Taking stock of pre-pack insolvency cases so far

Pre-pack insolvency was notified in April 2021, and since then only eight applications have been filed to initiate pre-pack insolvency, of which only six have been admitted. Of the six admitted, one was withdrawn before resolution. Of the five remaining cases, only one case has seen resolution under PPIRP. Four cases remain pending as on May 31, 2023.

MP Ram Mohan and Sriram Prasad discuss the course of these eight cases.

The two unsuccessful cases

In Krrish Realtech Private Limited (Krrish Realtech) the application for Pre-pack insolvency resolution process (PPIRP) was withdrawn prior to its admission. In CHD Developers Limited the application for PPIRP was rejected in favour of CIRP. CHD Developers Limited is currently under appeal.

Krrish Realtech Private Limited

In the case of Krrish Realtech, there was substantial debt due, involving numerous FCs and homebuyers from incomplete real estate projects.18 Objections against the PPIRP application were filed soon after its filing with the NCLT. Notices were issued, and the objecting parties were in the process of being heard. Response had been sought from Krrish Realtech to the objections raised. The objections claimed that the PPIRP application was not filed properly and the consent of the FCs was not taken as mandated under the IBC.

 In response, Krrish Realtech filed an appeal before the NCLAT seeking that the objections be heard after the admission of the PPIRP application. They argued that Pre-pack insolvency under IBC did not allow the hearing of objections during the admission process. The objectors argued that the manner of filing the PPIRP application indicated Krrish Realtech’s malafide and fraudulent intentions. The NCLAT upheld NCLT’s decision to hear the objections.

NCLAT prima facie found that the regulations had not been complied in obtaining approval of the FCs for filing the PPIRP application. NCLAT reasoned, when an application under section 54C did not fulfil the statutory requirement, a person having a claim in PPIRP could point out the infirmity and object to the admission of an improper application. The NCLAT further held that NCLT was guided by the principles of natural justice, and it was appropriate to provide reasonable time to file the objections.

Subsequent to the decision of the NCLAT, Krrish Realtech withdrew the PPIRP application. The time taken from the date of filing to the date of withdrawal was 137 days.

CHD Developers Limited

CHD Developers Limited initiated the application for pre-pack insolvency while CIRP applications by homebuyers were already pending before the NCLT. The CIRP applications under section 7 had been filed prior (in October, 2020) to the coming into effect of the PPIRP ordinance providing for PPIRP. In these cases, CHD admitted the default and did not dispute the section 7 application.

The NCLT had to determine whether to admit the pending section 7 petition or the newly filed section 54C application. Section 54C covers the procedure to initiate an application and section 54A covers eligibility. The NCLT drew upon section 11A(4) of the IBC, which states that if a section 7 application was filed before the coming into effect of Part IIIA of IBC, then the order of precedence provided under section 11A (1), (2), and (3) would not be applicable. Accordingly, the PPIRP application was rejected. In this case, the time taken between the date of filing and the rejection of the PPIRP application was 55 days. The decision of the NCLT is currently under appeal.

The six cases admitted to PPIRP The six cases which were admitted to PPIRP can mainly be divided into two categories. In the first, the key question was the completeness of the PPIRP application. In the second, the issue pertained to the conflict between section 7 and section 54A applications. The latter dealt with similar questions as discussed in the CHD Developers case above.

4 cases on completeness of the PPIRP application

While the facts of all four cases are different, the primary question before the NCLT was the completeness of the pre-pack insolvency application.

These four cases were:

1. GCCL Infrastructure and Projects Limited

2. Loon Land Developers Limited

3. Enn Tee International Limited

4. Amrit India Limited

In the case of both GCCL Infrastructure and Loon Land Developers, no significant clarifications were sought by NCLT prior to the admission. In the case of GCCL, there was a default towards FCs; while in the case of Loon Land Development, the default was towards OCs. In Enn Tee International Limited no significant clarifications were sought by the Tribunal, and a minor defect was corrected prior to admission of the application.

In the case of Amrit India Limited, the main issue related to the admissibility arose, due to the filing of a defective application before the NCLT. The application did not include a base resolution plan. The Tribunal granted additional time for clearing the defect. The base resolution plan was then filed 49 days after the filing of the initial application. The Tribunal’s approach to all these cases was similar. Upon finding that all the statutory requirements were fulfilled, the Tribunal admitted the PPIRP applications. In all four orders admitting the PPIRP application, the Tribunal listed out all the requirements under the IBC to initiate a PPIRP (under sections 54A, 54B, and 54C) and observed how these had been complied with and fulfilled in the PPIRP application. The time taken between the filing and the admission of the application for the four cases on average was 79 days.

Application of Section 11A in two cases of admission

In Shree Rajasthan Syntex and Sudal Industries Limited, both section 7 and section 54A applications were filed. The cases are discussed in detail below.

Shree Rajasthan Syntex

Shree Rajasthan Syntex Limited (SRS), a publicly listed company had incurred losses since 2015 and was negotiating with the consortium of banks to restructure the loan. The three banks were—State Bank of India (SBI) [50.73% of debt], Industrial Development Bank of India (IDBI) [28.39% of debt], and Bank of Baroda (BoB) [20.88% of debt]. While engaged in negotiations, BoB unilaterally filed a section 7 application without informing the consortium or SRS. Consequently, SRS filed a PPIRP application.

BoB objected to the PPIRP application, and its main arguments were: a) SRS was not an MSME under the criteria revised by the Ministry of MSME under notification dated June 26, 2020. b) The PPRIP application was filed as a response by SRS after BoB had filed a section 7 application to initiate a CIRP.

The Tribunal observed that in the given case, BoB filed a section 7 application on April 18, 2022, post which notices were issued on May 4, 2022. The PPRIP application was filed on July 26, 2022. However, SRS submitted, the process to initiate PPIRP had commenced in March 2022 – when SRS had obtained consent to initiate PPIRP from SBI on March 29, 2022 and IDBI on April 13, 2022. The Tribunal noted that BoB at the time of filing its CIRP application on April 18, 2022, was aware that an effort to file a PPIRP application was underway.

Consequently, the Tribunal held that BoB’s CIRP application was in bad faith – as more than 66% of the FCs had already approved the PPIRP scheme. NCLT allowed the PPIRP application, finding it in the interest of all the stakeholders; even though the PPIRP application was filed after the 14 days period provided under section 11A. The Tribunal also questioned the practicality of allowing a CIRP where more than 75% of the FCs favoured initiating a PPIRP. Regarding whether SRS was an MSME, the Tribunal was satisfied with SRS’s MSME certificate and SBI and IDBI’s submission that SRS was an MSME. Consequently, the Tribunal dismissed the CIRP application and admitted the PPIRP application, 267 days after it was filed.

Sudal Industries Limited

Sudal Industries Limited (Sudal), a publicly listed company, had submitted a PPIRP application while two CIRP applications were already pending. Of the two petitions, one was filed by Canara Bank (Canara) on July 17, 2020 which held 78.09% of total financial debt and had consented to the PPIRP. The other petition was filed by Jaldhara Properties & Trading Private Limited (Jaldhara) on December 9, 2020 which held 10.56% of the financial debt. Jaldhara objected to the PPIRP application and requested the Tribunal to decide the section 7 petition first, as was mandated under section 11A (4). On examining section 11A (4), the Tribunal found that the law mandated examining the section 7 petition first. Be that as it may, the Tribunal observed both section 7 and section 54A intended to achieve the same goal, which was resolution of insolvency.

As Canara had consented to the PPIRP application, NCLT dismissed its CIRP application as infructuous. The Tribunal further found that Jaldhara’s ‘opposition stems from its intent to displace the existing promoter(s) from its management than to resolve the Corporate Applicant’ and held that the application was not ‘in accordance with the intent and object of the code and deserve[d] to be dealt with accordingly’. Thus, the Tribunal found Jaldhara’s application not maintainable. After dismissing both section 7 petitions, the Tribunal found the section 54A application to be complete and admitted Sudal to PPIRP, 228 days after the initial filing of the PPIRP application. While this case was similar to CHD Developers, the Tribunal distinguished the case on facts and held that in CHD Developers, the CD had not disputed the section 7 application as was not the case in Sudal Industries.

The lone resolution till date: Amrit India

While pre-pack insolvency seems to be relatively straightforward, there has been only one resolution so far—the approval of the resolution plan of Amrit India by NCLT. In the case of Amrit India, there was only one FC. Amrit India declared insolvency due to worsening relations with the FC, where the FC refused to provide further credit. The business was incorporated in 1981, and had been defunct since 2019. It also claimed to have been adversely affected by COVID-19. Consequently, Amrit India initiated PPIRP and proposed a base resolution plan with a 90% haircut for the FC and a 100% impairment of rights of contingent creditors. The CoC in its second meeting rejected the base resolution plan after Amrit India was unable to improve its plan and invited resolution plans from prospective resolution applicants.

The CoC received only one resolution plan from Aquarius Fincaps and Credits Private Limited (Aquarius). At the request of the CoC, some modifications to its resolution plan were made by Aquarius. Thereafter, in its 5th meeting, the CoC approved Aquarius’s resolution plan. As per the plan, Aquarius was to pay 5 lakh to the FC against the amount of 12.7 lakh and provide 2.2 lakh for contingent claims valued at around 25.6 lakh. No amount was due to any OC per the information memorandum. The Tribunal approved the resolution plan after reviewing its compliance with the requirements under the IBC. The whole process from the date of admission to the date of approval of the resolution plan took 156 days. Additionally, it took 75 days for a complete application to be filed with the Tribunal. Thus, bringing the total time spent between filing and approval to 231 days. This included three adjournments at the request of the CD.

The article is an extract from the authors write-up titled Lessons from pre-packaged insolvency cases in India: A long road ahead which appeared in the publication IBC Evolution, Learnings and Innovation of IBBI

Also See: IBBI for higher involvement of stakeholders’ consultation committee in liquidation process