On Approval Of Plan By MSME Directors, They Will Be Treated As New Owners: NCLT Mumbai

The National Company Law Tribunal ("NCLT"), Mumbai Bench, comprising of Justice P.N. Deshmukh (Judicial Member) and Shri Shyam Babu Gautam (Technical Member), while adjudicating a petition filed in Aries Agro Pvt. Ltd. v ETCO Industries Pvt. Ltd., has held that once the resolution plan submitted by MSME Corporate Debtor's promoters/directors is approved by the Adjudicating Authority, the ownership of the Corporate Debtor shall be considered as fresh, even if the directors/promoters remain the same. Background Facts Aries Agro Private Limited ("Operational Creditor") had filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC") before NCLT, seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against ETCO Industries Pvt. Ltd. ("Corporate Debtor"). The Adjudicating Authority had admitted the petition and CIRP was initiated. The Corporate Debtor is a Medium, Small and Micro Enterprise (MSME). Hence its erstwhile Promoters/Directors had submitted a Resolution Plan for the Corporate Debtor which was approved by Adjudicating Authority. The Corporate Debtor had its current bank account with Union Bank of India (UBI) which was declared Non Performing Asset. Mr. Ramesh D. Shah ("SRA/Successful Resolution Applicant") had requested UBI to permit normal operations in current account and to upgrade the asset classification of account to "Standard" as per Reserve Bank of India norms. However, the UBI did not accept the request of the SRA. Thus hindrance was caused in the smooth implementation of the Resolution Plan, as transactions could not take place in Current Account towards implementation of the Resolution Plan. Therefore, the SRA filed an application against Union Bank of India before the Adjudicating Authority, seeking directions to allow normal operations in current account and to change the asset classification of the accounts to "Standard". Contentions Of The SRA The SRA submitted that if "Standard Asset" classification is not given to accounts of Corporate Debtor then the same will appear in the CIBIL report. This will have a direct bearing on the Corporate Debtor's business operations and difficulties would be faced in raising working capital from the market, Banks or Foreign Investors. Furthermore, Banks will refrain from opening any new accounts for the Corporate Debtor. Further, in case of an MSME Enterprise the directors/promoters are permitted to give a Resolution Plan for their revival as it is normally not easy to find buyers for MSME units. The objective of IBC is to provide a clean start to the MSME Corporate Debtor by not saddling it with extinguished claims and liabilities. Contentions Of Bank The Bank argued that an account cannot be upgraded to 'standard' until the full settlement amount is discharged. Further, as per RBI norms an account can be upgraded to 'standard' only after change in ownership is implemented. As Corporate Debtor had not undergone change in ownership, thus the accounts cannot be upgraded to standard until full amount is discharged. Decision Of NCLT The Bench opined that as per RBI norms the account can be upgraded as standard after the change in ownership is implemented. "But this is a case of an MSME Enterprise, wherein the directors/promoters are permitted to give a Resolution Plan for the revival of the Corporate Debtor or in other words the existing management is allowed to revive the Company by giving a Resolution Plan. The objective of this is to provide a clean start to the unit/Corporate Debtor. Therefore, once the resolution plan is approved by the Adjudicating Authority, the management/ownership of the Corporate Debtor shall be considered as fresh, even if the directors/promoters of the Corporate Debtor (MSME) remain the same." The Bench directed the Bank to allow all normal operations in current account of Corporate Debtor and to change the asset classification of its accounts to "Standard". Case Title: Aries Agro Private Limited v ETCO Industries Private Limited Case No.: CP (IB)No. 1111/MB/2019 Counsel For the Applicant: Mr. Kunal Kanungo Counsel For the Respondent: Mr. Deepak Saxena Click Here To Read/Download Order

On Approval Of Plan By MSME Directors, They Will Be Treated As New Owners: NCLT Mumbai

Pallavi Mishra

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