Supreme Court clarifies eligibility for resolution applicants in MSME insolvency cases: Hari Babu Thota vs. Shree Aashraya Infra-Con Limited (29 November 2023)

Date of the Judgment: 29 November 2023
Citation: 2023 INSC 1056
Judges: Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia
Can a promoter of a company, facing insolvency, submit a resolution plan if the company is classified as a Micro, Small, and Medium Enterprise (MSME)? The Supreme Court of India addressed this crucial question, clarifying the cut-off date for determining eligibility under Section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC) for MSMEs. The Court held that the relevant date for determining eligibility is the date of submission of the resolution plan, not the date of commencement of the Corporate Insolvency Resolution Process (CIRP). This judgment has significant implications for promoters of MSMEs undergoing insolvency proceedings. The judgment was authored by Justice Sanjay Kishan Kaul.

Case Background

Shree Aashraya Infra-Con Limited (the Corporate Debtor) underwent the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016. The appellant, Hari Babu Thota, was appointed as the Resolution Professional. A resolution plan, proposed by the promoters and approved by the Committee of Creditors (COC), was presented to the National Company Law Tribunal (NCLT), Bengaluru. However, the NCLT dismissed the plan on 28 February 2023, stating that the promoters were ineligible to submit a plan. This decision raised concerns about the appellant’s eligibility to continue as a Resolution Professional, and the possibility of the appellant being referred to the Insolvency and Bankruptcy Board of India (IBBI) for further action.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT), Bengaluru, dismissed the resolution plan on the grounds that the promoters were ineligible to present the plan. This order was based on the interpretation of Section 29A of the Insolvency and Bankruptcy Code, 2016, specifically in light of Section 240A, which provides certain exemptions for MSMEs. The NCLT relied on a previous order of the National Company Law Appellate Tribunal (NCLAT) in Digamber Anand Rao Pingle v. Shrikant Madanlal Zawar & Ors., which held that the MSME certificate must be obtained before the commencement of CIRP to avail the benefit of Section 240A. The appellant appealed against the NCLT order, which was also dismissed by NCLAT. Subsequently, the appellant approached the Supreme Court of India.

Legal Framework

The case primarily revolves around the interpretation of Section 29A and Section 240A of the Insolvency and Bankruptcy Code, 2016.

✓ Section 29A of the Insolvency and Bankruptcy Code, 2016, specifies the categories of persons who are ineligible to be resolution applicants. The relevant clauses for this case are:

• (c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset…
• (g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place…
• (h) has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part:

✓ Section 240A of the Insolvency and Bankruptcy Code, 2016, provides an exemption to MSMEs from certain disqualifications under Section 29A:

(1) Notwithstanding anything to the contrary contained in this Code, the provisions of clauses (c) and (h) of section 29A shall not apply to the resolution applicant in respect of corporate insolvency resolution process or pre-packaged insolvency resolution process of any micro, small and medium enterprises.

The purpose of Section 240A is to ensure that MSMEs, which are vital to the Indian economy, are not pushed into liquidation due to a lack of resolution applicants. This provision was introduced to allow promoters of MSMEs, who may be disqualified under Section 29A, to bid for their companies during insolvency.

Arguments

The arguments presented by the appellant and the Amicus Curiae focused on the interpretation of Sections 29A and 240A of the Insolvency and Bankruptcy Code, 2016. The key points of contention were:

• Whether the promoters were disqualified under Section 29A of the Insolvency and Bankruptcy Code, 2016.
• Whether the MSME status of the corporate debtor should be determined at the time of commencement of CIRP or at the time of submission of the resolution plan.
• Whether the benefit of Section 240A of the Insolvency and Bankruptcy Code, 2016, would be available if the MSME certificate was obtained after the commencement of CIRP but before submission of the resolution plan.

Submissions of the Appellant:

• The appellant argued that the promoters were not disqualified under Section 29A of the Insolvency and Bankruptcy Code, 2016, as none of the specific clauses (c), (g), and (h) applied to them.
• The appellant contended that there were no outstanding bank dues that would classify the account as a Non-Performing Asset (NPA), and therefore, the one-year period requirement under Clause (c) of Section 29A was not applicable.
• The appellant submitted that only one preferential transaction was identified, but no order was passed by the adjudicating authority, so Clause (g) of Section 29A was not applicable.
• The appellant also argued that Clause (h) of Section 29A had no factual application in the given scenario.
• The appellant emphasized that the disqualification under Section 29A is specific to promoters, and in this case, the promoter was not disqualified.

Submissions of the Amicus Curiae:

• The Amicus Curiae supported the appellant’s argument and further contended that the MSME certificate, if obtained before the presentation of the resolution plan, would qualify the applicant for the benefit of Section 240A of the Insolvency and Bankruptcy Code, 2016.
• The Amicus Curiae highlighted that the relevant date for determining the applicability of Section 240A is the date of submission of the resolution plan, not the date of commencement of CIRP.
• The Amicus Curiae referred to the judgment of the Supreme Court in Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors. [(2019) 2 SCC 1], which clarified that the disqualification under Section 29A(c) applies at the time of submission of the resolution plan.
• The Amicus Curiae also emphasized the objective of Section 240A, which is to protect MSMEs and allow their promoters to bid for them during insolvency.
• The Amicus Curiae submitted that the statement of the Finance Minister while introducing the amendment bill indicates that the cut-off date should be the date of application of making a bid.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the resolution applicant was disqualified under the primary conditions as specified under Section 29A of the Insolvency and Bankruptcy Code, 2016.
2. Whether the corporate debtor not having an MSME status at the time of commencement of CIRP proceedings would disqualify the Resolution applicant under Section 29A of the Insolvency and Bankruptcy Code, 2016, as benefit of Section 240A would not be available.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court set aside the orders of the NCLT and NCLAT, holding that the promoters were not disqualified from submitting a resolution plan. The Court clarified that the relevant date for determining the applicability of Section 240A of the Insolvency and Bankruptcy Code, 2016, is the date of submission of the resolution plan, not the date of commencement of CIRP. The Court also held that the benefit of Section 240A would be available if the MSME certificate was obtained before the submission of the plan.

The following table shows how each submission made by the parties was treated by the Court:

The following table shows how each authority was viewed by the Court:

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to protect MSMEs and ensure that they are not pushed into liquidation due to stringent eligibility criteria. The Court emphasized the following points:

• The objective of Section 240A of the Insolvency and Bankruptcy Code, 2016, is to provide an exception for MSMEs, allowing their promoters to bid for the company during insolvency.
• The legislative intent, as reflected in the statement of the Finance Minister, was to consider the date of submission of the resolution plan as the cut-off date for determining eligibility under Section 240A of the Insolvency and Bankruptcy Code, 2016.
• The Court observed that the language of Section 29A(c) of the Insolvency and Bankruptcy Code, 2016, itself refers to “at the time of submission of the resolution plan,” indicating that this is the relevant date for determining eligibility.

The Court also noted that even if there was an NPA, the defect could be cured before the submission of the plan, further reinforcing that the submission of the plan is the crucial date.

The Court’s reasoning was based on a combination of statutory interpretation, legislative intent, and the need to protect MSMEs. The Court rejected the interpretation that the MSME status should be determined at the time of commencement of CIRP, emphasizing that the relevant date is the date of submission of the resolution plan. This interpretation aligns with the objective of Section 240A, which is to encourage resolution rather than liquidation for MSMEs.

The Court quoted the following from the judgment:

“Thus, in a sense what is to be tested is whether the Tribunal’s view in Digambar Anand Rao Pingle ’s case (supra) sets forth the correct position of law.”

“We certainly can look to the statement of the Minister for purposes of a cut off date that “ there is no other specific provision providing for cut off date ” which submits that it should be the date of application of making a bid.”

“Thus, even on this count, the plan submitted in question will not incur the disqualification. We may also note that the aforesaid intent is reflected in the statutory provision itself that in Section 29A (c) which begins with “ at the time of submission of the resolution plan”.”

There was no minority opinion in this case. The judgment was delivered by a bench of two judges.

Key Takeaways

• The relevant date for determining the eligibility of a resolution applicant under Section 240A of the Insolvency and Bankruptcy Code, 2016, for MSMEs is the date of submission of the resolution plan, not the date of commencement of CIRP.
• Promoters of MSMEs can submit a resolution plan if the MSME certificate is obtained before the submission of the plan, even if it is after the commencement of CIRP.
• This judgment clarifies the interpretation of Section 240A and aims to protect MSMEs from liquidation by allowing their promoters to participate in the resolution process.
• The Supreme Court overruled the decision of the National Company Law Appellate Tribunal in Digamber Anand Rao Pingle v. Shrikant Madanlal Zawar & Ors., which held that the MSME certificate must be obtained before the commencement of CIRP.

Directions

The Supreme Court set aside the impugned orders of the NCLT and NCLAT and restored IA No.192/2022 in C.P. (IB) No.196/BB/2020 before the Adjudicating Authority for reconsideration. The Court also directed that any consequential action taken by the IBBI against the appellant will not survive.

Development of Law

The ratio decidendi of this case is that the cut-off date for determining eligibility under Section 240A of the Insolvency and Bankruptcy Code, 2016, is the date of submission of the resolution plan, not the date of commencement of CIRP. This judgment changes the previous position of law as laid down by the National Company Law Appellate Tribunal in Digamber Anand Rao Pingle v. Shrikant Madanlal Zawar & Ors., which held that the MSME certificate must be obtained before the commencement of CIRP. The Supreme Court has now clarified that the MSME certificate can be obtained before the submission of the resolution plan to avail the benefit of Section 240A.

Conclusion

The Supreme Court’s judgment in this case provides much-needed clarity on the eligibility criteria for resolution applicants in MSME insolvency cases. By clarifying that the relevant date for determining MSME status is the date of submission of the resolution plan, the Court has ensured that promoters of MSMEs are not unfairly disqualified from participating in the resolution process. This decision is crucial for the survival and revival of MSMEs, which are vital to the Indian economy.