Landmark Decision: Promoters Cleared to Submit Resolution Plans Despite MSME Registration Post CIRP Kickoff

In a groundbreaking ruling, the Supreme Court has paved the way for Corporate Debtor promoters to submit resolution plans, even if the entity was registered as a Micro, Small, and Medium Enterprise (MSME) after the initiation of the Corporate Insolvency Resolution Process (CIRP). The court overturned a National Company Law Appellate Tribunal (NCLAT) order that had deemed a promoter ineligible due to the MSME certificate being acquired post-CIRP commencement.

The case involved Shree Aashraya Infra-Con Limited, admitted into CIRP on April 6, 2021, and subsequently registered as an MSME on July 15, 2021. Mr. Hari Babu Thota served as the Resolution Professional.

Key to the dispute was Section 240A of the Insolvency and Bankruptcy Code, introduced on June 6, 2018. This section exempts MSME Corporate Debtors from the restrictions under Section 29A, allowing promoters to submit resolution plans even if categorized as ineligible under Section 29A.

The resolution plan submitted by the promoters of the Corporate Debtor was initially approved by the Committee of Creditors. However, on February 28, 2023, the NCLT rejected the plan, citing the post-CIRP acquisition of the MSME certificate. The NCLAT, in an appeal on June 2, 2023, upheld the NCLT decision, relying on precedent and concluding that MSME status post-CIRP initiation disqualified the promoter from Section 240A benefits.

The Supreme Court, in its verdict, delved into the rationale behind Section 29A, emphasizing its aim to prevent those responsible for a company’s financial situation from taking over the business. The court dismissed disqualification under Section 29A, noting the absence of NPA classification, limited preferential transactions, and irrelevant guarantees in the case.

Crucially, the court highlighted the exemption of MSMEs from Section 29A, as outlined in the Insolvency Law Committee’s 2018 Report. This exemption recognizes MSMEs as vital contributors to the Indian economy and justifies allowing their promoters, who are not wilful defaulters, to bid for the MSME in insolvency.

Consequently, the Supreme Court declared the NCLAT’s interpretation in Digamber Anand Rao Pingle v Shrikant Madanlal Zawar & Ors. flawed and set aside both NCLT and NCLAT orders. The ruling establishes that, even if MSME registration occurs post-CIRP commencement, promoters remain eligible to submit resolution plans under Section 240A. The matter has been remitted to the NCLT for reconsideration.