Examining The Interplay Between Sections 29A And 240A Of IBC: Clarifying The Status Of MSMEs Within Insolvency Resolution Framework

The NCLAT in a recent decision titled Ashish Singh, Resolution Professional forVibrant Buildwell Pvt. Ltd. v. Raj Kumar Sahani & Ors (Company Appeal (AT) (Insolvency)No. 253-254 of 2024) observed that under section 240A of the IBC, the date of submission of the resolution plan has to be seen to assess whether ineligibility under section 29A of the IBC is triggered. In this case, the tribunal extended the benefit of section 240A of the Insolvency and Bankruptcy Code, 2016 to the corporate debtor even though the MSME registration had been secured after the commencement of the CIRP. In this article, we analyse the interplay between sections 29A and 240A of the IBC. Introduction The Insolvency and Bankruptcy Code (hereinafter refer as “IBC”) which is a primarily legislation in India was enacted to resolve the insolvency of the corporate entities in a time bound manner. A clear cut time line has been provided under the code within which the entire process has to be completed. Additionally, since we follow a creditor-in –control model, the insolvency process has to be overseen by the designated professionals like Interim Resolution Professional and Resolution Professionals. It is their bounden duty to preserve the assets of the corporate debtor and keep it as a going concern while the entity is going through the process of insolvency. The role of the erstwhile management of the corporate debtor is negligible in the insolvency process. Furthermore, persons related to the corporate debtor have been kept out of the process so that the CIRP could be conducted in a transparent and fair manner without being influenced by any interested parties. It is in this context, the scheme of section 29A and section 240A has to be analysed and see how they are sub-serving the objectives of the IBC. Rationale Behind Incorporation of Sections 29A and Section 240A The main motive behind incorporation of section 29A of the IBC is to protect the insolvency process from being contaminated. It restricted the backdoor entry of the erstwhile management of the corporate debtor whose misconduct or mismanagement contributed to the insolvency. It helped protecting the interests of the creditors and maintaining the integrity of the insolvency process. Per contra, the primary intention behind introduction of section 240A of the IBC was to provide some relaxations to the MSMEs from the shadow of section 29A of the IBC. It was contemplated that the MSMEs are the major driving force of the economy therefore they should not be pushed into liquidation on the ground that no one came forward to resolve the insolvency of these entities. It permitted the promoters of the corporate debtor to submit the Resolution Plan and maintain the continuity of business operations. In this way, it is serving a broader purpose of protecting the viable businesses. Insolvency Committee Report (2018) The Report of the Insolvency Law Committee which was submitted in March, 2018 recommended that the MSMEs should be exempted from the restrictions laid down under section 29A of the IBC. The committed observed as under: “(i) in recognition of the importance of Micro, Small and Medium Enterprises (MSMEs) to the Indian economy and the unique challenges faced by them, it has been recommended to allow the Central Government to exempt MSMEs from application of certain provisions of the Code. Illustratively, since usually only promoters of an MSME are likely to be interested in acquiring it, applicability of section 29A has been restricted only to disqualify wilful defaulters from bidding for MSMEs;” The committee in the above report further observed that : “27.4 However, given that MSMEs are the bedrock of the Indian economy, and the intent is not to push them into liquidation and affect the livelihood of employees and workers of MSMEs, the Committee sought it fit to explicitly grant exemptions to corporate debtors which are MSMEs by permitting a promoter who is not a wilful defaulter, to bid for the MSME in insolvency. The rationale for this relaxation is that a business of an MSME attracts interest primarily from a promoter of an MSME and may not be of interest to other resolution applicants.” Statutory Framework Section 29A of the IBC was inserted by the Act No.8 of 2018 w.e.f. 23.11.2017. It lists the persons who are disqualified from submitting a resolution plan during the CIRP of the corporate debtor. The primary aim of this provision is to ensure that specific persons who are responsible for financial distress or misconduct are not given any kind of opportunity to regain control of the distressed assets. It disqualifies persons like undischarged insolvents, wilful defaulters, or promoters of companies with non-performing assets from submitting the resolution plan. However for the purpose of this article clause (c) and (h) of section 29A of the IBC are relevant. These...

Examining The Interplay Between Sections 29A And 240A Of IBC: Clarifying The Status Of MSMEs Within Insolvency Resolution Framework

Mohd Malik Chauhan

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