RP Can’t Obtain MSME Certificate Just To Enable Back-Door Entry Of Promoter/Suspended Management Of Corporate Debtor: NCLT Delhi

Under Section 25 of IBC the Resolution Professional is obligated to invite prospective resolution applicants to submit plans as per the criteria laid down by him. However, such criteria must be laid down in accordance with Section 29A and other provisions of IBC.

Background Facts

On 02.03.2020, Overnite Express Limited (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the NCLT.

Subsequently on 12.11.2021, the Resolution Professional with the consent of Committee of Creditors (“CoC”) obtained a Micro Small and Medium Enterprise (“MSME”) certificate for the Corporate Debtor.

Mr. Om Prakash Raj Ghoria (“Successful Resolution Applicant/SRA”) is a member of the Suspended Board of the Corporate Debtor. Section 29A of IBC prohibits the Promoter and Suspended Management of Corporate Debtor from submitting a resolution plan for the same. However, Section 240A of IBC states that the prohibition under Section 29A would be inapplicable to a Promoter/Suspended Management of a Corporate Debtor registered as a MSME.

Thereafter, the Suspended Management submitted a resolution plan for the Corporate Debtor. The said Plan was approved by the Committee of Creditors (CoC) and was pending before the NCLT for approval.

Deutsche Bank A.G (“Applicant”) is a Secured Financial Creditor of the Corporate Debtor. The Applicant filed an objection to the resolution plan while contending that the Corporate Debtor is fraudulently vying to take advantage available to an MSME under Section 240A of IBC.

NCLT Verdict

While placing reliance on Section 25 of IBC, the Bench observed that the Resolution Professional is obligated to invite prospective resolution applicants to submit plans as per the criteria laid down by him. However, such criteria must be laid down in accordance with Section 29A and other provisions of IBC.

“On the perusal of Section 25(h), it is seen that the RP is duty-bound to invite prospective resolution applicants, who fulfill such criteria as may be laid down by him with the approval of the Committee of Creditors, to submit Resolution Plan(s). In our considered view, such criteria have to be consistent with the Code and cannot be laid down by ignoring Section 29A of IBC 2016. The provisions under Section 25 of IBC 2016 nowhere authorize an RP to obtain an MSME Certificate of the CD for the purpose of opening back door entry to a defaulting Ex-Director(s)/Promoter(s)/Suspended Management.”

Further reliance was placed on Supreme Court’s decision in Arun Kumar Jagatramka Vs Jindal Steel and Power Ltd. & Anr., Civil Appeal No. 9664 of 2019, wherein it was held that Section 29A was incorporated to prevent unscrupulous persons from gaining control over the affairs of the company, including those who by their misconduct have contributed to the defaults of the company or are otherwise undesirable.

It was concluded that neither Section 25 nor Section 28 of IBC empowers the Resolution Professional or CoC to obtain an MSME Certificate to enable the back door entry of the defaulting Promoter/Suspended Management into the Corporate Debtor, who are otherwise barred under Section 29A of IBC to submit the EOI/Resolution Plan.

“Thus, we find that neither there is any explicit provision under Section 25 of IBC 2016 enabling an RP to obtain an MSME Certificate nor such is the intention behind the insertion of Section 29A in the Code as observed by the Hon’ble Supreme Court in the Judgement (ibid). Further, under the garb of fixing the criteria for the intending Prospective Resolution Applicants, the RP cannot assume the role of a “Facilitator” to enable the Defaulter Promoter(s)/ Suspended Board of Director(s)/ Ex-Management to submit the EOI/Resolution Plan by abusing the provisions contained under Section 240A of IBC 2016.”

It was held that the benefit of Section 240A of IBC can only be availed by a genuine MSME Enterprise, whose registration or MSME Certification is done prior to the commencement of CIRP of a Corporate Debtor.

The plan submitted by the SRA has been rejected and the Corporate Debtor has been sent into liquidation.

Case Title: M/s Hi-Tech Resource Management Limited v M/s Overnite Express Limited

Case No.: Company Petition No. (IB)-2240(ND)/2019

Counsel For Applicant: Adv. Rahul Tyagi

Counsel for Respondent: Adv. Sumant Batra, Adv. Ruchi Goyal, and Mr. Devendra Umrao, Adv. Aishwarya.

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