Banking Companies Not Required To Exhaust MSME Revival Option Before Filing Petition U/S 7 Of IBC: NCLT, Mumbai

The NCLT, Mumbai Bench comprising Shri Prabhat Kumar (Technical Member) and Justice Shri V.G. Bisht (Judicial Member) has observed that restructuring process contemplated in the notification dated 29.05.2015 issued by the Ministry of Micro, Small and Medium Enterprises is another mode for revival and rehabilitation of the MSME Corporate Persons in addition to Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal held that it cannot be said that MSMED Act overrides the provisions of IBC, unless said so expressly in terms of Section 240A(2). Thus, it is not incumbent on the Banking companies to first exhaust the avenue of revival under the Notification before proceeding to file an application under section 7 of IBC for the resolution of financial defaults under the Code. The Tribunal also held that an application under section 7 can be adjudicated by the Tribunal even on application of one financial creditor, provided the debt due to such financial creditor exceeds the threshold limit. Therefore, another lender of Corporate Debtor need not be impleaded as party to proceed under section 7. Brief Facts: The NCLT, Mumbai had initiated Corporate Insolvency Resolution Process (CIRP) against Perfect Infraengineers Limited ("Corporate Debtor") by an order dated 15.07.2024, upon a petition filed by the Technology Development Board (“Financial Creditor”) under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). Ms. Manisha Nimesh Mehta (Promoter and Director of Corporate Debtor) filed a writ petition challenging the initiation of CIRP. She sought a declaration that being a Micro, Small, and Medium Enterprise (MSME) within the meaning of Micro, Small and Medium Enterprises Development Act, 2006 and the Notification dated 29.05.2015 issued by the Central Government under Section 9 of the Act, as well as circulars and guidelines issued by the Reserve Bank of India under Section 10 thereof providing for a mechanism for resolution of stress, no proceedings for recovery under the Securitisation and Reconstruction of Financial Stress and Enforcement of Security Interest Act, 2002 (SARFAESI Act) would lie against the Corporate Debtor, except in the manner contemplated under the Notification; and the Act in so far as not having created a special forum/tribunal to adjudicate inter-se rights and obligations, the jurisdiction of the civil Court is not ousted. Both parties had agreed before the High Court that the NCLT should consider the Supreme Court's judgment in M/s Pro Knits v. The Board of Directors of Canara bank & Ors. (Civil Appeal No. 8332 of 2024) dated 01.08.2024, which held that instructions issued by the Central Government under Section 9 of the MSME Act and by the RBI under Sections 21 and 35A have statutory force and are binding on all banking companies. The Bombay High Court in its order dated 1.10.2024 also directed the NCLT to maintain a status quo on the 15.07.2024 order. Contentions of the Parties: Counsel for Corporate Debtor stated that the Notification dated 29.5.2015 lays down the instructions for the Framework for Revival and Rehabilitation of MSMEs and MSME Act being a beneficial legislation overrides the provision of IBC. In Pro Knits, the Supreme Court held that “The Instructions/Directions issued by the Central Government under Section 9 of the MSMED Act and by the RBI under Section 21 and Section 35A have statutory force and are binding to all the Banking companies”. He contended that unless ICICI bank (another lender of Corporate Debtor) is impleaded as party, he cannot proceed any further, upon being asked to make his case as to how it does not fall within the four corners of section 7 of IBC. He further submitted that no recovery action should be taken by any financial institution unless procedure prescribed in Notification has been followed. The jurisdiction of civil court is ousted in matters of Insolvency Resolution under the IBC. Per contra, Counsel for Financial creditor submitted that the proceedings under section 7 are not recovery proceedings, but are in realm of Resolution proceedings; the decision in case of Pro Knits deals with initiation of recovery proceedings under SARFAESI Act and not resolution under IBC; the said Notification is not applicable to Technology Development Board as it is not a financial institution or Banking Company; section 238 of the IBC supersedes the Notification as being later in time; and IBC also provides alternate mode of resolution of stress of debt of a corporate debtor. Observations: The Tribunal referred to the case of Johnson Lifts Limited v. M/s. Tracks & Towers Infratech Pvt. Ltd., where the NCLAT held that the High Courts should refrain from intervening in proceedings governed by a special statute such as the IBC. The NCLAT had referred to the judgment of Supreme Court in Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors. and ...

Banking Companies Not Required To Exhaust MSME Revival Option Before Filing Petition U/S 7 Of IBC: NCLT, Mumbai

Tazeen Ahmed

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