IBC | Cut-Off Date To Determine Resolution Applicant's Eligibility Under S.240A Is Date Of Submitting Resolution Plan : Supreme Court

The Supreme Court has held that for the purpose of Section 240A of Insolvency and Bankruptcy Code, 2016 (“IBC”), the cut-off date to determine the eligibility of a resolution applicant to submit a resolution plan, is the date on which the resolution plan was submitted and not the date on which Corporate Insolvency Resolution Process (“CIRP”) commenced.

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, by relying on the ratio in Digamber Anand Rao Pingle v Shrikant Madanlal Zawar & Ors., Comp. App. (AT) (Ins.) No.43-43A/2021.

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.

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.

SUPREME COURT VERDICT

The Court noted that Section 29A of IBC was introduced to cure the mischiefs of the persons who may be responsible for the financial situation of the company against trying to submit a plan. It was opined that Section 240A of IBC exempted MSMEs from application of Section 29A due to the nature of business carried out by such entities.

Reliance was placed on the statement of the then Finance Minister, Government of India, delivered while moving the amendment Bill introducing Section 29A, which states as under:

“Now a number of ineligibility clauses were not there in the original Act, and, therefore, Clause 29-A introduces those who are not eligible to apply. For instance, there is a clause with regard to an undischarged insolvent who is not eligible to apply: a person who has been disqualified under the Companies Act to act as a Director cannot apply: and a person who is prohibited under the SEBI Act cannot apply. So these are statutory disqualifications. And, there is also a disqualification in clause (c) with regard to those who are corporate debtors and who, as on the date of the application making a bid, do not operationalize the account by paying the interest itself i.e. you cannot say that I have an NPA. I am not making the account operational. The accounts will continue to be NPAs and yet I am going to apply for this. Effectively, this clause will mean that those, who are in management and on account of whom this insolvent or the nonperforming asset has arisen, will not try and say, I do not discharge any of the outstanding debts in terms of making the accounts operational, and yet I would like to apply and get the same enterprise back at a discounted value, for this is not the object of this particular Act itself. So Clause 5 has been brought in with that purpose in mind.”

It was observed that the aforesaid statement, while giving the objective of interpretation of Section 29A and referring to the disqualification in Clause (c), is in regard to those who are corporate debtor and provides the cut off 2023 “as on date of the application making a bid”.

The Court held that for the purpose of Section 240A of IBC, the cut-off date to determine eligibility of a resolution applicant to submit a resolution plan is not the date on which CIRP commenced, rather the cut off date would be the date on which the resolution plan was submitted.

“The common submission thus, is that while interpreting Section 240A, the reason for carving out an exception in micro, small and medium industries is set out on the date of application for making the bid as the crucial date. The submission is that while for some other aspects the initiation of the CIRP proceedings would be the cut off date, the same would not apply in the case of Section 240A, in view of the statement by the Minister themselves while introducing the amendment Bill…….We are inclined to accept the aforesaid plea as it is quite obvious that while seeking to protect this category of industries, the disqualification is not to be incurred, especially in view of the “notwithstanding clause”.”

The Court has set aside the NCLT and NCLAT orders and 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.

Case Title: Hari Babu Thota v. Other

Citation:  2023 LiveLaw (SC) 1051

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