Eligibility Of Suspended Director To Submit A Resolution Plan: Revisiting Hari Babu Thota

The National Company Law Appellate Tribunal (“NCLAT”) and the various benches of the National Company Law Tribunal (“NCLT”) across the country have opined that an erstwhile promoter of a CD can submit a resolution plan in the CIRP if on the initiation date, the CD was a registered MSME. However, the Hon'ble Supreme Court of India in its recent judgment of In re Hari Babu Thota^[2] has reversed the earlier precedents,^[3] and held that the cut-off date for registration of CD as a MSME will be the date of submission of the resolution plan for availing the benefit of Section 240A of the IBC. This effectively means that if the MSME registration for a CD has been obtained after the initiation of CIRP against it, the promoter or suspended director of such a CD can submit its resolution plan provided the MSME registration is obtained prior to the submission of the resolution plan.

However, in In re Hari Babu Thota^[4], the Hon'ble SC has not answered a critical question as to “who is the authorized person to apply for such MSME registration for a CD, after CIRP is initiated?”. If the erstwhile promoter of the CD is allowed to obtain an MSME registration even after the initiation of CIRP, it would defeat the entire purpose of Section 29 (A)(c) of the IBC, which is to prevent the defaulting promoter from submitting a resolution plan for such a CD and possibly to return to its management. The said analysis of this statutory provision is relevant in view of In re Hari Babu Thota^[5], as the current MSME registration process is an online self-declaration that requires no proof for registration of an entity as an MSME.

It is no more 'res integra' that once CIRP is initiated against a CD, the powers and functions of the board of directors of such CD stand suspended and are exercised by the Interim Resolution Professional (“IRP”) or Resolution Professional (“RP”). Therefore, it is only the IRP or RP who is authorized to obtain such MSME registration. This legal position has been laid down by the NCLT Delhi Bench in the matter of Hi-Tech Resource vs. Management Limited vs. Overnite Express Limited^[6], wherein the Hon'ble Bench categorically held that if during the CIRP, a suspended director or promoter obtains an MSME Certificate it shall be an “ultra vires” act. Further, the Hon'ble NCLAT Delhi Bench in Harikirat Singh Bedi vs. The Oriental Bank of Commerce & Anr^[7] has expressly disallowed the shelter of Section 240A to a suspended director and/or erstwhile promoter who obtained an MSME certificate for the CD, after the initiation of CIRP.

It is noteworthy that both the above judicial precedents by the Hon'ble NCLAT and the NCLT Delhi Bench were decided prior to the Hon'ble SC's decision in In re Hari Babu Thota^[8], which extended the cut-off date for obtaining an MSME certificate from the date of initiation of CIRP to the date of submission of the resolution plan for a CD. This change in the cut-off date, without clarifying that a suspended director or erstwhile promoter of the CD cannot obtain an MSME certificate on behalf of the CD after initiation of the CIRP, may potentially have a cascading effect on various ongoing CIRPs. The said action may possibly open the floodgates for a suspended director or erstwhile promoter to submit resolution plans in an ongoing CIRP, by obtaining the MSME certificate for the CD, after the initiation of CIRP.

For instance, such an attempt by a suspended director or promoter was recently disallowed by the Hon'ble NCLT, Hyderabad Bench in the matter of G Yoganand vs. Mr. Birendra Kumar Agarwal and Anr.^[9]. In this matter, the Hon'ble NCLT aptly recognized that the MSME registration is an online, free, paperless, and self-declaration-based process^[10], requiring no verification by any authority. The Hon'ble Bench observed that anyone could register any entity by simply providing his Aadhar and mobile number, and therefore the suspended director should not be permitted to submit a resolution plan based on an MSME certificate obtained by it after the initiation of CIRP.

In the aforesaid Order, the Hon'ble NCLT, Hyderabad Bench while adjudicating the issue of “obtaining the MSME registration for a CD”, substantially answered the question which was left unanswered by the Hon'ble SC in In re Hari Babu Thota^[11]. The NCLT clarified that a suspended director or promoter has no authority to obtain an MSME registration of the CD once the CIRP is initiated. This is in line with the object of Section 29A of the IBC^[12], to prevent a CD from getting into the hands of a suspended director or promoter who was responsible for its insolvency in the first place. In the author's view, the position of law as laid out by the Hon'ble NCLT Hyderabad Bench is an affirmative interpretation of Section 240A of the IBC. It would be interesting to see the final word of the Hon'ble SC in this regard. If this issue is not clarified, it has the potential to open a pandora's box for the misuse of beneficial legislation such as the MSMED Act, 2006 and Section 240A of the IBC at the hand of erstwhile promoters of a CD, which definitely would not have been the intention of the Hon'ble Supreme Court in In re Hari Babu Thota.^[13]

Views are personal.