2024 (3) TMI 82 - AT - Insolvency and Bankruptcy

MSME registration after insolvency proceedings valid, resolution plan approval cannot be rejected on registration timing

Ramesh Shah In consortium with Masitia Capital Services Pvt. Ltd. Versus Central Bank of India, Nandkishore Despande (Resolution Professional/Liquidator of ETCO Denim Pvt. Ltd.), Committee of Creditors, Through Union Bank of India (e-Corporation Bank) And Nandkishore Despande Resolution Professional of Etco Denim Pvt. Ltd. Versus Central Bank of India, Committee of Creditors, Through Union Bank of India (e-Corporation Bank)

NCLAT Principal Bench allowed appeal against rejection of resolution plan by Corporate Debtor claiming MSME benefits. The Adjudicating Authority had ... Eligibility of ex-promoter/Corporate Debtor u/s 29A read with Section 240A of the IBC to submit a resolution plan claiming the benefits of MSME - rejection of Resolution Plan. Eligibility of the Corporate Debtor to submit a resolution plan in the present facts of the case when it has acquired a change in its status to that of an MSME after initiation of the CIRP proceedings - HELD THAT:- As the subsequent Chartered Accountant’s certificate was not based on any independent valuation or investigation but premised on the faulty certificate of the Chartered Engineer and hence cannot be relied upon. Whether the Adjudicating Authority could have raised concern over the plausibility of the reports of the Chartered Engineer and other the valuation reports which had validated the MSME entitlement of the Corporate Debtor by going under the skin of the computation exercise conducted by them in rejecting the MSME status of the Corporate Debtor? - HELD THAT:- The MSME registration was done by the competent authority under MSME Act on 23.10.2020 which was subsequent to the date of MSME Notification of 26.06.2020. Hence the certificate prima-facie was issued on the basis of the new Notification. Also in the present case, admittedly, the application has been filed online and the registration was done online on the basis of ITRs and hence there lies no case of any patent procedural violation or deviation from the normal practice. Any infirmity or defect in the MSME registration certificate could have therefore been corrected only by the competent authority or any other designated authority as specified in the notification. The MSME Act as it stands clearly does not provide any supervisory role on the Adjudicating Authority to revise/modify/revoke/interfere with MSME registration at its level. Clearly the notification framed thereunder also does not bestow upon the Adjudicating Authority with any such authority to hold an MSME registration certificate to be null and void on its own - The MSME registration can only be revoked by the competent authority and the Adjudicating Authority cannot arrogate this jurisdiction upon itself to modify/revise/revoke or interfere in any manner with the MSME registration granted by the competent authority. It is opined that the MSME status of the Corporate Debtor as granted by the competent authority continues to subsist and could not have been disregarded by the Adjudicating Authority unilaterally. CoC was not consulted before MSME registration of the Corporate Debtor - HELD THAT:- As regards the process of consideration and approval of resolution plan is concerned, the matter is essentially that of the commercial wisdom of the CoC and the scope of judicial review is strictly circumscribed within the boundaries of Section 30(2) of the IBC for the Adjudicating Authority. This discipline has been emphasised by the Hon’ble Supreme Court in several judgments and laid down that the powers of the Adjudicating Authority dealing with the resolution plan does not extend to examining the correctness or otherwise of the commercial wisdom exercised by the CoC and every dissatisfaction does not partake the character of a legal grievance and cannot become a ground of appeal. Collective action along with ‘timely resolution’ and ‘value maximisation’ is fundamental to the operational aspects of an insolvency regime. It is also well settled that the IBC places the CoC in control of the insolvency process and the CoC exercises its power of decision making through the process of voting. Voting mechanism which is the instrument of decision making for the CoC has been coupled with specific threshold levels of voting share required for taking such decisions - Finality and binding force of the resolution plan in accordance with the majority decision is well settled. That being the case, there are no position to subscribe to the findings of the Adjudicating Authority in rejecting the resolution plan which has been recommended by the CoC with requisite majority. The Adjudicating Authority committed gross error in rejecting the application for approval of the resolution plan of the SRA on the ground that the MSME registration was obtained after commencement of the insolvency proceedings and that the registration was wrongly obtained - both the impugned orders of the Adjudicating Authority are unsustainable - Appeal allowed. Issues Involved:1. Eligibility of the Corporate Debtor to submit a resolution plan after acquiring MSME status post-CIRP initiation.2. Validity of the MSME registration obtained by the Corporate Debtor.3. Authority of the Adjudicating Authority to review and revoke MSME registration.4. Commercial wisdom of the Committee of Creditors (CoC) in approving the resolution plan.Summary:1. Eligibility of Corporate Debtor to Submit Resolution Plan:The primary issue was whether the Corporate Debtor, having acquired MSME status after the initiation of CIRP, was eligible to submit a resolution plan. The Adjudicating Authority had initially ruled that the ex-promoter/Corporate Debtor was ineligible under Section 29A read with Section 240A of the IBC. However, the Appellate Tribunal noted that the Supreme Court in Hari Babu Thota (CA No. 4422 of 2023) clarified that MSME status obtained before the submission of the resolution plan, even if after CIRP initiation, does not disqualify the Corporate Debtor. Thus, the Corporate Debtor was eligible to submit the resolution plan.2. Validity of MSME Registration:The Adjudicating Authority questioned the MSME registration, suggesting it was unauthorized as it was obtained post-CIRP initiation. The Appellate Tribunal highlighted that the MSME registration was acquired through proper channels and procedures, including online application and verification by competent authorities. The Tribunal emphasized that any discrepancies should be addressed by the designated MSME authorities, not the Adjudicating Authority.3. Authority of Adjudicating Authority to Review MSME Registration:The Appellate Tribunal underscored that the Adjudicating Authority does not have the jurisdiction to unilaterally review or revoke MSME registration. The MSME Act and related notifications do not confer such powers on the Adjudicating Authority. The Tribunal noted that only the competent MSME authorities could address any grievances or discrepancies regarding MSME registration.4. Commercial Wisdom of CoC:The Tribunal reiterated the established legal principle that the commercial wisdom of the CoC is paramount and not subject to judicial review, except on limited grounds specified in Section 30(2) or Section 61(3) of the IBC. The CoC had approved the resolution plan with a 77.56% vote share, and the Tribunal held that the Adjudicating Authority erred in rejecting the plan based on its assessment of MSME registration validity. The Tribunal cited multiple Supreme Court judgments affirming the primacy of CoC's commercial decisions.Conclusion:The Appellate Tribunal allowed the appeals, setting aside the Adjudicating Authority's orders. It held the Corporate Debtor eligible to submit a resolution plan as an MSME and directed the Adjudicating Authority to pass a fresh order on the resolution plan within three months. The Tribunal emphasized adherence to the commercial wisdom of the CoC and the proper jurisdictional boundaries concerning MSME registration.