NCLT cannot reject approval of Resolution Plan submitted by Successful Resolution Applicant being an ex-promoter, by rejecting the validity of the MSME registration obtained by Corporate Debtor post initiation of CIRP: NCLAT New Delhi

The Hon’ble NCLAT Delhi in the matter of Ramesh Shah in consortium with Masitia Capital Services Pvt. Ltd. v. Central Bank of India & Ors. vide its order dated February 29, 2024, allowed two Appeals preferred by the Resolution Applicant and the Resolution Professional, wherein the issues that arose for consideration were as follows:

• Whether the Resolution Applicant being an ex-promoter of the Corporate Debtor is eligible to submit a Resolution Plan when the Corporate Debtor has acquired a change in its status to that of an MSME after initiation of the CIRP proceedings?
• Whether the Adjudicating Authority can raise concerns over the plausibility of the reports which had validated the MSME entitlement of the Corporate Debtor, by going under the computation exercise conducted by the Corporate Debtor and thereby reject the MSME status of the Corporate Debtor?

The peculiar facts of the case are such that the Corporate Debtor had been issued an MSME Certificate by the competent authority on the basis of an online application filed by an employee of the Corporate Debtor on the instructions of the Resolution Professional. Since the MSME Registration Certificate was obtained prior to the date of submission of the resolution plan, the Resolution Applicant (ex-promoter) filed a Resolution Plan seeking benefits of Section 240A of the IBC.

The said resolution plan was approved by the CoC with 77.56% vote share. The RP filed an Interlocutory Application for approval of the said resolution plan, which was dismissed by the Adjudicating Authority thereby rejecting the proposal for approval of the resolution plan. Also, the Central Bank of India, as a dissenting Financial Creditor, filed an Interlocutory Application seeking stay of the approval of the resolution plan before the Adjudicating Authority and challenged the eligibility of the ex-promotor as a Successful Resolution Applicant (“SRA”). The Adjudicating Authority allowed the Application of the dissenting Financial Creditor and held the SRA to be ineligible under Section 29A read with Section 240A of the IBC to submit a resolution plan. Hence, the two appeals were filed before the NCLAT.

The law as laid down by the Hon’ble Supreme Court in the matter of Hari Babu Thota in Civil Appeal No. 4422 of 2023 [(2024) 242 Comp Cas 1], was discussed “that not having MSME status at the time of commencement of the CIRP proceedings does not disqualify the ex-promoter from being a Resolution Applicant under Section 29A of the IBC as long as this status is attained well before the submission of the resolution plan”. However, the aforesaid ratio was questioned by the Respondent on the ground that the facts were distinguishable, as unlike in the present facts of the case, there was no dispute regarding the calculation, basis which MSME registration was obtained.

In view of the aforesaid facts and circumstances, the Hon’ble NCLAT observed and held that,

• The MSME registration can only be revoked by the competent authority and the Adjudicating Authority cannot claim this jurisdiction upon itself to modify/revise/revoke or interfere in any manner with the MSME registration granted by the competent authority.
• The RP was not required to seek permission of the CoC under Section 28(h) of IBC since the CoC was all along kept apprised by the RP regarding MSME registration and the CoC had therefore clearly found the Corporate Debtor to be eligible for MSME status and the SRA to submit a resolution plan.
• RP who is running the business of the Corporate Debtor is best suited to take the decision for applying for MSME registration of the Corporate Debtor as long as it is not detrimental to the continued business operations of the Corporate Debtor.
• The SRA is eligible to submit a resolution plan for the Corporate Debtor now being an MSME.
• The Adjudicating Authority was thus directed to proceed to pass a fresh order in the Application filed by the RP seeking approval of the resolution plan along with necessary directions.