Mr. Mukesh Goel vs CA Santanu Brahma & Anr.

Brief in nutshell:

a. An order be passed directing the Respondents to relax and/or dispense with the eligibility criteria in respect of the Applicant herein in submitting the EoI pursuant to the issuance of Form-G by the Respondent No. 1 on December 30, 2023, considering that the Applicant is a promoter of the Corporate Debtor which is an MSME Entity.

- b. The Applicant may be permitted to submit its EoI pursuant to publication of the FORM-G/ EoI dated 30.12.2023 considering that the Applicant is promoter of the Corporate Debtor which is an MSME Entity. - c. Pending disposal of the present application, the Form G/ EoI published on 30.12.2023 by the Respondent No. 1 - d. Any order may deem fit and proper.

Brief Background

Submissions by the Learned Senior Counsel, Shri Joy Saha for the Applicant:

Gist of submissions of the Learned Counsel for the RP:

“8.

In this context, the RP acknowledged the fact that there are judicial precedencies’ where the MSME Promoters are given exemption in respect of Net Worth criteria and hence the same be considered by the CoC at its discretion.’

“9.

On the question of extending waiver on EMD amount, the RP states that deposit of the EMD amount, somewhat, tests the extent of financial solvency possessed by the MSME Promoter which is very important for a viable resolution plan and to attain the objective of value maximization of the CD’s asset especially where public money is involved - as the CD is a listed concern with 67.79% public holding (as per September 2023 reporting with BSE Ltd.). Such waiver shall set free the MSME Promoter thereby raising the probability of unwanted litigations which shall disrupt the timely resolution of the CD Citing such reasons, the RP recorded his dissentient on waiver of EMD amount and left it to CoC to take the final call on the matter.”

“7.

In this respect, RP stated that exemption and relaxation may be granted with respect to Net Worth criteria. However, the RP expresses his disagreement in respect of providing exemption for EMD for reasons which have already been cited in the previous (40) CoC meeting. The RP also added that granting such exemptions and relaxations are the prerogative of CoC members and hence the final decision of the CoC shall prevail.”

“8.

After detailed discussion and deliberation on the matter, the following resolution has been decided to put for e-voting of the CoC members.”

Issue that cropped up for determination:

Analysis and Findings:

a) Net Worth Eligibility Criteria:

(i)

The prospective resolution applicant being an individual/firm/body Corporate/Joint Venture/Consortium should have a minimum net worth, at individual or group level, of [INR 55 Crores] Only or more as per the latest audited financial statement and for individuals - ‘net worth certificate issued by a practicing Chartered Accountant;

(ii)

The applicant being PE funds/Financial institutions/NBFCs/Other Financial Investors / Alternate Investment Funds should have a minimum asset under management (at individual or group level) of [INR 55 Crores] Only or more as per the latest audited Financial Statement;

(iii)

In the case of a joint venture or consortium or an SPV representing or including any of the participants from (i) or (ii) above, then either of the participants and/or jointly needs to qualify any one of the criteria i.e., either the minimum net-worth or minimum Assets under Management.

b) Non-Interest bearing Refundable ‘Earnest Money Deposit’ (EMD):

Non-Interest bearing Refundable EMD for an amount of [INR 2 Crores] Only to be paid by prospective Resolution Applicant at the time of submission of the Expression of Interest in accordance with the timeline specified in the Form G. In the event where the resolution plan submitted by the Resolution Applicant is approved by the Hon’ble Tribunal, then the said EMD amount shall get adjusted against the payment due as per the approved Resolution Plan.

c)

There shall be no Process Participation Fees.

A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person— - (a) is an undischarged insolvent; - (b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949; - (c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as nonperforming asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor: Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan; Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.

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Section 240A: Application of this Code to micro, small and medium enterprises.

(2)

Subject to sub-section (1), the Central Government may, in the public interest, by notification, direct that any of the provisions of this Code shall—

(a)

not apply to micro, small and medium enterprises; or

(b)

apply to micro, small and medium enterprises, with such modifications as may be specified in the notification.

(3)

A draft of every notification proposed to be issued under sub-section (2), shall be laid before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions.

(4)

If both Houses agree in disapproving the issue of notification or both Houses agree in making any modification in the notification, the notification shall not be issued or shall be issued only in such modified form as may be agreed upon by both the Houses, as the case may be.

(5)

The period of thirty days referred to in sub-section (3) shall not include any period during which the House referred to in sub-section (4) is prorogued or adjourned for more than four consecutive days.

(6)

Every notification issued under this section shall be laid, as soon as may be after it is issued, before each House of Parliament.

Explanation. — For the purposes of this section, the expression “micro, small and medium enterprises” means any class or classes of enterprises classified as such under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).]

“79.

The ILC Report of 2018 exempted these industries from Section 29A(c) and 29A(h) of the Code, their rationale for doing so being contained in paragraph 27.4 of the Report, which reads as follows:

27.4

Regarding the first issue, the Code is clear that default of INR one lakh or above triggers the right of a financial creditor or an operational creditor to file for insolvency. Thus, the financial creditor or operational creditors of MSMEs may take it to insolvency under the Code. However, given that MSMEs are the bedrock of the Indian economy, and the intent is not to push them into liquidation and affect the livelihood of employees and workers of MSMEs, the Committee sought it fit to explicitly grant exemptions to corporate debtors which are MSMEs by permitting a promoter who is not a wilful defaulter, to bid for the MSME in insolvency. The rationale for this relaxation is that a business of an MSME attracts interest primarily from a promoter of an MSME and may not be of interest to other resolution applicants.

80.

Thus, the rationale for excluding such industries from the eligibility criteria laid down in Section 29A(c) and 29A(h) is because qua such industries, other resolution applicants may not be forthcoming, which then will inevitably lead not to resolution, but to liquidation.”

“21.

The Parliament with specific intention amended the provisions of the ‘I&B Code’ by allowing the Promoters of ‘MSME’ to file ‘Resolution Plan’. The intention of the legislature shows that the Promoters of ‘MSME’ should be encouraged to pay back the amount with the satisfaction of the ‘Committee of Creditors’ to regain the control of the ‘Corporate Debtor’ and entrepreneurship by filing ‘Resolution Plan’ which is viable, feasible and fulfils other criteria as laid down by the ‘Insolvency and Bankruptcy Board of India’.”

“22.

Therefore, we hold that in exceptional circumstances, if the ‘Corporate Debtor’ is MSME, it is not necessary for the Promoters to compete with other ‘Resolution Applicants’ to regain the control of the ‘Corporate Debtor’.”

“8.

We, thus, turn to the relevant portion of the judgment in Bafna’s case passed by the Tribunal as to really appreciate the context in which the observations were made in paragraph 22 of that judgment, it is necessary to see how that judgment proceeded from paragraph 18 to 22;

“18.

Therefore, it is clear that ‘I&B Code’ envisages maximization of value of the assets of the ‘Corporate Debtor’ so that they are efficiently run as going concerns and in turn, will promote entrepreneurship. The preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no 'Resolution Plan' or the 'Resolution Plan's submitted are not up to the mark.

19.

Admittedly, the 'Corporate Debtor' is a 'MSME' and the promoters are not ineligible in terms of Section 29A of the 'I&B Code'. Therefore, it is not necessary for the 'Committee of Creditors' to find out whether the 'Resolution Applicant' is ineligible in terms of Section 29A or not.

20.

The 'Committee of Creditors' is to consider the feasibility, viability and such other requirements as has been specified by the Board. If it proposes maximisation of the assets and is found to be feasible, viable and fulfil all other requirements as specified by the Board, the company being MSME, it is not necessary for the 'Committee of Creditors' to follow all the procedures under the 'Corporate Insolvency Resolution Process'. For example, if case is settled before, the constitution of the 'Committee of Creditors' or in terms of Section 12A on the basis of offer given by Promoter, in such case, all other procedure for calling of application of 'Resolution Applicant' etc. are not followed. If the Promoter satisfy all the creditors and is in a position to keep the 'Corporate Debtor' as a going concern, it is always open to 'Committee of Creditors' to accept the terms of settlement and approve it by 90% of the voting shares. The same principle can be followed in the case of MSME.

21.

The Parliament with specific intention amended the provisions of the 'I&B Code' by allowing the Promoters of 'MSME' to file 'Resolution Plan'. The intention of the legislature shows that the Promoters of 'MSME' should be encouraged to pay back the amount with the satisfaction of the 'Committee of Creditors' to regain the control of the 'Corporate Debtor' and entrepreneurship by filing 'Resolution Plan' which is viable, feasible and fulfils other criteria as laid down by the 'Insolvency and Bankruptcy Board of India'.

22.

Therefore, we hold that in exceptional circumstances, if the ‘Corporate Debtor’ is MSME, it is not necessary for the Promoters to compete with other ‘Resolution Applicants’ to regain the control of the ‘Corporate Debtor’.

9.

A reading of the aforesaid shows that it begins with the fundamental principle that the Court envisages maximization of value of assets of the corporate debtor. Thereafter, it proceeds to discuss the scenario of a corporate debtor, which is an MSME, qua the ineligibility in terms of the inapplicability of Section 29A (c) & (h) of the Code to a promoter.

10.

The discussion proceeds to the aspect of Committee of Creditors (for short ‘CoCs’) considering the feasibility, viability and such other requirements as have been specified by the Code and observes that if it proposes maximization of assets as feasible, viable and fulfills all requirements as specified by the Code, it is not necessary for the CoCs to follow all the procedures under the Corporate Insolvency Resolution process. The example given thereafter is, if a case has been settled before the Constitution of a CoCs or in terms of Section 12A of the Code on the basis of an offer given by the promoter, in such a case, the procedure for calling of applications of the resolution applicants etc. are not followed and they would be in a position to keep the concern as a going concern and the CoCs would accept the terms of settlement and approve it by 90%. This, as one may say, is a special privilege for MSMEs. It is, thereafter, in paragraph 22, penned down, that in “exceptional circumstances” if a corporate debtor is an MSME, it is not necessary for promoters to compete with other resolution applicants to retain control of the corporate debtor.

11.

In the impugned judgment, it can hardly be disputed that there is no discussion on the special circumstances other than the reference to judgment in Bafna’s case. The impugned judgment is predicated on a broad reasoning as if ipso facto there is no need to call other proposals if it is an MSME. In view of the larger context it would have, we clearly observe and hold that this is not the correct position of law.

12.

This is more so as in the factual scenario of Bafna’s case, the observations were made in the context of (a) before the constitution of CoCs or (b) in terms of Section 12A of the Code on the basis of an offer given by the promoter in such a case.

13.

This is to clarify the legal principles so that there is no confusion in future in appreciating the context of the observations made in Bafna’s Case.

14.

We are, thus, clearly of the view that the appellant cannot be faulted for calling for other proposals in which the proposal given by respondent No.1 was also to be examined, put them to voting before the CoCs and declare the results.”

“18.

We have gone through the pleadings and heard the Ld. Counsel for the RP and the Ld. Senior Counsel for the applicant. The present situation has arisen mainly because of the plan being submitted without the requisite EMD. Even though the plan has been submitted and even considered by the CoC but was termed as non-compliant primarily due to lack of deposition of the EMD as required. Noting the fact that after initial contentions of exemption, the applicant had offered to deposit the necessary EMD, the present case essentially can be seen as the one seeking for condoning of delay in depositing the Earnest Money. Today when the matter was heard, the Ld. Senior Counsel appearing for the applicant stated that he was prepared to deposit the required amount of EMD provided he gets an assurance that his plan would be considered by the CoC afresh.

21.

[...] We also note the submissions of the applicant that even though the CoC did not consider the EMD exemption available to the MSME, however considering the various exemptions and relaxations given to the MSME including the exemption provided in Section 240A of the code to MSME sector and relying on the ratio of the Swiss Ribbons(supra), we are inclined to grant the relief sought as set out herein.

22.

Thus keeping in mind the main objective of the Code which is the maximization of the value of the Corporate Debtor vis-à-vis the facts and circumstances of the case as brought out herein above. We hereby revert the matter back to CoC and RP to consider the resolution plan submitted by the applicant subject to depositing of required EMD of Rs. One Crore within two days from the date of order.”