Banking Companies Not Required To Exhaust MSME Revival Option Before Filing Petition U/S 7 Of IBC: NCLT, Mumbai

Brief Facts:

The NCLT, Mumbai had initiated Corporate Insolvency Resolution Process (CIRP) against Perfect Infraengineers Limited ("Corporate Debtor") by an order dated 15.07.2024, upon a petition filed by the Technology Development Board (“Financial Creditor”) under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Ms. Manisha Nimesh Mehta (Promoter and Director of Corporate Debtor) filed a writ petition challenging the initiation of CIRP. She sought a declaration that being a Micro, Small, and Medium Enterprise (MSME) within the meaning of Micro, Small and Medium Enterprises Development Act, 2006 and the Notification dated 29.05.2015 issued by the Central Government under Section 9 of the Act, as well as circulars and guidelines issued by the Reserve Bank of India under Section 10 thereof providing for a mechanism for resolution of stress, no proceedings for recovery under the Securitisation and Reconstruction of Financial Stress and Enforcement of Security Interest Act, 2002 (SARFAESI Act) would lie against the Corporate Debtor, except in the manner contemplated under the Notification; and the Act in so far as not having created a special forum/tribunal to adjudicate inter-se rights and obligations, the jurisdiction of the civil Court is not ousted.

Both parties had agreed before the High Court that the NCLT should consider the Supreme Court's judgment in M/s Pro Knits v. The Board of Directors of Canara bank & Ors. (Civil Appeal No. 8332 of 2024) dated 01.08.2024, which held that instructions issued by the Central Government under Section 9 of the MSME Act and by the RBI under Sections 21 and 35A have statutory force and are binding on all banking companies. The Bombay High Court in its order dated 1.10.2024 also directed the NCLT to maintain a status quo on the 15.07.2024 order.

Contentions of the Parties:

Counsel for Corporate Debtor stated that the Notification dated 29.5.2015 lays down the instructions for the Framework for Revival and Rehabilitation of MSMEs and MSME Act being a beneficial legislation overrides the provision of IBC. In Pro Knits, the Supreme Court held that “The Instructions/Directions issued by the Central Government under Section 9 of the MSMED Act and by the RBI under Section 21 and Section 35A have statutory force and are binding to all the Banking companies”. He contended that unless ICICI bank (another lender of Corporate Debtor) is impleaded as party, he cannot proceed any further, upon being asked to make his case as to how it does not fall within the four corners of section 7 of IBC. He further submitted that no recovery action should be taken by any financial institution unless procedure prescribed in Notification has been followed. The jurisdiction of civil court is ousted in matters of Insolvency Resolution under the IBC.

Per contra, Counsel for Financial creditor submitted that the proceedings under section 7 are not recovery proceedings, but are in realm of Resolution proceedings; the decision in case of Pro Knits deals with initiation of recovery proceedings under SARFAESI Act and not resolution under IBC; the said Notification is not applicable to Technology Development Board as it is not a financial institution or Banking Company; section 238 of the IBC supersedes the Notification as being later in time; and IBC also provides alternate mode of resolution of stress of debt of a corporate debtor.

Observations:

The Tribunal referred to the case of Johnson Lifts Limited v. M/s. Tracks & Towers Infratech Pvt. Ltd., where the NCLAT held that the High Courts should refrain from intervening in proceedings governed by a special statute such as the IBC. The NCLAT had referred to the judgment of Supreme Court in Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors. and Kalparaj Dharamshi & Anr. v. Kotak Investment Advisors Ltd., where it was held that:

“...High Courts should lay their hands off in those proceedings which are governed by a special statute like I & B Code 2016, because the right of judicial review being made available before the Appellate Jurisdiction under the code itself, it should not be left open to be gone into under Article 226 & 227 of the Constitution of India…”

The Tribunal further referred to the judgment of Bombay High Court in Jotun India Limited vs. PSL Ltd., which held that “NCLT is not a court subordinate to the High Court”. It allowed the Corporate Debtor to make their submission, being conscious of the fact that the order dated 15.7.2024 passed by the Tribunal had attained finality in the absence of an appeal in terms of Section 61 of IBC.

The Tribunal noted that the Supreme Court in Pro Knits held that “if at the stage of classification of the loan account of the borrower as NPA, the borrower does not bring to the notice of the concerned bank… that it is a Micro, Small or Medium Enterprise… such an Enterprise could not be permitted to misuse the process of law for thwarting the actions taken under the SARFAESI Act by raising the plea of being an MSME at a belated stage.” The Tribunal observed that the question before Supreme Court in Pro Knits was not whether the provisions of MSME Act overrides the provisions of IBC, which is a later legislation. It noted that IBC contains a non-obstante clause u/s. 238.

Further, the Tribunal observed that Section 240A of IBC makes certain concessions to MSME Corporate person and vests powers in Central Government u/s 240A(2) of the Code to direct in the public interest, by notification, that any of the provisions of the Code shall either not apply to MSMEs; or apply to MSMEs with such modifications as may be specified in the notification. The Notification had not been notified later on in terms of Section 240A(2) of the IBC by the Central Government. The Tribunal held that it cannot be said that MSMED Act overrides the provisions of IBC, unless said so expressly in terms of Section 240A(2).

Furthermore, the Notification dated 29.5.2015 was prior in time of introduction of IBC. Had it been intent of Central Government to mandate recourse to Revival and Rehabilitation Framework first before availing alternative equally effective remedy available in the later legislation, the Central Government in terms of powers vested in Section 240A(2) could have said so. The Tribunal thus held, “the lenders of a MSME enterprise are not precluded from taking alternative course of resolution of the stress of a MSME Corporate Debtor in case of a default. It can also not be said that even if a lender fails to take recourse to Notification dated 29.5.2015, the existence of default vanishes and it is precluded from initiating Insolvency Resolution process in terms of provisions of IB Code.”

The Tribunal then referred to Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and Ors., wherein it was held that:

"A financial creditor may trigger the Code either by itself or jointly with other financial creditors or such persons as may be notified by the Central Government when a 'default' occurs. The Explanation to Section 7(1) also makes it clear that the Code may be triggered by such persons in respect of a default made to any other financial creditor of the corporate debtor, making it clear that once triggered, the resolution process under the Code is a collective proceeding in rem…"

The Tribunal observed that the restructuring contemplated in para 5(4) of the notification is another mode for revival and rehabilitation of the MSME Corporate Persons in addition to IBC. It held that it is not incumbent on the Banking companies to first exhaust the avenue of revival under the Notification before proceeding to file an application u/s 7 of IBC for the resolution of financial defaults under the Code.

The Tribunal referred to M. Suresh Kumar Reddy vs. Canara Bank & Ors., where the SC held that “...even the non payment of a part of debt when it becomes due and payable will amount to default on the part of a Corporate Debtor. In such a case, an order of admission under Section 7 of the IB Code must follow.” Since there there exists a debt and default in repayment thereof, the Tribunal declined to interfere with the impugned order dated 15.7.2024.

The Tribunal rejected the contention that ICICI Bank had to be impleaded as a necessary part to proceed further. It noted that a financial creditor may file a section 7 application either by itself or jointly with other financial creditors when a “default” occurs. In other words, an application u/s 7 can be adjudicated by the Tribunal even on application of one financial creditor, provided the debt due to such financial creditor exceeds the threshold limit. The Tribunal relied upon Axis bank Ltd. vs. Lotus Three Development Ltd. and Others, which held that “No other person has a right to be heard at the stage admission of the application under Section 7 and 9 of the I&B Code including the 'shareholders' or the 'personal guarantors”.

The Tribunal upheld the impugned order dated 15.7.2024 whereby the CIRP was commenced in case of the Corproate Debtor, i.e. Perfect Infra-engineers Limited.

Case Title: Technology Development Board vs. M/s Perfect Infraengineers Limited

Case Number: C.P.(IB) No. 322/MB/2023

For the Financial Creditor : Mr. Sumedh Ruikar, Advocate.

For the Corporate Debtor : Adv. Mathews Nedumpara a/w Adv. Hemali M. & Adv. Akhilesh Nair for the Respondent.

Date of Order: 29.10.2024