Supreme Court: Even If MSME Registration Is Taken Post-CIRP Initiation, Promoter Eligible To Submit Resolution Plan

Supreme Court: Even If MSME Registration Is Taken Post-CIRP Initiation, Promoter Eligible To Submit Resolution Plan

Restores the matter to be re-considered by the National Company Law Tribunal

The Supreme Court has held that the promoter of a corporate debtor is eligible to submit a resolution plan under Section 240A of the Insolvency and Bankruptcy Code (IBC), 2016, even if it was registered as a Micro Small Medium Enterprise (MSME) after commencement of the Corporate Insolvency Resolution Process (CIRP).

The bench comprising Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia set aside an order passed by the National Company Law Appellate Tribunal (NCLAT), wherein the promoter of an MSME corporate debtor was declared ineligible to submit a plan on the premise that the MSME certificate was obtained post the CIRP commencement.

On 06 April 2021, Shree Aashraya Infra-Con Limited (corporate debtor) was admitted into CIRP under IBC, by the National Company Law Tribunal (NCLT). Subsequently, on 15 July 2021, the corporate debtor was registered as MSME. Hari Babu Thota (appellant) was appointed as the Resolution Professional (RP) of the corporate debtor.

Meanwhile, vide the amendment effective from 23 November 2017, Section 29A was inserted in IBC. The provision listed the persons ineligible to submit a resolution plan for the corporate debtor, including the promoters and related parties.

Later, with effect from 06 June 2018, Section 240A was inserted in IBC. It provided that the bar under Section 29A to submit a plan would not apply in the CIRP of MSME corporate debtor. Therefore, the promoter of an MSME corporate debtor was eligible to submit a resolution plan by availing the benefit of the exception under Section 240A.

Thus, benefitting from it, the corporate debtor submitted a resolution plan, which was approved by the Committee of Creditors (CoC). However, on 28 February 2023, the NCLT declined to approve the resolution plan since the MSME certificate was obtained after the CIRP commencement.

In an appeal, on 02 June 2023, the NCLAT upheld the order of the NCLT. It relied on its earlier judgment in the Digamber Anand Rao Pingle v Shrikant Madanlal Zawar & Ors., Comp. App. (AT) (Ins.) No.43-43A/2021 case. The tribunal held that when the MSME certificate was obtained post-CIRP commencement, the promoter could not avail the benefit of Section 240A to submit a plan for the corporate debtor.

Thus, the RP approached the top court against the NCLAT order.

The issue was whether the corporate debtor not having an MSME status at the time of CIRP commencement would disqualify the resolution applicant under Section 29A, as a benefit of Section 240A was not available.

The Apex Court noted that the objective behind introducing Section 29A was to cure the mischiefs of persons responsible for the financial situation of the company against trying to submit a plan and take over the company.

Sub-sections (c), (g), and (h) of Section 29A pertained to the ineligibility related to the promoter of the corporate debtor.

Section 29A(c) disqualified a person whose account was classified as a non-performing asset (NPA) and a year had lapsed from such classification till the CIRP date.

Section 29A(g) disqualified wherein preferential, undervalued, fraudulent, or extortionate transactions took place and the NCLT passed an order in that context.

Section 29A(h) disqualified a person executing a guarantee in favor of a creditor of a corporate debtor, against which the creditor filed insolvency proceedings and the guarantee was invoked by the creditor and remained unpaid in full or partly.

Justice Kaul and Justice Dhulia observed that no bank dues were outstanding to term it an NPA. Also, only one preferential transaction was identified by the RP but the NCLT did not pass any order. The judges held that Section 29A(h) had no factual application in the present context. Thus, under Section 29A, the promoter of the corporate debtor was not disqualified per se to disentitle him from presenting the plan.

The bench stated that exempting MSMEs from the application of Section 29A was done due to the nature of business carried out by such entities.

The Court relied on the Insolvency Law Committee's Report 2018, wherein under the ‘Exemption of Micro, Small and Medium Enterprises from Section 29-A’ the matter was simplified.

The report stated, “Given that MSMEs are the bedrock of the Indian economy, and the intent is not to push them into liquidation and affect the livelihood of the employees and workers, the Committee sought it fit to explicitly grant exemptions to the corporate debtors, which are MSMEs, by permitting a promoter who is not a willful defaulter, to bid for the MSME in insolvency. The rationale for this relaxation is that a business of an MSME attracts interest primarily from a promoter of an MSME and may not be of interest to other resolution applicants.”

The bench thus set aside the NCLT and NCLAT orders and held that even if the MSME registration was obtained post-commencement of CIRP, the promoter of the corporate debtor would be eligible to submit a resolution plan under Section 240-A of IBC. It restored the matter to NCLT for reconsideration.