High Court Halts NCLT Insolvency Order on MSME, Cites Jurisdictional Error

The court stayed the NCLT order initiating insolvency proceedings against a company falling under the MSME category, due to jurisdictional concerns. The court noted that the NCLT overlooked the increased jurisdictional limit of Rs. 1 crore for insolvency proceedings effective from March 24, 2020, and proceeded based on a default amount of Rs. 1 lakh. The petitioner was required to deposit Rs. 10 lakhs with the Registrar General to continue company operations. The case was adjourned for further discussion on jurisdictional issues and compliance with updated regulations to protect MSMEs.

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Issues Involved:
Challenge to NCLT order under IBC Section 9 regarding insolvency proceedings against a company falling under MSME category with jurisdictional concerns.

Analysis:
The petition challenges an NCLT order dated 29th May, 2020, initiating insolvency proceedings against a company, of which the petitioner is a Promoter-Director, under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). The petitioner argues that the company falls under the MSME category and would face severe consequences if insolvency proceedings continue, affecting numerous employees and vendors. The petitioner highlights that the NCLT failed to consider the increased jurisdiction to Rs. 1 crore effective from 24th March, 2020, as the order proceeded on the basis of a defaulted amount exceeding Rs. 1 lakh. The petitioner also points out discrepancies in the amount owed to the operational creditor, which is significantly less than the threshold amount mentioned in the order.

Upon reviewing the records and pleadings, the court notes that the purpose of raising the NCLT's jurisdictional limit to Rs. 1 crore was to protect MSMEs from abrupt insolvency actions during the lockdown period. However, the NCLT entertained the petition based on a default amount of Rs. 1 lakh, leading to the initiation of Corporate Insolvency Resolution Process (CIRP) and declaration of moratorium under Section 14 of the IBC. The court acknowledges that the NCLT's decision may have overlooked the impact of the notification dated 24th March 2020, which raised the minimum default amount to Rs. 1 crore for insolvency proceedings. Consequently, the court stays the NCLT order subject to the petitioner depositing Rs. 10 lakhs with the Registrar General, allowing the company to continue its operations. The IRP is granted the liberty to seek further directions from the court if necessary.

The court directs the ASG representing the Union of India to inform the NCLT about the notification dated 24th March, 2020, emphasizing the importance of adhering to the revised threshold for initiating insolvency proceedings. The case is scheduled for the next hearing on 13th August, 2020, indicating a need for further deliberation on the jurisdictional issues and compliance with the updated regulations to safeguard MSMEs from unwarranted insolvency actions.

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