Disposal of Applications under Section 54C and Section 7/9/10: Section 11A under IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) is one of the most significant economic legislations in India, designed to consolidate and amend laws relating to insolvency and bankruptcy of companies, partnerships and individuals. One of its core objectives is to ensure a time-bound and efficient resolution of stressed assets, while balancing the rights of creditors and the survival of the debtor.

Over the years, the Code has undergone several amendments to address practical challenges faced in its implementation. One such amendment was the insertion of Section 11A by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021. This section governs the order in which the Adjudicating Authority (NCLT) must dispose of applications filed under Section 54C (initiation of pre-packaged insolvency resolution process or PPIRP) and applications filed under Sections 7, 9, or 10 of the Code.

The provision was introduced to remove confusion when multiple insolvency applications are filed against the same corporate debtor. It lays down clear rules on whether priority should be given to the pre-packaged insolvency resolution process (PPIRP) or to the corporate insolvency resolution process (CIRP) filed by financial creditors, operational creditors, or corporate applicants.

This article provides a detailed analysis of Section 11A, the scenarios it covers, judicial interpretations, and its significance in the insolvency framework.

Understanding the Relevant Sections

Before analysing Section 11A, it is important to understand the provisions it interacts with:

• Section 7: Allows a financial creditor to initiate CIRP against a corporate debtor.
• Section 9: Allows an operational creditor to initiate CIRP against a corporate debtor.
• Section 10: Allows a corporate applicant (the debtor itself) to initiate CIRP.
• Section 54C: Provides for the initiation of Pre-Packaged Insolvency Resolution Process (PPIRP) by a corporate debtor, subject to approvals under Sections 54A and 54B.

The PPIRP mechanism was introduced in 2021 specifically for Micro, Small and Medium Enterprises (MSMEs) to provide them a faster, cost-effective and less disruptive method of resolving stress compared to the regular CIRP.

However, since creditors can still file applications under Sections 7, 9, and 10 against the same debtor, a conflict often arose: which application should the NCLT hear first? Section 11A provides the answer.

Section 11A: Text and Key Provisions

Section 11A lays down three specific scenarios for disposal of applications when both Section 54C and Sections 7/9/10 are involved.

When a Section 54C Application is Already Pending

• If an application under Section 54C is pending before the NCLT, the Adjudicating Authority shall first admit or reject it before considering any application under Section 7, 9, or 10 against the same corporate debtor.
• This provision ensures that the PPIRP, being a debtor-initiated resolution process, is not sidelined by creditor-driven CIRP at the initial stage.

When Section 54C Application is Filed Within 14 Days of Section 7/9/10

• If the corporate debtor files an application under Section 54C within 14 days of the filing of a creditor’s application under Section 7, 9, or 10, then priority will be given to the Section 54C application.
• The NCLT must dispose of the Section 54C application first, notwithstanding anything contained in Sections 7, 9, and 10.
• This shows legislative intent to give debtors a small window to opt for PPIRP even after creditors have moved for CIRP.

When Section 54C Application is Filed After 14 Days of Section 7/9/10

• If the corporate debtor files a Section 54C application after 14 days of a creditor’s application, then priority shifts to the Section 7/9/10 application.
• In such cases, the NCLT must dispose of the creditor’s application first.
• This prevents debtors from delaying CIRP proceedings by filing belated PPIRP applications.

Non-Applicability

Section 11A does not apply to cases where an application under Section 7, 9, or 10 was already pending as on the date of commencement of the Amendment Act, 2021.

Rationale Behind Section 11A of IBC

The insertion of Section 11A was based on the following considerations:

• Avoiding Confusion: Earlier, there was no clarity on how to proceed when multiple applications were pending. This often led to inconsistent orders and prolonged litigation.
• Balancing Interests: While PPIRP is designed to give debtors (especially MSMEs) a chance to resolve stress without losing control, creditor applications under Sections 7/9/10 cannot be ignored. Section 11A strikes a balance.
• Preventing Abuse: By introducing the 14-day rule, the legislature prevented debtors from misusing PPIRP provisions as a delaying tactic once creditors have already approached the NCLT.

Mandatory or Directory: The 14-Day Rule

A major question that arose after the introduction of Section 11A was whether the 14-day period under Section 11A(3) is mandatory (strictly binding) or directory (flexible).

Bank of Baroda v. Shree Rajasthan Syntex Ltd.

• Facts:
  • A financial creditor filed an application under Section 7.
  • The corporate debtor later filed an application under Section 54C, but it was filed after 14 days of the Section 7 filing.
  • The corporate debtor argued that the 14-day period should be considered directory, and delays in obtaining approvals under Sections 54A and 54B should be excluded.
• NCLAT’s Findings:
  • The tribunal rejected the debtor’s arguments.
  • It held that when a statute prescribes a specific time frame and attaches consequences to its violation, the provision must be treated as mandatory.
  • Section 11A(3) clearly states that if the Section 54C application is filed after 14 days, the Section 7 application must be disposed of first.
  • Therefore, no exclusion of time for approvals under Sections 54A or 54B is permissible.
• Legal Principle Applied: The Supreme Court in Sharif-ud-Din v. Abdul Gani Lone had observed that if the object of a provision is defeated by non-compliance, it must be considered mandatory. Applying this principle, the NCLAT concluded that the 14-day requirement under Section 11A(3) is mandatory.
• Conclusion of Tribunal: The Adjudicating Authority erred in admitting the Section 54C application because it was filed beyond the statutory 14-day period. The Section 7 application had to be given priority.

Conclusion

Section 11A of the Insolvency and Bankruptcy Code, 2016 plays a crucial role in determining the order of disposal of insolvency applications when both pre-packaged insolvency resolution process (PPIRP) and corporate insolvency resolution process (CIRP) applications are filed against the same corporate debtor.

The provision creates a clear framework:

• If a Section 54C application is pending, it must be decided first.
• If filed within 14 days of a Section 7/9/10 application, Section 54C gets priority.
• If filed after 14 days, Section 7/9/10 gets priority.

Judicial interpretation, particularly in Bank of Baroda v. Shree Rajasthan Syntex Ltd., has made it clear that the 14-day period under Section 11A(3) is mandatory. This ensures that PPIRP cannot be misused to delay creditor-driven CIRP proceedings.