On November 29, 2023, the Supreme Court of India in the case of Hari Babu Thota v. [None] [Civil Appeal No. 4422/2023] held that a promoter of a Corporate Debtor shall not be disqualified under Section 29A of the Insolvency and Bankruptcy Code, 2016 ("Code") from submitting a resolution plan even where MSME registration certificate is obtained post commencement of the corporate insolvency resolution process ("CIRP") but prior to submission of resolution plan. The Hon'ble Supreme Court overruled the judgement of the Hon'ble National Company Law Appellate Tribunal, New Delhi ("NCLAT") in Digamber Anandrao Pingle v. Shrikant Madanlal Zawar,[Company Appeal (AT) (Ins) No. 43-43A of 2021], wherein the NCLAT had observed that where application for MSME certificate is made after commencement of CIRP, the same cannot tide over ineligibility under Section 29A of the Code.
Background:
Shree Aashraya Infra-Con Limited ("Corporate Debtor") was admitted into CIRP on April 6, 2021. The Corporate Debtor obtained its MSME Registration Certificate on July 15, 2021, i.e. after initiation of CIRP.
The Resolution Professional ("Appellant") of Corporate Debtor filed an application presenting a resolution plan before the National Company Law Tribunal, Bengaluru ("NCLT") as submitted by the promoters of the Corporate Debtor and approved by the Committee of Creditors. The NCLT dismissed the application vide Order dated February 28, 2023 by holding that since the MSME Certificate was obtained subsequent to the initiation of CIRP, such Certificate was required to be ignored and the promoters were not eligible to file resolution plan under Section 29-A of the Code. The NCLAT relying upon the judgement of Digamber Anandrao Pingle (supra) affirmed the order passed by the NCLT.
Aggrieved by the Order passed by NCLAT, the Resolution Professional filed an appeal before the Supreme Court.
Issue:
The issue before the Supreme Court was whether a 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 Code even when such MSME status is accorded before submission of resolution plan.
Since there was no opposing party, the Supreme Court appointed an amicus curiae to assist the Court.
Contentions of the Appellant/ Amicus:
The Appellant contended that the issue shall have far reaching consequences in so far as his role/status as Resolution Professional is concerned. The Appellant also argued that while interpreting Section 240A, the date of making the bid is the crucial date for the purpose of determining the eligibility under Section 29A. The Amicus contended that if the MSME certificate is obtained prior to the presentation of the resolution plan, the disqualification under Section 29A would not apply and benefit of Section 240A would be available.
Decision:
While answering the question, the Hon'ble Supreme Court recognized the importance of the issue, particularly in view of the judgement in Digamber Anandrao Pingle (supra) based on which the NCLAT had dismissed the appeal. It was noted that the NCLTs/NCLATs were usually following the judgement of Digamber Anandrao Pingle (Supra) while deciding this issue. The Hon'ble Supreme Court noted the legislative history of Sections 29A and 240A and observed as under:
- Section 29-A was added as an amendment with effect from November 23, 2017 with the objective to cure the mischiefs of the persons who may be responsible for the financial situation of the company against trying to submit a plan and take over the company.
- The judgement of Supreme Court in Arcelormittal India Private Limited v. Satish Kumar Gupta, [(2019) 2 SCC 1] observes that the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant and the date of commencement of the CIRP is only relevant for the purpose of calculating a period of one year from date of classification of a person as NPA.
- The Court referred to the judgement of Supreme Court in Swiss Ribbons Private Limited v. Union of India, [(2019) 4 SCC 17] to observe that MSMEs are the bedrock of the Indian economy and reason for excluding such industries from disqualification under Section 29A (c) and (h) is because other resolution applicants may not be forthcoming for such industries which would inevitably lead to their liquidation instead of resolution.
- The Court relied on the statement of the then Finance Minister while moving the amendment bill to introduce Section 29A as an aid to interpret the provision. The Court observed that the statement of the Finance Minister makes it clear that the cut-off date for applicability of Section 29A (c) was "as on date of the application making a bid".
- Since there is no other specific provision providing for cut-off date to determine eligibility under Section 29A with respect to MSMEs, the date of submission of resolution plan must be taken as the cut-off date. The said intent is also reflected in the statutory provision itself in Section 29A(c) which begins with "at the time of submission of resolution plan".
- The law laid down by NCLAT in Digamber Anandrao Pingle (Supra) is not the correct position in law.
In view of above observations, the Hon'ble Supreme Court held that the cut-off date for determining the eligibility of the resolution applicant under Section 29A of the Code in case of an MSME is the date of submission of resolution plan. Accordingly, the Hon'ble Supreme Court allowed the Appeal and set aside the orders passed by the NCLT and the NCLAT.
Author`s View:
While the Court traces the legislative history of the exemption given to MSMEs from rigors of Section 29A and relies on the plain language of the said provision to hold that the cut-off date shall be the date of submission of resolution plan, there is a likelihood of this judgement being misused by unscrupulous promoters to their advantage. With this judgement, a promoter of a corporate debtor who may not have even applied for an MSME status during its existence may still have a backdoor entry to regain control of the corporate debtor by obtaining MSME registration prior to submission of resolution plan. This cannot be the intent of the legislature and goes against the mischief which was sought to be prevented by introducing Section 29A of the Code.
Please find a copy of the judgement, here.
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