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TMI Blog2025 (2) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... rength 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/ revis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djudicating 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 affid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Ministry of Micro, Small and Medium Enterprises to the CD. iv. On 29.03.2022, the State Bank of India ("SBI") vide its letter consented to the proposed offer of OTS of Rs.30 crores. The IDBI Bank also vide letter dated 13.04.2022 has consented to the proposed offer of OTS of Rs.30 crores of the CD. The Bank of Baroda, who was also Member of the Consortium, however, did not communicate its acceptance and filed an Application on 18.04.2022 under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "IBC") against the CD, praying for initiation of Corporate Insolvency Resolution Process ("CIRP") against the CD. On 04.05.2022, Section 7 Application came to be listed. v. The Board of Directors of the CD Resolved to file an Application of PPIRP and a declaration was made by the Directors on 07.05.2022 to initiate steps for PPIRP. An IA No.236/2022 was filed by the CD on 17.05.2022 seeking condonation of delay in filing the Application under Section 54C of the IBC. In Section 7 Application, the CD also filed its reply. On 10.06.2022, a Special Resolution was passed by shareholders of the Company approving to initiate PPIRP. Request letter was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls have been heard together and are being decided by this common judgment. 4. Shri Ashish Verma, learned Counsel appearing for the Appellant submits that Section 54C Application was filed by the CD, after 14 days from the filing of the Application under Section 7 by the Bank of Baroda, hence, the Application under Section 7 was to be heard and decided on merits first and Application under Section 54C was not required to be considered. It is submitted that Adjudicating Authority by passing the order dated 19.04.2023, admitting Application under Section 54C, committed error and acted contrary to the legislative intent of the IBC. Reliance is placed on Section 11A of the IBC. It is submitted that Section 11A provides for a sequence of disposal of an Application. In the present case, Section 7 Application was filed by the Bank of Baroda on 18.04.2022, and Application under Section 54C was filed by the CD on 25.07.2022, Section 7 Application, ought to have been heard and decided first. Section 54C Application, which was filed 14 days after filing of Section 7 Application, could not have been considered or admitted. Both the orders passed by Adjudicating Authority on 19.04.2023, are con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CD, deserved to be rejected on this ground alone. 5. Shri Krishnendu Datta, learned Senior Counsel appearing for the CD refuting the submissions of Learned Counsel for the Appellant submits that the present is a case where CD, much before initiation of filing of an Section 7 Application has submitted proposal for settlement with all the three Lenders, including Bank of Baroda. The SBI and IDBI on 29.03.2022 has agreed and accepted the offer of negotiated settlement, whereas Bank of Baroda did not give its consent. The Bank of Baroda was very well aware that other two Lenders have given their consent and the CD was contemplating steps for Resolution of the CD. It is submitted that the Bank of Baroda, without even informing the other Lenders, rushed and filed Section 7 Application on 18.04.2022, which proceeding was nothing but proceeding for recovery of dues. Application under Section 7 was listed for the first time on 04.05.2022, on which date the CD, came to know about filing of Section 7 Application. The Board of Directors Resolved to proceed with PPIRP on 07.05.2022. Notice for Resolution was given to the Members of the Company. Declaration as required by law, was passed on 17. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted by Shri Datta that calculation of investment in plant, machinery and equipment is linked with the income tax return of the previous year filed under the Income Tax Act, 1961. Shri Datta also relied on clarification issued by Ministry of MSME dated 06.08.2020. It is submitted that the submission of the Appellant that CD is not a MSME is wholly incorrect and false. The CD is MSME and it is entitled for statutory protection and the Bank of Baroda denying the status of MSME, itself indicate that the Bank of Baroda is acting against spirit and object of the IBC. Shri Datta submits that SBI and IDBI Bank have accepted the Base Resolution Plan submitted by the CD. In the PPIRP, the Bank of Baroda is also bound, even though it is a dissenting Financial Creditor. It is submitted that the action taken by the Bank of Baroda in filing Section 7 Application is wholly malafide and is not for Resolution of the CD. The Bank of Baroda is taking steps, which is prejudicial to the rights and interest of a MSME. In pursuance of the Base Resolution Plan approved by Adjudicating Authority on 22.08.2023, payments to all Financial Creditors, including Bank of Baroda has already been made. The Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, 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? (4) 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)? (5) 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? (6) 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? (7) 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? (8) To what relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to the CD on 21.07.2020 as Annexure-1 to the affidavit dated 31.01.2023 filed by the CD, which indicates that the CD was classified as Small Enterprise Type based on Financial Year 2020-21. The learned Counsel for the Respondent has also relied on the Office Memorandum dated 06.08.2020 issued by Ministry of MSME. Paragraph 5 of the OM dated 06.08.2020 is as follows: "5. Value of Plant and Machinery or Equipment; (i) There are clarifications sought by the entrepreneurs regarding valuation of plant and machinery or equipments on cost or purchase price while filing the Udyam Registration. (ii) Para 3 of clause 4 Notification No. S.O. 2119(E) dated 26.6.2020 reads as follows: "The expression plant and machinery or equipment of the enterprise, shall have the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings)". (iii) It is clarified that online Form for Udyam Registration captures depreciated cost as on 31 st March each year of the relevant previous year. Therefore, the value of Plant arid Machinery or Equipments f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but the ITR of an enterprise for the previous years filed with the Income Tax Department that has to be seen for the purpose of determining the classification (Pg. 31 of the First Additional Affidavit). Such reasoning also gains strength from the fact that the status of the Company in the FY 2022-23 was automatically changed from MEDIUM to SMALL and back to MEDIUM in the F.Y. 2023-24, without any role/indication of/from the Company, as the data of the ITR was obtained automatically by the MSME Department based upon which the classification was changed year by year. The table hereinbelow indicates the status/ classification of the Company based upon its ITR by the MSME Department : IMG In F.Y. 2020-21, the net Investment in plant and machinery or equipment as per the ITR of the th Company went below Rs 10 crores (Rs 9.45 crores) whereas the turnover went below Rs 50 crores (Rs 36.62 crores) and therefore the Company was re- classified to SMALL category. Similarly, taking data of FY 2021-22, the turnover again crossed Rs 50 crores (Rs 50.77 crores) and the Net Investment in Plant and Machinery OR Equipment as per the ITR was 8.03 Crores, and the company was again automatically c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on any exercise of unilaterally undertaking calculation of the WDV at its own level, the Adjudicating Authority ought to have asked itself the question as whether the Parliament while framing the MSME Act intended to bestow any such authority on it. In the exercise of summary jurisdiction by the Adjudicating Authority under IBC, the Adjudicating Authority is not expected to go into details of accounts and examination of certificates issued by the competent authority under MSME Act and notification issued thereunder. 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. We are of the considered opinion 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." 13. In view of the aforesaid discussion, we are satisfied that CD had valid MSME registration certificate dated 21.07.2020 and CD as MSME was eligible to file Application under Section 54C. Question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reject such application, before considering any CIRP application that is filed subsequently. This approach provides an objective manner of dealing with simultaneous applications as it considers the application that has been filed first before any subsequent applications. b. Where an application for initiating CIRP is filed and subsequently a pre-pack application is filed within 14 days of the former, the Adjudicating Authority should first dispose of the application for initiating the pre-pack process. Although under this approach the application that has been filed subsequently is to be disposed first, such a provision may be necessary to allow effective access to pre-packs in practice. The filing of a pre-pack application requires more preparation while CIRP applications can often be filed (and are indeed filed) immediately on default. Further, certain creditors may rush to file a CIRP application if they discover that the corporate debtor is attempting to negotiate a base resolution plan with its creditors. This may make accessibility to pre-packs limited, hindering quicker and cost-effective resolution of the stress faced by MSME corporate debtors. Therefore, the Committee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... An application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006. (2) Without prejudice to sub-section (1), an application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor, who commits a default referred to in section 4, subject to the following conditions, that-- (a) it has not undergone pre-packaged insolvency resolution process or completed corporate insolvency resolution process, as the case may be, during the period of three years preceding the initiation date; (b) it is not undergoing a corporate insolvency resolution process; (c) no order requiring it to be liquidated is passed under section 33; (d) it is eligible to submit a resolution plan under section 29A; (e) the financial creditors of the corporate debtor, not being its related parties, representing such number and in such manner as may be specified, have proposed the name of the insolvency professional to be appointed as resolution professional for cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d; and (d) such other information and documents as may be specified. 54B. Duties of insolvency professional before initiation of pre- packaged insolvency resolution process. (1) The insolvency professional, proposed to be appointed as the resolution professional, shall have the following duties commencing from the date of the approval under clause (e) of sub-section (2) of section 54A, namely:- (a) prepare a report in such form as may be specified, confirming whether the corporate debtor meets the requirements of section 54A, and the base resolution plan conforms to the requirements referred to in clause (c) of subsection (4) of section 54A; (b) file such reports and other documents, with the Board, as may be specified; and (c) perform such other duties as may be specified. (2) The duties of the insolvency professional under sub- section (1) shall cease, if, - (a) the corporate debtor fails to file an application for initiating pre-packaged insolvency resolution process within the time period as stated under the declaration referred to in clause (f) of sub-section (2) of section 54A; or (b) the application for initiating pre-packaged insolvency resolution process i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elineated 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. Learned Counsel for the Appellant has relied on the judgment of the Hon'ble Supreme Court in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. - (2022) 8 SCC 352, where the Hon'ble Supreme Court had laid down that first and foremost principle of interpretation of a statute is the rule of literal interpretation. In paragraphs 65 to 69, the Hon'ble Supreme Court laid down following: "65. It is well settled that the first and foremost principle of interpretation of a statute is the rule of literal interpretation, as held by this Court in Lalita Kumari v. State of U.P. [Lalita Kumari v. State of U.P., (2014) 2 SCC 1, para 14 : (2014) 1 SCC (Cri) 524] If Section 7(5)(a) IBC is construed literally the provision must be held to confer a discretion on the adjudicating authority (NCLT). 66. In Hiralal Rattanlal v. State of U.P. [Hiralal Rattanlal v. State of U.P., (1973) 1 SCC 216 : 1973 SCC (Tax) 307] , this Court held : (SCC p. 224, para 22) "22. ... In construing a statutory provision, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay refer to recent judgment of the Hon'ble Supreme Court delivered on 29.01.2025 in Independent Sugar Corporate Ltd. vs. Girish Sriram Juneja - Civil Appeal No.6071 of 2023, where the Hon'ble Supreme Court had occasion to interpret the provisions of Section 31(4) of the IBC. The Hon'ble Supreme Court in paragraphs 83 and 84 has laid down following: "83. In Sharif-ud-Din v. Abdul Gani Lone, the Supreme Court held as follows : "9... In order to find out the true character of the legislation, the court has to ascertain the object which the provision of law in question has to subserve and its design and the context in which it is enacted. If the object of a law is to be defeated by non-compliance with it, it has to be regarded as mandatory... Whenever a statute prescribes that a particular act is to be done in a particular manner and also lays down that failure to comply with the said requirement leads to a specific consequence, it would be difficult to hold that the requirement is not mandatory and the specified consequence should not follow." 84. The long-standing principle of the consequence of non- compliance being the determinative factor, was later reaffirmed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transparency. Such an approach not only reinforces the integrity and credibility of the legal framework but also highlights India's commitment to fostering a regulatory environment, which is conducive to both business and innovation. Additionally, it also ensures the protection and enforcement of rights in an equitable manner, free from bias or favouritism. 154. Therefore, a balance between the need for expeditious relief and adherence to the statutory framework must necessarily be maintained, in order to ensure that the objectives of both, the IBC and the Competition Act are met in a manner that supports India's long-term economic aspirations." 23. The submission of Shri Datta that the period, which is required for compliance of mandatory requirement under Section 54A and 54B before filing an Application under Section 54C, needs to be excluded while computing 14 days period, does not commend us. Legislature is well aware of requirement under Section 54A and 54B and when both the provisions under Section 54A and 54B and sub-section (3) of Section 11A inserted in the Act by amending Act No.26 of 2021. Hence, the legislature was well aware of the statutory scheme and the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record a reply Application filed by the SBI to Section 54C Application filed by the CD. The SBI in its reply affidavit has given detailed facts and sequence of events regarding OTS received from the CD, as well as approval of Resolution Plan on 21.07.2022. We need to notice paragraphs 3, 4, 5 and 6 of the reply filed by the SBI, which are as follows: "3. That as per the information available on the record of the Respondent No. 1, the OTS proposal submitted by the Corporate Applicant with the Resp. 3- Bank of Baroda on 04.02.2022 is still pending and that while negotiations were going on between the Corporate Applicant and the Resp. 3 Bank of Baroda regarding finalization of the stipulations of the OTS from 04.02.2022 till 17.04.2022, Resp. 3- Bank of Baroda, without either informing the Corporate Applicant and/or any of the other two consortium members proceeded to file Section 7 Application under the provisions of Insolvency and Bankruptcy Code, 2016 against the Corporate Applicant, while keeping the OTS proposal dated 04.02.2022 of the Corporate Applicant pending with it. 4. That thereafter, despite having filed the said Section 7 Application, Resp. 3 Bank of Baroda has all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitting Section 54C Application filed by the CD, a Base Resolution Plan was submitted, which came for consideration before the Consortium Lenders of the Bank on 21.07.2022, which received approval by 79.12% of Lenders. The SBI and IDBI both accepted the Plan. Bank of Baroda having 26.09% voting share has dissented the Plan. The Adjudicating Authority in its order dated 22.08.2023 has noticed the aforesaid facts in paragraph 2.11, which is as follows: "2.11. It is further submitted that out of 3 Financial Creditors, SBI with 47.21% voting shares, IDBI Bank with 26.70% voting shares thereby constituting 73.91% of the total voting shares ofCoC casted their votes on the Base Resolution Plan submitted by the Corporate Debtor and approved the plan with vote of more than 66% as provided under Section 54K (13) of the IBC, 2016. The Base Resolution Plan of the Corporate Debtor has been approved by vote of 73.91% and therefore, the said plan has been approved as per the provisions of the code." 30. Paragraph 3 also notice the payment of Resolution Plan proceeds to all the Financial Creditors. Paragraph 3A is as follows : "Sr. No. Name of Bank Principal O/s Amount % of total Expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be set aside. Learned Counsel for the Appellant referring to provision of Resolution Plan 4.11(d) contend that the said Resolution Plan, which provided same payment to assenting Financial Creditors and dissenting Financial Creditors, is not acceptable. Clause 4.11(d), has been quoted in paragraph 7.15 of the Company Appeal (AT) (Ins.) No.1492 of 2023 is as follows: "7.15. On the contrary the resolution plan in Clause 4.ll(d) provides as under : - "d. Payment to dissenting Financial Creditors (FCs): The basis of PPIRP is relied on "Cramdown" mechanism (as mentioned under compliance table u!s 30(2)) and the offered amounts if approved by majority of FCs would be applicable and binding to all FCs including FCs in minority and dissenting FCs. In the case of present Liquidation Value of assets being higher than the offered resolution amount, and the PPIRP being a revival plan, provisions of Section 30(2)(b) would be limited to the amounts decided under the approved resolution plan by the CO C. Priority in release of payment under the provisions of the amounts in the plan shall be given to such dissenting creditors over the creditors voting in favour of the Resolution Plan. It is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solution Plans has to be in compliance of Section 30, sub-section (2). Section 54K, sub-section (3) is as follows: "54K(3) The resolution plans and the base resolution plan, submitted under this section shall conform to the requirements referred to in sub-sections (1) and (2) of section 30, and the provisions of sub-sections (1), (2) and (5) of section 30 shall, mutatis mutandis apply, to the proceedings under this Chapter. 36. We find substance in the submission of the Appellant that dissenting Financial Creditor has to be paid the amount not less than the amount, which would be payable to him in event liquidation under Section 53, sub-section (1). 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. 37. We have already noticed the amount, which has been already offered to the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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