Section 54C is filed within 14 days of the filing of the said application then the precedence has to be given to the said application but Section 11A(3) cast an exception as it provides that where an application under Section 54C is filed after fourteen days of the filing of the application under Section 7, 9 or 10 then it has not to be given precedence rather the precedence has to be given to the application filed under Section 7, 9 or 10 of the Code. Section 11A(4) of the Code says that the provision of this Section i.e. 11A shall not apply where an application under Section 7, 9 or 10 is filed and pending as on the date of the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2021. Meaning thereby, if the application under Section 7, 9 or 10 is already filed and then the Act of 2021 came into being then the applicant filing the application under Section 54C cannot take the help of this Section. In the present case, what precisely has happened is that the application under Section 7 was filed on 09.12.2020, the Act of 2021 came into being on 04.04.2021 and the application under Section 54C was filed on 04.09.2022 that is much after the expiry of year, therefore, the rigours of Section 11A(4) is squarely applied to the controversy at hand and hence the Tribunal has committed a patent error in taking up the application under Section 54C of the Code over and above the application filed much earlier under Section 7 of the Code and decided the same. This procedure could not have been followed as the law is totally against it, therefore, in such circumstances, the order passed on the application filed under Section 54C on 20.04.2023 for the purpose of initiation of PPIRP is patently illegal and thus, the same is hereby set aside. Appeal allowed.

Issues Involved:

1. Precedence of application under Section 54(C) of the Insolvency and Bankruptcy Code, 2016 over an application under Section 7 filed prior to the amendment of the Code.
2. Interpretation and application of Section 11A(4) of the Insolvency and Bankruptcy Code, 2016.
3. Legality of the approval of the resolution plan under the Pre-Packaged Insolvency Resolution Process (PPIRP).

Detailed Analysis:

1. Precedence of Application under Section 54(C) over Section 7:

The core issue in the first appeal was whether the Tribunal erred in prioritizing the application under Section 54(C) of the Insolvency and Bankruptcy Code, 2016 over an earlier application under Section 7. The Appellant argued that the Tribunal's decision to prioritize the Section 54(C) application, filed by the Corporate Debtor on 04.09.2022, over the Section 7 application, filed on 09.12.2020, was erroneous. The Tribunal admitted the Section 54(C) application and imposed a moratorium, which the Appellant contended was a violation of Section 11A(4) of the Code. The Appellant maintained that the Section 7 application, filed before the 2021 amendment, should have been given precedence.

2. Interpretation and Application of Section 11A(4):

Section 11A(4) of the Code was pivotal in this case. It stipulates that the provisions of Section 11A do not apply where an application under Section 7, 9, or 10 is filed and pending as of the commencement date of the Insolvency and Bankruptcy Code (Amendment) Act, 2021. The Tribunal, however, overruled the Appellant's objection based on this provision, asserting that the Section 54(C) application deserved precedence. The Tribunal's reasoning was that the Section 7 application was not aligned with the Code's intent and object, as it seemed aimed at displacing existing management rather than resolving the Corporate Debtor's financial distress. The Appellate Tribunal, however, found that the Tribunal had committed a patent error by not adhering to Section 11A(4), which clearly exempted the Section 7 application from the precedence rules applicable to Section 54(C) applications filed after the 2021 amendment.

3. Legality of the Approval of the Resolution Plan:

The second appeal challenged the approval of the resolution plan under the PPIRP, which was contingent on the outcome of the first appeal. Since the first appeal was allowed, the approval of the resolution plan was also set aside. The Appellate Tribunal concluded that the PPIRP proceedings were initiated incorrectly, given the precedence of the Section 7 application. Consequently, the order approving the resolution plan was deemed patently illegal and was annulled.

Conclusion:

The Appellate Tribunal allowed both appeals, setting aside the Tribunal's orders that had prioritized the Section 54(C) application and approved the resolution plan. The Tribunal's interpretation of Section 11A(4) was found to be erroneous, as it failed to recognize the precedence of the Section 7 application filed prior to the 2021 amendment. The Appellate Tribunal's decision underscores the importance of adhering to statutory provisions governing the precedence of insolvency applications, particularly in the context of amendments to the Insolvency and Bankruptcy Code.

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