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MSME Status at CIRP Initiation Does Not Disqualify If Acquired Before the Submission of a Resolution Plan

The NCLAT, Principal Bench overturned an Adjudicating Authority decision, stating that MSME status at CIRP initiation does not disqualify if acquired before the resolution plan submission. ETCO Denim's ex-promoter can now submit a plan. The ruling emphasized MSME status legality and dismissed concerns over the calculation basis. The Adjudicating Authority must issue a fresh order within three months.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan and Technical Members Barun Mitra and Arun Baroka was hearing an appeal and observed that the Adjudicating Authority erred in rejecting a resolution plan based on MSME registration issues. The NCLAT Bench held that MSME status at CIRP initiation does not disqualify if acquired before the submission of a resolution plan.

In the matter at hand, two appeals were filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("IBC") challenging orders issued by the Adjudicating Authority in IA No. 2895/2021 & 317/2022 in Company Petition No. 126/MB/C-III/2019. The first order concluded that the ex-promoter/Corporate Debtor was ineligible under Section 29A read with Section 240A of the IBC to submit a resolution plan claiming MSME benefits. The second order rejected the approval of the resolution plan submitted by the successful resolution applicant, who was also the ex-promoter/Corporate Debtor.

ETCO Denim Private Ltd, the Corporate Debtor, had undergone the Corporate Insolvency Resolution Process (CIRP) and obtained an MSME certificate during this period based on the reclassification of MSMEs by the Government of India. The ex-promoter, in collaboration with another entity, proposed a resolution plan approved by the Committee of Creditors (CoC). However, the Adjudicating Authority rejected the plan, arguing that the Corporate Debtor acquired MSME status post the initiation of CIRP.

The appeals contended that the MSME certificate was obtained before the submission of the resolution plan, rendering the ex-promoter eligible. Reference was made to a Supreme Court judgment supporting this argument. It was asserted that the CoC was aware of the MSME status during deliberations, and the Adjudicating Authority's rejection was contested, highlighting the CoC's commercial wisdom.

The Respondent, the Central Bank of India, argued that the MSME registration was unauthorized, and the Adjudicating Authority rightfully questioned the calculation basis, rendering the Corporate Debtor ineligible. The Respondent claimed that the MSME certificate was obtained for self-benefit during a shutdown, hindering the maximization of asset value.

The NCLAT found the Adjudicating Authority's rejection to be against settled law, citing the Supreme Court's clarification that MSME status at CIRP initiation does not disqualify if acquired before the resolution plan submission. Objections raised by the Respondent regarding the calculation basis were not upheld.

To summarize, the NCLAT overturned the Adjudicating Authority's decision, emphasizing the legality of acquiring MSME status and dismissing concerns over the calculation basis. This ruling allowed the ex-promoter to submit the resolution plan. The Adjudicating Authority was directed to issue a fresh order on the resolution plan application within three months.


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