MSME resolution plan approved after Section 240A exemption overrides Section 29A ineligibility for corporate debtor

NCLAT Principal Bench set aside the Adjudicating Authority's order rejecting a resolution plan for an MSME-registered corporate debtor. The Authority had deemed the resolution applicant ineligible under Section 29A(c) of IBC, finding that the applicant's managing director was also the promoter and in control of the corporate debtor whose account became non-performing. However, NCLAT held that Section 240A of IBC, which provides exemptions for MSMEs, applied since the corporate debtor was registered as MSME before plan submission. The ineligibility under Section 29A(c) could not be invoked when Section 240A was applicable. The resolution plan was approved and appeal allowed.

---

---

Issues Involved:
1. Eligibility of the Successful Resolution Applicant (SRA) under Section 29A(c) of the Insolvency and Bankruptcy Code, 2016 (IBC).
2. Applicability of Section 240A of the IBC to the Corporate Debtor registered as MSME.
3. Validity of the Resolution Plan approved by the Committee of Creditors (CoC).
4. Commercial wisdom of the CoC in approving the Resolution Plan.

Detailed Analysis:

1. Eligibility of the SRA under Section 29A(c) of the IBC:
The primary issue was whether Bishwanath Traders and Investment Limited, the SRA, was ineligible under Section 29A(c) of the IBC. This section disqualifies a person from submitting a resolution plan if they have an account classified as a non-performing asset (NPA) for at least one year before the commencement of the CIRP. The Adjudicating Authority found that the SRA was ineligible because the account of the Corporate Debtor (CD) was deemed an NPA on 14.06.2020, and the SRA was under the management and control of the same person managing the CD.

2. Applicability of Section 240A of the IBC:
The judgment emphasized the applicability of Section 240A, which exempts MSMEs from certain disqualifications under Section 29A, including clauses (c) and (h). The Corporate Debtor was registered as an MSME before the submission of the Resolution Plan. The Supreme Court in Hari Babu Thota clarified that the relevant date for determining eligibility under Section 29A is the date of submission of the resolution plan, not the initiation of CIRP. The MSME registration of the Corporate Debtor allowed the SRA to bypass the ineligibility under Section 29A(c).

3. Validity of the Resolution Plan approved by the CoC:
The Resolution Plan submitted by Bishwanath Traders was approved by the CoC with 100% votes. The Suspended Director objected to the plan, arguing that it included an illegal set-off of Rs.12 crores due from the Financial Creditor to the SRA, which would reduce the plan value below the liquidation value. However, the CoC's commercial wisdom in approving the plan was supported by the Supreme Court's precedents, which restrict judicial intervention in CoC's commercial decisions unless they contravene Section 30(2) of the IBC.

4. Commercial wisdom of the CoC:
The judgment reiterated the principle that the commercial wisdom of the CoC is paramount and non-justiciable, as established in K. Sashidhar vs. Indian Overseas Bank and Committee of Creditors of Essar Steel India Ltd. vs. Satish Kumar Gupta. The CoC's decision to approve the Resolution Plan, including the set-off clause, was within its domain and could not be overturned by the Adjudicating Authority or the Appellate Tribunal unless it violated specific provisions of the IBC.

Conclusion:
The Appellate Tribunal allowed the appeals, set aside the order of the Adjudicating Authority, and approved the Resolution Plan submitted by Bishwanath Traders & Investment Ltd. The Tribunal concluded that the SRA was not ineligible under Section 29A(c) due to the MSME status of the Corporate Debtor, which invoked Section 240A. The Tribunal directed the Adjudicating Authority to pass consequential orders for the approval of the Resolution Plan within 60 days.

---