MSMEs can reclaim bankrupt companies

Promoters of micro medium and small enterprises (MSME) going through insolvency proceedings can take another shot at running their companies, based on a Supreme Court ruling, paving the way for expeditious resolution of insolvencies in the sector.as per economic times reports.

The Supreme Court on July 15 upheld rulings by the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT) that approved the decisions by the Committee of Creditors (CoC) of Bafna Pharmaceuticals to accept a resolution plan by its erstwhile promoter.

Promoters of MSMEs are permitted to be considered for resolution of their own companies unlike in the case of other companies as they are exempt from section 29(A) of the Insolvency and Bankruptcy Code (IBC), which debars individuals who have defaulted on debt obligations from bidding for stressed assets during the corporate insolvency resolution process.

The order by the NCLAT in the insolvency proceedings of Bafna Pharmaceuticals held 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.’

Saravana Global Holdings had appealed against the decision of the Chennai bench of the NCLT to approve the resolution plan put forward by the promoter and accepted by the CoC.

The appellate tribunal, however, upheld the order of the NCLT stating that it was “open to the CoC to defer the process of issuance of information memorandum, if the promoter of MSME offers a viable and feasible plan maximising the assets of the corporate debtor.”

“This is an interpretation which favours promoters of MSME. The NCLAT has taken this view that since Section 12A is similar, they have extended a slight relaxation to MSMEs. The idea is that a CoC knows what is in the interest of creditors,” said Punit Dutt Tyagi, executive partner at law firm Lakshmikumaran and Sridharan.

Biswajit Dubey, partner, Cyril Amarchand Mangaldas, also said that this would help expedite resolutions for MSMEs but also pointed out that this precedent allowed promoters to regain control of their companies without meeting the 90% threshold required by a withdrawal under section 12A of the Insolvency and Bankruptcy Code.

“The court may have felt that since the disqualification under 29(A) is not applicable, therefore the strict 90% rule is not necessary as promoters would have been able to this even if they have 66% support of creditors, so why not do it sooner?” asked Dubey.

Abizer Diwanji, partner, EY, said the move was a positive step towards resolution of insolvencies in the case of MSMEs. “The benefit is only for the creditors, ultimately. The commercial decision rightfully lies with CoC,” said Diwanji.