2025 (2) TMI 523 - AT - IBC

MSME debtor's pre-packed insolvency resolution upheld despite late filing under Section 11A(3) IBC

NCLAT upheld the admission of Pre-Packed Insolvency Resolution Process (PPIRP) for a corporate debtor with valid MSME registration despite the application ... Admission of Pre-Packed Insolvency Resolution Process (PPIRP) against the CD - Corporate Debtor (CD) qualifies as a Micro, Small, and Medium Enterprise (MSME) based on its registration or not - value of its plant, machinery and equipment is more than Rs.50 crores as submitted by the Appellant in the year 2021-22 or not - period of 14 days as referred to in sub-section (3) of Section 11A of the IBC is a directory or mandatory - Appellant has made out a case to set aside the orders dated 19.04.2023, admitting Application under Section 54C or not - payment to the Appellant, i.e. dissenting Financial Creditor in the Resolution Plan is in accordance with Section 30, sub-section (2) (b) of the IBC or not. Whether the CD on the strength of registration dated 21.07.2020 issued by Ministry of Micro, Small and Medium Enterprises, can be treated to be a MSME? - Whether value of its plant, machinery and equipment is more than Rs.50 crores as submitted by the Appellant in the year 2021-22? - HELD THAT:- There are no error in classification of the CD as MSME. Learned Counsel for the Respondent has also placed reliance of the judgment of this tribunal in Amit Guptaq vs. Yogesh Gupta, RP (Company Appeal (AT) (Ins) No.903 of 2019) decided on 20.12.2019 wherein it is held that in the summary procedure under IBC, the Adjudicating Authority is not expected to go into account and investigate if and in which category an application falls under Section 7 examining Notifications under the MSME Act. This Tribunal in Ramesh Shah vs. Central Bank of India & Ors. [2024 (3) TMI 82 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI - LB] had occasion to consider the issue and this Tribunal had clearly laid down that the Adjudicating Authority is not expected to go into accounts and examination of certificates issued by the competent authority under MSME Act and notification issued thereunder or modify/ revise/ revoke or interfere in any manner with the MSME registration granted etc. CD had valid MSME registration certificate dated 21.07.2020 and CD as MSME was eligible to file Application under Section 54C. Whether period of 14 days as referred to in sub-section (3) of Section 11A of the IBC is a ‘directory’, i.e. whether an Application under Section 54C is filed even after 14 days of filing of Section 7 Application, the Adjudicating Authority can proceed to decide Section 54C Application first?; & What is the intent and purpose of 14 days provided in sub-section (3) of Section 11A? - In event it is held that period of 14 days as mentioned in sub- section (3) of Section 11A is ‘mandatory’, what is the consequence on the order dated 19.04.2023 passed by Adjudicating Authority, which has been challenged in these two Appeal(s)? - HELD THAT:- The statutory scheme delineated by Section 11A provides the same priorities as recommended by the Insolvency Law Committee. In the present case, the relevant dates for filing of the Application under Section 7 or Section 54C are not disputed. Section 7 Application was filed by the Bank of Baroda on 18.04.2022, whereas Application under Section 54C was filed by the CD on 25.07.2022. The submission, which has been pressed by the Appellant is that Application under Section 7 having been filed on 18.04.2022 and the Application under Section 54C having been filed much beyond 14 days period, Application under Section 7 ought to have been first disposed of, which is mandatory requirement under Section 11A (3) and the Adjudicating Authority erred in first considering Section 54C Application and admitted the same. Provision for PPIRP was inserted in IBC when amendment in Code was found necessary to provide for PPIRP. When Chapter III-A was inserted by Act No.26 of 2021, legislator was well aware that against the CD there might be Applications under Section 7, 9 and 10 pending or will be filed. Chapter III-A and Section 11A, after Chapter II was inserted by the same amending Act No.26 of 2021 - The entire scheme delineated by Section 11A by sub-section (1), (2) and (3) provides for priority of disposal of different Applications under Section 54C in respect of Application under Section 7, 9 and 10. Application under Section 54C was filed after 14 days from filing of Section 7 Application and as per Section 11A, sub-section (3), the Adjudicating Authority was obliged to consider the Application under Section 7 before proceeding to dispose of Section 54A Application. Whether in the facts of the present case, when Resolution Plan has been approved in the PPIRP of the CD, which Plan also stand implemented, the Appellant has made out a case to set aside the orders dated 19.04.2023, admitting Application under Section 54C and order dated 22.08.2023 approving the Base Resolution Plan? - Whether in the facts of the present case, the Appellant has made out a case for directing Section 7 Application (filed by the Appellant on 18.04.2022) to be heard and decided on merits, by setting aside all actions taken in Application under Section 54C? - HELD THAT:- The CD is a MSME. The IBC provide for special protection to the MSME and Chapter III-A, inserted by Act No.26 of 2021 was with purpose and object of quick resolution of MSME - There is no dispute between the parties that Consortium of Lenders, including SBI, IDBI Bank and Bank of Baroda has extended Financial Facilities to the CD. After the accounts having been declared NPA, the CD had submitted the proposal for negotiated settlement to all the three Banks. In the affidavit, which has been filed by the CD dated 31.07.2023 in Company Appeal (AT) (Ins.) No.888 and 890 of 2023, the CD has brought on record a reply Application filed by the SBI to Section 54C Application filed by the CD. The object of the IBC is Resolution of the CD. The present is a case, which consist of three Consortium Members of the Bank – SBI being 47.21% vote share; IDBI Bank 26.70% vote share and Bank of Baroda with 26.09% vote share. Both the Lenders, i.e., SBI and IDBI had also granted approval of negotiated settlement much prior to filing of Section 7 Application - no useful purpose shall be served in setting aside order dated 19.04.2023 passed by Adjudicating Authority admitting Section 54C Application and directing for fresh consideration of Section 7 Application - CD having been resolved by making payments to all the Lenders, including the Appellant, it is not in the interest of all the stakeholders or the CD to set aside the entire action taken under Section 54C and direct for hearing of Section 7 Application filed by the Bank of Baroda, which was for the purpose of resolution of the CD. Whether the payment to the Appellant, i.e. dissenting Financial Creditor in the Resolution Plan is in accordance with Section 30, sub-section (2) (b) of the IBC? - HELD THAT:- The Learned Counsel for the Appellant is right in his submission that the Resolution Plan provides for same payment to assenting and dissenting Financial Creditors. The Appellant was thus clearly entitled for payment in the Resolution Plan as per Section 30, sub-section (2) (b) in reference to Section 53(1) (b), i.e. whatever amount was payable to the dissenting Financial Creditor, in event of liquidation, the said amount would be required to be paid - The Bank of Baroda, which has total exposure of 13.61 + 10.09 percentage i.e. 23.70% of outstanding debt of total exposure. The Appellant has already been 30.02 percent of outstanding amount. There may be little difference between amount, if computed as per amount payable to the dissenting Financial Creditor under Section 30, sub-section (2) (b). But whatever may be the difference, if the said amount is greater to the amount paid to the Appellant, the same is entitled to be paid. The ends of justice will be served in directing the SRA to make the payment of differential amount, if any, to the Appellant, as per Section 30, sub-section (2) (b), which payments be made within a period of 30 days from today. Conclusion - i) CD had valid MSME registration certificate dated 21.07.2020 and CD as MSME was eligible to file Application under Section 54C. ii) Application under Section 54C was filed after 14 days from filing of Section 7 Application and as per Section 11A, sub-section (3), the Adjudicating Authority was obliged to consider the Application under Section 7 before proceeding to dispose of Section 54A Application. iii) CD having been resolved by making payments to all the Lenders, including the Appellant, it is not in the interest of all the stakeholders or the CD to set aside the entire action taken under Section 54C and direct for hearing of Section 7 Application filed by the Bank of Baroda, which was for the purpose of resolution of the CD. iv) The ends of justice will be served in directing the SRA to make the payment of differential amount, if any, to the Appellant, as per Section 30, sub-section (2) (b), which payments be made within a period of 30 days from today. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether a corporate debtor holding a registration dated 21.07.2020 from the Ministry of Micro, Small and Medium Enterprises qualifies as an MSME for purposes of Chapter III-A of the IBC and thus is eligible to initiate a pre-packaged insolvency resolution process (PPIRP). 2. Whether the value of plant and machinery for MSME classification must be determined by reference to the written down value (WDV) as per Income Tax Returns (ITR) rather than gross/book values disclosed in annual reports. 3. Whether the 14-day period in Section 11A(3) of the IBC is mandatory or directory, i.e., whether an application under Section 54C filed after 14 days from a pending Section 7 application requires the Adjudicating Authority to first dispose of the Section 7 application. 4. If the 14-day period is mandatory, what is the consequence for an Adjudicating Authority's prior admission of a Section 54C application filed after 14 days and disposal of the Section 7 application. 5. Whether, in circumstances where a PPIRP resolution plan has been approved by the requisite majority, implemented and payouts made to creditors (including a dissenting creditor), the appellate forum should set aside the admission of the Section 54C application and direct fresh adjudication of a previously filed Section 7 application. 6. Whether payments made under the approved resolution plan to a dissenting financial creditor conform to the requirement of Section 30(2)(b) read with Section 53(1), and if not, what relief is appropriate. 7. What specific reliefs, if any, should be granted to a dissenting financial creditor where differential amounts remain payable under Section 30(2)(b). ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: MSME status and valuation basis for plant & machinery Legal framework: Classification under the MSME Development Act (Notification dated 26.06.2020) prescribes thresholds for micro, small and medium enterprises and provides that calculation of investment in plant and machinery or equipment is to be linked to ITR of previous years; Office Memorandum clarified that WDV as at end of financial year (per Income Tax Rules) is to be used. Precedent treatment: Tribunal precedents recognize that an Adjudicating Authority is not to re-examine or revoke MSME registration conferred by the competent authority in summary IBC proceedings. Interpretation and reasoning: The Court accepted that MSME registration dated 21.07.2020 was valid, observed statutory text and Ministry clarification requiring reliance on ITR and WDV rather than book values in annual reports, and noted the automated year-to-year classification by the MSME portal based on ITR data. The Adjudicating Authority is not empowered to reassess or revoke the MSME certification in its summary jurisdiction under IBC. Ratio vs. Obiter: Ratio - MSME registration by the competent authority on the basis of ITR/WDV is binding for the purposes of Chapter III-A and the Adjudicating Authority should not re-open such classification in summary proceedings. Obiter - reliance on the Office Memorandum's clarification as explanatory guidance. Conclusion: The corporate debtor possessing the registration dated 21.07.2020 qualifies as an MSME; valuation for classification is to be made with reference to WDV as per ITR, not the annual report figures. Issue 3 & 4: Nature of the 14-day period in Section 11A(3) Legal framework: Section 11A establishes priority rules for disposal where Section 54C and Section 7/9/10 applications are concurrently pending; sub-section (3) prescribes that where Section 54C is filed after 14 days from a Section 7/9/10 filing, the Adjudicating Authority shall first dispose of the Section 7/9/10 application. Precedent treatment: Legislative history (Insolvency Law Committee Report) contemplated strict adherence to the 14-day window to prevent abuse; superior court authorities cited (literal interpretation, mandatory/directory distinction, and consequences) reinforce approach to mandatory statutory timelines where the statute prescribes consequences. Interpretation and reasoning: The Court applied principles of statutory interpretation, emphasizing that when the statute prescribes a consequence for timing, the provision is to be treated as mandatory. The Court rejected the submission that time taken to complete pre-pack statutory formalities (Sections 54A/54B) should be excluded from the 14-day computation, holding that the legislature was aware of such requirements when enacting Section 11A and did not provide exclusions. The plain words and scheme mandate disposal sequence under Section 11A(3). Ratio vs. Obiter: Ratio - Section 11A(3)'s 14-day limit is mandatory and obliges the Adjudicating Authority to first dispose of an earlier Section 7/9/10 application where Section 54C is filed after 14 days. Obiter - policy discussion referencing the Insolvency Law Committee and comparative reasoning. Conclusion: The 14-day period in Section 11A(3) is mandatory; where Section 54C is filed after 14 days, the Adjudicating Authority should have first adjudicated the pending Section 7 application. Issue 5 & 6: Consequence of mandatory 14-day rule given subsequent approval and implementation of PPIRP plan Legal framework: Interplay of Sections 11A, 54K and Chapter III-A; object of IBC to facilitate resolution rather than mere recovery; voting thresholds and binding effect in PPIRP context. Precedent treatment: Parliamentary intent and tribunal practice promote quick resolution of MSME debtors by PPIRP; jurisprudence discourages revisiting implemented resolution plans absent compelling reasons. Interpretation and reasoning: Although Section 11A(3) was mandatory and the Adjudicating Authority should have first decided the Section 7 application, the Court weighed practical consequences and the object of IBC. The Court observed that a negotiated base resolution plan had been approved by requisite majority, implemented and payouts were completed (including to the dissenting creditor). Setting aside the admission of Section 54C and unraveling an implemented PPIRP would not serve stakeholders' or corporate debtor's interests and would frustrate the IBC objective of resolution. Accordingly, despite the procedural impropriety, no useful purpose would be served by directing fresh adjudication of the earlier Section 7 application at this stage. Ratio vs. Obiter: Ratio - where a PPIRP has been validly approved by the requisite majority, implemented and payouts made, the appellate forum may decline to set aside prior actions taken under Section 54C solely on the ground of non-compliance with Section 11A(3) if undoing the process would defeat the object of IBC and prejudice stakeholders. Obiter - balancing considerations of statutory fiat versus commercial certainty. Conclusion: Although the procedural mandate of Section 11A(3) was breached, the Court refused to set aside the admission of the Section 54C application or to direct fresh adjudication of the Section 7 application in view of approval and implementation of the resolution plan and the interests of stakeholders. Issue 7: Compliance of payment to dissenting financial creditor with Section 30(2)(b) and appropriate relief Legal framework: Section 30(2)(b) requires that amounts offered to dissenting financial creditors under a resolution plan be not less than amounts payable under Section 53(1) in liquidation; Section 54K(3) makes Section 30(1) and (2) applicable mutatis mutandis to PPIRP plans. Precedent treatment: Principle that dissenting creditors must not be worse off than in liquidation is a statutory requirement; plans must comply with Section 30(2)(b). Interpretation and reasoning: The Court found merit in the complainant's contention that the resolution plan treated assenting and dissenting financial creditors identically and did not expressly guarantee the minimum payable amount under Section 30(2)(b). Given that the plan has been implemented, the Court directed a limited, pragmatic remedy: computation by the resolution professional of any differential amount due to the dissenting creditor under Section 30(2)(b) (if the liquidation-entitled amount exceeded that paid), and payment of that differential within a specified short period. Ratio vs. Obiter: Ratio - where a completed PPIRP payment is potentially less than the statutory minimum amount due to a dissenting creditor under Section 30(2)(b), the appellate forum may order computation and payment of the differential rather than unwinding the entire PPIRP. Obiter - procedural directions as to computation timeline. Conclusion: The dissenting financial creditor is entitled to any differential amount due under Section 30(2)(b); the resolution professional must compute the differential and the implementing authority must pay it within the Court-specified timeline. Final Disposition and Practical Outcomes 1. The 14-day limit in Section 11A(3) is mandatory. 2. The corporate debtor's MSME registration based on ITR/WDV is valid; Adjudicating Authority should not re-open such classification in summary IBC proceedings. 3. Although the Adjudicating Authority erred in admitting a Section 54C application filed after 14 days without first deciding the earlier Section 7 application, the Court declined to set aside the PPIRP outcome because the resolution plan was approved, implemented and payouts made; undoing it would be contrary to the IBC's resolution objective. 4. The dissenting financial creditor must be paid any shortfall mandated by Section 30(2)(b); the resolution professional to compute the amount and the implementing authority to pay the differential within the timeframe ordered.