NCLT Kolkata: MSME Promoters Can Be Relaxed From Net Worth Criteria For Resolution Plan Submission, But Are Required To Deposit Security Deposit And EMD

Background Facts:

On 08.04.2022, Wearit Global Ltd. (Corporate Debtor), a registered MSME, was admitted into the Corporate Insolvency Resolution Process ('CIRP'). Rachna Jhunjunwala, Resolution Professional ('RP'), invited Expression of Interest ('EoI') on 20.11.2023, with a submission deadline of 20.12.2023. Mr. 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 03^rd meeting of the Committee of Creditors ('CoC'), the request for exemptions based on the MSME status of the Applicant was discussed. The CoC decided not to grant the requested relief, noting that the Applicant had also failed to submit the required Earnest Money Deposit ('EMD'). On 22.12.2023, the RP emailed the minutes of the 3^rd CoC meeting to the Applicant, informing him that no secured lender had agreed to the requested exemption in eligibility criteria.

On 30.12.2023, during the 4th CoC meeting, it was discussed that the Applicant had not submitted the EMD and therefore, did not meet the eligibility criteria. Consequently, the Applicant was excluded from the provisional list of Prospective Resolution Applicants.

The Applicant filed an application against the RP and the Corporate Debtor's CoC (Respondents) to direct the Respondents to relax the eligibility requirement of a minimum tangible net worth of Rs.15 crores for the Applicant of the Corporate Debtor. It has also sought to Order the RP to accept the Applicant's EoI as a Prospective Resolution Applicant under Section 240A of the IBC, given that the Corporate Debtor is classified as a deemed MSME. Further, it seeks that the NCLT issue a stay on Agenda No.5 from the Minutes of the Meeting of the 3rd CoC of the Corporate Debtor held on 20.12.2023 until the said application is resolved.

Verdict of the Tribunal:

The NCLT Kolkata bench allowed the application and held that MSME promoters can 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 observed that the objectives of the Insolvency and Bankruptcy Code, 2016 ('Code') as outlined in its Preamble, are to facilitate the reorganization and insolvency resolution of corporate entities, partnership firms, and individuals in a timely manner. 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 of 2018 (ILC Report) supports exempting MSME entities from competing with other resolution applicants due to their crucial role in the Indian economy.

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

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

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 is unwarranted.

Additionally, the Tribunal noted that in the case of Rajesh Kumar Damani vs. CoC of Pami Metals Pvt. Ltd. and Ors., the promoter voluntarily submitted the EMD, which led to the matter being referred back to the CoC.

It observed that given the various exemptions and relaxations already available to MSMEs, including those in Section 240A of the IBC, the requirement to furnish EMD and Security Deposit (refundable if the resolution plan fails) ensures 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.

The Tribunal, presently, ruled that an MSME promoter, who has defaulted and whose company has subsequently entered CIRP due to this default, can be exempted from the net worth criterion when submitting their plan. However, this exemption does not extend to the requirement to deposit the Security Deposit at the time of submitting their EoI and the EMD at the time of submitting their Resolution Plan.

In conclusion, NCLT Kolkata directed that the RP allow the Applicant's EoI and Resolution Plan, exempting the net worth criterion upon the payment and deposit of the Security Deposit and EMD.

Case Title: Mr. Manish Kumar, suspended director of Wearit Global Ltd. vs. Rachna Jhunjunwala, RP and Anr.

Case No.: I.A. (IB) No. 53/KB/2024 in Company Petition (IB) No. 100/KB/2019

Counsel for Applicant: Mr. Joy Saha, Sr. Adv. Mr. Dripto Majumdar, Adv. Mr. Sumit Biswas, Adv. Mr. R. Bhowmick, Adv. Mr. C. Mitra, Adv.

Counsel for Resolution Professional: Mr. Shaunak Mitra, Adv. Mr. Pranay Agarwal, Adv. Ms. Sreya Choudhury, Adv. Ms. R. Jhunjhunwala, RP.

Date of Judgment: 05^th June, 2024

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