NCLAT Delhi: Ex-Director Is Ineligible To Submit Resolution Plan For MSME CD Being Wilful Defaulter

Background Facts:

On 19.07.2021 and 04.10.2021, IDBI Bank Ltd. (Respondent 2) declared Mr. Namdev Hindurao Patil (Appellant), the Suspended Director and one of the Resolution Applicants of Warana Dairy and Agro Industries Ltd. (Corporate Debtor), as a wilful defaulter. The said declaration was challenged by the Appellant before the Bombay High Court via a Writ Petition.

The Appellant was permitted by the Resolution Professional to submit the Resolution Plan depending on the outcome of the challenge by the Appellant before the Bombay High Court. On 12.05.2022, the Appellant filed Form G and submitted his Resolution Plan. The said challenge was dismissed by the High Court as withdrawn via an Order dated 24.08.2022. The Appellant filed a regular Civil Suit and Civil Judge granted the stay on 19.09.2022.

On 06.10.2022 and 07.10.2022, the Committee of Creditors (CoC) in its 21st Meeting held the Appellant to be ineligible to submit the Resolution Plan on account of him being declared a willful defaulter and subsequently, did not consider the Resolution Plan on merits and further resolved to liquidate the Corporate Debtor.

Subsequently, the Civil Judge via Order dated 19.12.2022, dismissed the suit as non-maintainable. The Appellant lodged a Civil Appeal with the District Court, Kolhapur, contesting the Civil Judge's decision, which was also rejected via an order dated 01.04.2023. The Appellant has since filed a Second Appeal, which is pending adjudication before the Bombay High Court.

The Appellant has filed an appeal against NCLT Mumbai's Order dated 19.04.2023 ordering the Corporate Debtor into liquidation.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal and held that an ex-director is ineligible to submit a resolution plan for the resolution of MSME Corporate Debtor based on his declaration as a wilful defaulter at the date of submitting the Resolution Plan.

The Appellate Tribunal noted that Section 29A of the Insolvency and Bankruptcy Code, 2016 ('IBC') aims to safeguard the legitimate creditors of the Corporate Debtor by preventing unscrupulous individuals from benefiting themselves at the expense of creditors and undermining the objectives of the IBC.

It highlighted that the initial clause of Section 29A specifies that "A person shall not be eligible to submit a Resolution Plan if such person" is afflicted with any of the disqualifications listed in clauses (a) to (i) of Section 29A. This indicates that Section 29A disqualifies individuals who have caused or contributed to the downfall of the Corporate Debtor, rendering them unfit to assume control of its management.

NCLAT noted that following the RBI guidelines, individuals who though have the financial capability to repay but fail to do so are declared willful defaulters are prohibited by Section 29A of IBC to submit a Resolution Plan.

Further, MSMEs were granted partial exemptions from Section 29A of IBC specifically concerning clauses (c) and (h) which are read below:

Section 29A. Persons not eligible to be resolution applicant.

(c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:

(d) has been convicted for any offence punishable with imprisonment –

(i) for two years or more under any Act specified under the Twelfth Schedule; or

(ii) for seven years or more under any law for the time being in force:

This exemption was granted to ensure that other resolution applicants would not shy away from participating, thus aiding in the resolution of such MSME corporate debtors and avoiding their liquidation. The primary objective of IBC is the resolution of corporate debtors rather than their liquidation, hence the exemptions granted to MSMEs concerning Section 29A.

Promoters of MSMEs are exempted only from clauses (c) and (h) of Section 29A, with all other eligibility criteria under Section 29A remaining applicable. Clause (b) of Section 29A is not exempted. Moreover, the exemption provided under Section 240A of the Code specifying the application of IBC to MSMEs does not extend to Section 29A(b), which is the subject under discussion in the current appeal.

Presently, the Appellant defended his case through an interim stay granted by the Civil Judge, Junior Division, Kolhapur. However, at the date of submitting the Resolution Plan, the Appellant was ineligible under Section 29A(b) of the IBC.

NCLAT also pointed out that since Section 240A of the Code does not provide any exemption to the Appellant from the application of Section 29A(b) of the Code, the Appellant had no legal recourse to challenge the said ineligibility as decided upon by the CoC and NCLT Mumbai. Moreover, there was no judicial stay in favor of the Appellant regarding their status as a willful defaulter on 12.05.2022.

In conclusion, NCLAT observed that NCLT Mumbai via its Order dated 19.04.2023 rightly adjudicated and deemed the Appellant ineligible to submit the Resolution Plan.

Case Title: Namdev Hindurao Patil vs. Virendra Kumar Jain, Liquidator, Warana Dairy and Agro Industries Ltd. and Ors.

Case No.: Comp. App. (AT) (Ins) No. 858 of 2023 & I.A. No. 2925 of 2024

Counsel for Appellant: Mr. Krishnendu Datta, Sr. Advocate along with Ms. Neha Agarwal & Mr. Nipun Gautam

Counsel for Respondent: Mr. Udita Singh, for R-1, Mr. Abhishek Sharma, Mr. Kritya Sinha & Mr. Shawaiz Nisar, for R-2, Mr. Mithilesh Kumar Pandey, for R-3.

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