NCLT: MSME Promoter Can Be Relaxed From Net Worth Criteria For Resolution Plan Submission

NCLT: MSME Promoter Can Be Relaxed From Net Worth Criteria For Resolution Plan Submission

They are required to deposit a Security Deposit and Earnest Money Deposit

The Kolkata bench of the National Company Law Tribunal (NCLT) has held that MSME promoters can be relaxed from the net worth eligibility criteria to submit a Resolution Plan.

The bench of Justice Bidisha Banerjee (Judicial Member) and Arvind Devanathan (Technical Member), however, clarified that they cannot be waived off from depositing Security Deposit and Earnest Money Deposit (EMD).

On 08.04.2022, Wearit Global Ltd (corporate debtor), a registered MSME, was admitted into the Corporate Insolvency Resolution Process (CIRP).

Rachna Jhunjunwala, the Resolution Professional (RP), invited an Expression of Interest (EoI) on 20.11.2023, with a submission deadline of 20.12.2023.

Manish Kumar (applicant), the suspended director of the corporate debtor requested the RP to relax the eligibility criteria, specifically the minimum tangible net worth requirement of Rs.15 crore, for submitting the EoI and the Resolution Plan.

On 20.12.2023, during the meeting of the Committee of Creditors (CoC), the request for exemptions based on the MSME status of the appellant was discussed. The CoC decided not to grant the relief, noting that the applicant had failed to submit the required EMD.

On 22.12.2023, the RP emailed the minutes of the third CoC meeting, informing the applicant that no secured lender agreed to the requested exemption.

On 30.12.2023, during the fourth CoC meeting, it was discussed that the applicant had not submitted the EMD and therefore, did not meet the eligibility criteria. Consequently, he was excluded from the provisional list of Prospective Resolution Applicants (PRA).

The applicant applied for the RP and the corporate debtor's CoC (respondent) to direct the respondents to relax the eligibility requirement of a minimum tangible net worth of Rs.15 crores. It also sought to order the RP to accept the applicant's EoI as a PRA under Section 240A of the Insolvency and Bankruptcy Code, (IBC), as the corporate debtor was classified as a deemed MSME. It sought that the NCLT issue a stay on Agenda No.5 from the Minutes of the Meeting of the third CoC until the issue was resolved.

The NCLT allowed the application and held that the MSME promoters could be relaxed from the net worth eligibility criteria to submit a Resolution Plan but not be waived off from depositing Security Deposit and EMD.

The tribunal noted that the objectives of the IBC, as outlined in its Preamble, were to facilitate the reorganization and insolvency resolution of corporate entities, partnership firms, and individuals on time. This aims to maximize the value of their assets, promote entrepreneurship, ensure the availability of credit, and balance the interests of all stakeholders.

It noted that the Insolvency Law Committee Report, 2018 supported exempting MSME entities from competing with other resolution applicants due to their crucial role in the Indian economy.

The bench observed that the goal was to avoid pushing MSMEs into insolvency or liquidation as it would negatively impact the livelihood of employees and workers. The intention was to support MSME entrepreneurship by allowing promoters, who were not willful defaulters, to bid for the MSME under the insolvency process. This exemption was justified because MSME businesses attract interest from their promoters rather than external resolution applicants.

The NCLT observed that further relaxation of the net worth requirement for promoters was unnecessary, given the Code's objectives and the ILC Report's recommendations, along with various relaxations provided under Section 240A.

It ruled that ensuring a viable Resolution Plan that revives the corporate debtor's business and maximizes asset value, especially when public funds are involved, requires maintaining the net worth requirement. Thus, an exemption from this requirement was unwarranted.

The tribunal cited the Rajesh Kumar Damani vs. CoC of Pami Metals Pvt Ltd case, wherein the promoter voluntarily submitted the EMD, which led to the matter being referred back to the CoC.

It observed that the various exemptions and relaxations available to MSMEs, ensured the resolution applicant's seriousness and genuine interest in reviving the business, rather than merely regaining control or disrupting the CIRP of the corporate debtor.

Thus, the tribunal held that an MSME promoter, who defaulted and whose company entered CIRP, could be exempted from the net worth criterion when submitting the plan. However, the exemption did not extend to the requirement to deposit the Security Deposit at the time of submitting the EoI and the EMD at the time of submitting the Resolution Plan.

The NCLT directed the RP to allow the applicant's EoI and Resolution Plan, exempting the net worth criterion upon the payment and deposit of the Security Deposit and EMD.