Even If MSME Registration Obtained Post Commencement Of CIRP, the Promoter is Eligible to Submit Resolution Plan by taking the exemption under Section 240A of IBC – Insolvency and Bankruptcy Code, 2016.

Civil Appeal No.4422/2023 Decided on 29^th November 2023.

Summary:

The Supreme Court has held that the Promoter of a Corporate Debtor is eligible to submit a resolution plan in terms of Section 240A of the Insolvency and Bankruptcy Code, 2016 (“IBC”), even if the Corporate Debtor was registered as Micro Small Medium Enterprise (“MSME”) after commencement of Corporate Insolvency Resolution Process (“CIRP”). The Division Bench of Supreme Court has set aside an order passed by the National Company Law Appellate Tribunal (“NCLAT”), wherein the Promoter of a MSME Corporate Debtor was declared ineligible to submit a plan on the premise that the MSME certificate was obtained post commencement of CIRP.

Facts of the case:

On 06.04.2021, Shree Aashraya Infra-Con Limited (“Corporate Debtor”) was admitted into CIRP under IBC, by the National Company Law Tribunal (“NCLT”). Subsequently, the Corporate Debtor was registered as Micro, Small and Medium Enterprise (“MSME”) on 15.07.2021.Mr. Hari Babu Thota (“Appellant”) was appointed as the Resolution Professional of the Corporate Debtor. The Resolution Professional presented a plan before the National Company Law Tribunal, Bengaluru as propounded by the promoters and approved by the Committee of Creditors [COC] but in terms of the order dated 28.02.2023, the application was dismissed on the ground that the promoters could not have presented the plan as per Section 29A of IBC which puts a bar on certain persons from becoming a resolution applicant.

Issue:

Whether the Corporate Debtor not having an MSME status at the time of commencement of CIRP, would disqualify the Resolution applicant under Section 29A of IBC as benefit of Section 240A would not be available?

Judgement:

Court examined section 29Awhichlists down the persons ineligible to submit a resolution plan for the Corporate Debtor, including the Promoters and Related Party of the Corporate Debtor and Section 240A which provides that the bar under Section 29A to submit a plan would not apply in the CIRP of MSME Corporate Debtor. Consequently, the Promoter of a MSME Corporate Debtor is eligible to submit a resolution plan for the same by availing benefit of exception given under Section 240A of IBC. The Court opined that in the case at hand, there are no bank dues/outstanding which would at all invite a concept of NPA much less the period of one year. Further, only one preferential transaction was identified by the Resolution Professional but NCLT has not passed any order in that regard. Lastly, Section 29A(h) has no factual application in the given scenario.

It was concluded that in terms of Section 29A, the Promoter of the Corporate Debtor was not disqualified per se to dis-entitle him from presenting the plan. The Court took the view that exempting MSME from application of Section 29A has been done due to the nature of business carried out by such entities. The Court has set aside the NCLT and NCLAT orders and has held that even if the MSME registration was obtained post commencement of CIRP, the Promoter of such Corporate Debtor would be eligible to submit a resolution plan in terms of Section 240-A of IBC.

Analysis:

This Judgement is a welcome step as it upholds the intent behind inclusion of section 240A, rather than defeating the purpose of the section by getting into the technicalities. Though this Judgement considers the overall scheme of things, the judiciary shall maintain a balanced approach and the ambit of Section 240A shall not be widened to the extent that it dilutes the purpose of Section 29A of IBC 2016.