New Delhi, Dec 20 (KNN) In a significant judgment with far-reaching implications for distressed Micro, Small and Medium Enterprises (MSMEs), the Supreme Court of India has carved a pathway for resolution plans presented by promoters even when they meet certain disqualification criteria under Section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC).

The landmark decision in the matter of Shree Aashraya Infra-Con Limited (“Appellant”) vs. NCLT & IBBI (“Respondents”) lays down a crucial interpretation of Section 240A's carve-out for MSMEs, potentially revitalising the resolution landscape for this vital segment of the Indian economy.

The case involved Shree Aashraya Infra-Con Limited, an MSME undergoing Corporate Insolvency Resolution Process (CIRP). The Resolution Professional (RP) proposed a plan backed by the promoters and approved by creditors. However, the plan was rejected based on a previous interpretation of the IBC that disqualified promoters with certain financial misdeeds from submitting plans.

The court examined clauses (c), (g), and (h) of Section 29A of the IBC Code and emphasised that this section was introduced with the intention of addressing issues related to individuals responsible for a company's financial troubles attempting to submit a plan and acquire control over the company.

The court took note of the argument that the three clauses in Section 29A were specific to promoters and highlighted that the company's promoter, in this case, was not disqualified or rendered ineligible to present the plan.

In an earlier order, the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) determined that promoters of MSMEs that were registered as such subsequent to the commencement of insolvency proceedings are deemed ineligible.

The court noted that the exclusion of such industries from disqualification under Sections 29A (c) and (h) is imperative, as these industries might not readily come forward. Such reluctance could inevitably result not in resolution but in liquidation.

The Court appointed an Amicus Curiae (Friend of Court), Adv. Bishwajit Dubey to address the matter. He asserted that in construing Section 240A, individuals or entities registered as MSMEs prior to the submission of the Resolution Plan (bid) should qualify for exemption, regardless of the initiation date of the CIRP proceedings.

The Supreme Court accepted this submission and overturned the earlier ruling, clarifying that Section 29A of the IBC, which disqualifies promoters, does not apply to MSMEs. Henceforth, Micro, Small, and Medium Enterprises (MSME) promoters, provided they are registered before the submission of a bid, shall be deemed eligible as resolution applicants.

This exemption recognises the crucial role MSMEs play in the economy and aims to promote their survival even in challenging situations. The challenges that MSMEs face in Insolvency proceedings were also highlighted at a seminar on ‘Reducing Cost of Litigation for MSMEs’ organised by Federation of Indian Micro and Small & Medium Enterprises (FISME) in collaboration with ‘Friends of MSMEs in Parliament’ on 10 August, 2023 in New Delhi.

(KNN Bureau)