National Company Law Tribunal & NCLATPromoter/director of MSME’s considered as “wilful defaulter” allowed to provide Resolution Plan under Section 230

National Company Law Tribunal, Chennai

Ravindranath Narayan Rao v. Maruthanayagam Kathiresh

IA No./260/2020 in IBA/265/20109 | DATE: 03 March 2020

FACTS 

In the present case, Ravindranath Narayan Rao (hereinafter referred to as “Applicant/RP”) on 11.03.2019 initiated the Corporate Insolvency Resolution Process (CIRP process) of corporate debtor and was appointed as Insolvency Resolution Process (hereinafter referred to as “IRP”) on the same date. On 14. 03. 2019 IRP made an announcement in order to invite claimants from creditors of corporate debtor. The claims for the invitations were file by the Operational creditors, Financial Creditors and other stakeholders.

Thereafter, a Committee for Creditors (hereinafter referred to as “CoC”) was formed on 29.03.2019. The First meeting of CoC was held on 05.04.2019 in which, CoC decided to appoint Applicant as Resolution Professional. Further, on 11.04.2019, in order to evaluate the assets of corporate Debtor Resolution Professor appointed 2 IBBI Registered Valuers and the liquidation value and the fair value was INR 7,97,00,000 and INR 12,59, 67,291 respectively which can be inferred from Form – H.

Now, In the Second CoC meeting which was held on 15. 05. 2019, wherein CoC decided to issue invitation for Expression of Interest (hereinafter referred to as “EoI”) and on 05. 06. 2019 the in order to invite resolution applicants EoI was published in Form-G in newspapers

In the Sixth meeting of CoC which was held on 21. 08. 2019 extension of time for submitting the resolution plan was discussed from one Malbar Ispat Limited. However, the resolution applicant failed to submit the resolution plan till date, even when they were provided with sufficient time to submit the resolution plan from the period of publication of EOI in newspaper under Form-G. Therefore, the members of CoC concluded that he never intended to submit the plan. Further, the members of CoC also discussed that other Resolution Applicant i.e. Sakthi Ferro Alloys India Pvt. Ltd. Didn’t submit the plan in time.

Thereafter, CoC after considering several factors and the fact that Corporate Debtor does not have any fixed assets and is operating a non-viable business, they were not in favour to extend the time period for submission of resolution plan and they unanimously decided to initiate Liquidation Resolution against the Corporate Debtor under Section 33(2) of I&B Code and appointed Mr. Ravindranath Narayana Rao as Liquidator. 

However, the said application filed under Section 33(2) was challenged by Mr. Maruthanayagam Kathiresh (hereinafter referred as Promoter of Corporate Debtor), stating that, in order to safeguard interest of Promoter of MSME’s, Section 240A was introduced under which, they are exempted from the restriction provided under Section 29A of I&B Code, 2016 and they are allowed to participate in the resolution process of the Corporate Debtor and submit resolution plan to save their Enterprise.

Thereafter the said Interim Application was filed before NCLT, Chennai Bench.

ISSUES BEFORE THE NCLT

Whether a Promoter/Director of MSME’s being a “wilful defaulter” participate in the Resolution Process under section 230 of Companies act, 2013?

DISCUSSION AND FINDINGS

In the present case, the Promoter/Director of MSME challenged the application filed under Section 33(2) of I&B Code, stating that on 10.06.2019 they had submitted the EoI to the resolution Professional in response to invitation dated 21.05.2019. Nevertheless, the Applicant rejected the EoI submitted by them stating that the Promoters/Directors of Corporate Debtor were considered as ‘wilful defaulters’, based on the information provided by Indian Overseas Bank, (sole CoC Member) via email dated 18.06.2019. However, the Promoter could not challenge the contention of Resolution Applicant regarding rejection of EOI due to lack of professional advice.

Now, the Tribunal after hearing all the contentions made by the parties, stated that, since corporate debtor is a MSME, and therefore, even if Promoter/Director of MSME has been classified as ‘wilful defaulters’ under Section 29A of I&B Code, they can participate in the Resolution Process Initiated under Section 230  of the Companies Act, 2013 and submit a resolution plan to take over the Company as a going concern. Further, the Tribunal stated that:

“Even after declaration of initiation of liquidation proceedings, the Intervenor still have a chance to tender definite plan for taking over the company as a going concern or under section 230 of Companies Act. The Regulation 2B of IBBI (Liquidation Process) Regulations, 2016 contemplates that a period of 90 days has to be provided for completion of the scheme of compromise during which prospective Resolution applicant can submit his plan under Section 230 of the Companies act, 2013”.

However, Pursuant to section 240A of the I&B Code, which states that “Notwithstanding anything to the contrary contained in this Code, the provisions of clauses (c) and (h) of section 29A shall not apply to the resolution applicant in respect of corporate insolvency resolution process of any micro, small and medium enterprises“.

The Tribunal decided to initiate the liquidation proceeding against Corporate Debtor based on the meeting of Review Committee, held on 12.03.2018, wherein the committee held the promoter director should be considered as ‘wilful defaulter’, based on the following points –

• Show cause notice was issued on 07.08.2015 to the borrowers and their directors.
• The borrowers represented by Mr. M. Kathiresh denied the allegations made in show cause notice via letter dated 25.08.2015. However, RO and ZO refused to accept the rejection of Mr. M. Kathiresh and Insisted to consider the Promoter/Director as “wilful defaulters”. 
• The identification committee took personal hearing of the borrowers and Mr. M. Kathiresh on 08.09.2017. wherein, they admitted that the receipts were not routed through account (ground for wilful default). However, money/proceeds out of stocks were utilised for meeting expenses of borrower firm and were not diverted to any other account.
• Further, during the personal hearing of Identification committee conducted on 08.09.2017, the borrower Inclined that they would set-off the dues through One Time Settlement Scheme (OTS). However, they failed to submit OTS In favour of the Company.

Therefore, Tribunal based on the above reasons was of the opinion that “there is no need to interfere with the decision made by the CoC” and hence dismissed the Interim Application of Promoter/Director and agreed to consider the application made under Section 33(2) for initiation of liquidation proceeding against Corporate Debtor.

AMLEGALS REMARKS 

The Tribunal in this case has concluded that in the circumstances where Corporate Debtor is an MSME, and the Promoters/Director of the Corporate Director have been classified as ‘wilful defaulters’ pursuant to Section 230 of the Companies Act, 2013 they can still apply, since they are exempted from the restrictions provided under Section 29A of I&B Code, 2016 and even if the declaration of liquidation has been issued the promoters and directors have a chance to submit their plan to take over the Company under Section 230 of Companies Act, 2013.

ABOUT US

AMLEGALS is a multi-specialised law firm. We would love to hear your views, queries, feedback and comments on anand@amlegals.com or tanmay.banthia@amlegals.com