Sec 240A IBC | Even If MSME Registration Obtained Post Commencement Of CIRP, Promoter Eligible To Submit Resolution Plan: Supreme Court

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 Bench comprising Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia, 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.

BACKGROUND FACTS

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 Section 29A was inserted in IBC vide amendment effective from 23.11.2017. The provision lists down the persons ineligible to submit a resolution plan for the Corporate Debtor, including the Promoters and Related Party of the Corporate Debtor.

Section 240A was inserted in IBC with effect from 06.06.2018 and 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.

Taking benefit of Section 240A, the Promoters of the Corporate Debtor submitted a resolution plan for the Corporate Debtor, which was approved by the Committee of Creditors. However, on 28.02.2023 the NCLT declined to approve the resolution plan since the MSME certificate was obtained post commencement of CIRP.

In appeal, on 02.06.2023 the NCLAT upheld the NCLT order. NCLAT relied on its earlier judgment in Digamber Anand Rao Pingle v Shrikant Madanlal Zawar & Ors., Comp. App. (AT) (Ins.) No.43-43A/2021, and held that when MSME Certificate is obtained post commencement of CIRP, the Promoter cannot avail benefit of Section 240A to submit a plan for the Corporate Debtor.

The Resolution Professional filed an appeal against the NCLAT order before the Supreme Court.

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?

SUPREME COURT VERDICT

The Court noted that objective behind introducing Section 29A of IBC was to cure the mischiefs of persons who may be responsible for the financial situation of the company against trying to submit a plan and take over the company.

Sub sections (c), (g) and (h) of Section 29A pertain to the ineligibility related to Promoter of Corporate Debtor. The Section 29A(c) disqualifies a person whose account has been classified as a non performing asset (NPA) and a year has lapsed from such classification till the CIRP date. Section 29A(g) disqualifies a Promoter of a Corporate Debtor wherein preferential, undervalued, fraudulent or extortionate transactions had taken place and the NCLT has passed an order in that regard. Section 29A(h) disqualifies a person who has executed a guarantee in favour of a creditor in respect of a of a Corporate Debtor, against which such creditor has filed insolvency proceedings and the same has been admitted under IBC, and such guarantee has been invoked by the creditor and remains unpaid in full or part.

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 say 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.

Reliance was placed on the Insolvency Law Committee's Report 2018, wherein under the head “exemption of Micro, Small and Medium Enterprises from Section 29-A”, it has been discussed that, “However, given that MSMEs are the bedrock of the Indian economy, and the intent is not to push them into liquidation and affect the livelihood of employees and workers of MSMEs, the Committee sought it fit to explicitly grant exemptions to corporate debtors which are MSMEs by permitting a promoter who is not a wilful defaulter, to bid for the MSME in insolvency. The rationale for this relaxation is that a business of an MSME attracts interest primarily from a promoter of an MSME and may not be of interest to other resolution applicants.”

While evaluating whether the Promoter was eligible under Section 240A of IBC to submit a plan, the Bench observed that the NCLAT judgment in Digamber Anand Rao Pingle v Shrikant Madanlal Zawar & Ors., Comp. App. (AT) (Ins.) No.43-43A/2021, lays down the incorrect position of law.

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.

The matter has been restored to NCLT for reconsideration.

Case Title: Hari Babu Thota

Citation: 2023 LiveLaw (SC) 1051

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