Rakesh Kumar Agarwal & Ors. Vs Devendra P. Jain - It is settled law as per the decisions of the Hon’ble Supreme Court that the liquidation is only the last resort.

NCLAT (01.06.2021) in Rakesh Kumar Agarwal & Ors. Vs Devendra P. Jain [Company Appeal (AT) (Insolvency) No. 1034 of 2020] held that;

• We have perused the notification dated 01.06.2020 and Section 240A of the IBC and in terms of above notification the Corporate Debtor falls into the category of MSME. The Appellants vehemently contend that being existing promoters now they are eligible to submit a Scheme.

• Before taking steps to sell the assets of the ‘corporate debtor(s)’(companies herein), the Liquidator will take steps in terms of Section 230 of the Companies Act, 2013. The Adjudicating Authority, if so required, will pass appropriate order. Only on failure of revival, the Adjudicating Authority and the Liquidator will first proceed with the sale of company’s assets.  . . . .

• it is settled law as per the decisions of the Hon’ble Supreme Court that the liquidation is only the last resort and as per the preamble of the IBC the main object of the Code is in resolving corporate insolvencies and not the mere recovery of monies due and outstanding.

• For the foregoing reasons and relied upon the Judgments of the Hon’ble Supreme Court and this Tribunal we are of the view that the Appellant being eligible to submit a scheme by virtue of an amendment to Section 7 of Micro, Small and Medium Enterprises Development Act, 2006 vide notification dated 01.06.2020.

Excerpts of the order;

Brief Facts:

# 2. Learned Counsel for the Appellants submitted that the Hon’ble Adjudicating Authority rejected the I.A purely on Law point and had no issues whatsoever as far as merit and facts of the above I.A are concerned. 3. Learned Counsel for the Appellant submitted that the Corporate Debtor filed Application under Section 10 of Insolvency and Bankruptcy Code (IBC) and the Application was admitted by the Adjudicating Authority on 11.01.2018.

# 4. By virtue of admission the Adjudicating Authority appointed IRP and the IRP taken over the charge and conducted the proceedings. While so the IRP issued Expression of Interest (EOI) on 15.02.2018 and only one application received from M/s Growfast Global. However, they have not filed any Resolution Plan to the EOI. Thereupon the Second EOI was issued on 09.08.2018 and in pursuance thereof one M/s Indsur Gears Ltd. filed application along with other applicants. However, none of the Prospective Resolution Applicant(PRA) submitted a Resolution Plan. In view of the situation in 7th CoC held on 26.10.2018 a Resolution was passed for Liquidation of the Corporate Debtor by approving 97.37% of the Voting Share.

# 5. The RP filed I.A No. 461 of 2018 for liquidation of the Corporate Debtor and the Adjudicating Authority passed order liquidating the Corporate Debtor on 28.08.2019.

# 6. The Learned Counsel submitted that the RP appointed as Liquidator and issued form –B inviting Applications. The Appellant submitted a scheme under Section 230 of the Companies Act, 2013. The Scheme submitted by the Appellant was approved by stakeholders of the Corporate Debtor and an Application bearing I. A No. 66 of 2020 for approval of this scheme of arrangement was filed before the Adjudicating Authority. While so, the I. A No. 66 of 2020 was dismissed as withdrawn in view of notification dated 06.01.2020 issued by Government of India whereby an amendment was made in Regulation 2B of Insolvency and Bankruptcy Board of India (IBBI) (Liquidation Process) Regulations 2016, by virtue of which the Appellants became ineligible to submit a scheme in the liquidation process of the Corporate Debtor.

# 7. It is further submitted that by way of an amendment to MSME Act and certain changes were made in the criteria for classifying entities as Micro, Small & Medium Enterprises. In view of the amendment the Appellants became eligible to submit a scheme in the liquidation process. Hence, the Appellant filed I.A No. 496 of 2020 was filed before the Adjudicating Authority seeking permission to propose a scheme and a direction to consider the said scheme in view of the amendment.

# 8. Learned Counsel further submitted that the Adjudicating Authority passed the above impugned order on 15.10.2020 dismissing the said I.A. 

# 10. Learned Counsel submitted that the Hon’ble Adjudicating Authority held that the Corporate Debtor at this stage cannot claim to be fall under the classification of MSME and take the benefit of MSME in view of amendment vide notification on 01.06.2020 with effect from 01.07.2020 by having its retrospective effect when admittedly on the date of filing of Application under Section 10 of the I&B Code, the Corporate Debtor does not fall under the criteria of MSME, in view of aforesaid reasons, the Application is bad in the eye  law, hence rejected.

# 11. Learned Counsel admitted that in the present case when the Application under Section 10 was filed and CIRP initiated the Corporate Debtor was not falling in the criteria/classification of MSME. The amendment came during the liquidation process.

# 15. However, as stated above the Government of India had issued the notification dated 01.06.2020 revising the limit of MSME and on the basis of such revival limits the Corporate Debtor is eligible to be considered as MSME and fall into the category of MSME. The Hon’ble Adjudicating Authority was of the view that as per the notification dated 01.06.2020 the Corporate Debtor fall under the category of MSME and thereby the promoters are eligible to submit the scheme. However, the Corporate Debtor was not MSME at the time of filing of Section 10 Application. Therefore, the Hon’ble Adjudicating Authority rejected the I.A No. 496 of 2020 by passing the impugned order.

# 18. Learned Counsel for the Appellant relied on the Judgment of the Hon’ble Supreme Court in the matter of ‘Swiss Ribbons Pvt. Ltd. vs Union of India dated 25.01.2019, at para 26,27.

19. Learned Counsel also relied upon the Judgment of the Hon’ble Supreme Court in the matter of ‘Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta & Ors.’ dated 15.11.2019.

# 20. Learned Counsel submitted that the Hon’ble Supreme Court in both the Judgments held that “Preamble of the Code provide that liquidation is the last resort and it is duty of the RP/liquidator to explore all possibilities to keep the unit as going concern and take steps for revival within the ambit of the Code and liquidation of assets per- se would only be resorted if these steps are not possible.”

# 21. Learned Counsel relied upon the Judgment of this Tribunal in the matter of ‘S.C. Sekaran vs Amit Gupta & Ors.’, Appeal No. 495 & 496 of 2018’ and in the matter of ‘Siva Rama Krishna Prasad vs S Rajendra, Official Liquidator of M/s Krishna Industrial Corporation Ltd. & Ors.’, Appeal No. 751 & 752 of 2020’and in the matter of ‘Y Shivram Prasad vs S. Dhanapal & Ors.’ Company Appeal (AT) (Ins) No. 224 of 2018 dated 27.02.2019 has observed that even after pushing the Corporate Debtor into liquidation, Promoter/Ex- Director of the Corporate Debtor can take recourse to Section 230 of the Companies Act, 2013 by submitting a scheme for revival of the Corporate Debtor, subject of course to eligibility of the applicant.

# 24. Pursuant to the liquidation order, public announcement inviting claim from the Creditors of the Corporate Debtor was published in form B. In response thereof the Creditors submitted their claims which were duly verified by the liquidator. The Appellant/ Promoters of the Corporate Debtor submitted their scheme under Section 230 of the Companies Act, 2013 for sale of the Corporate Debtor as a going concern. The scheme submitted by the Appellant was approved by stakeholders of the Corporate Debtor and accordingly an Application bearing I. A No. 66 of 2020 was filed before the Adjudicating Authority.

# 25. However, the said I.A was dismissed as withdrawn in view of notification dated 06.01.2020 issued by the Government of India whereby an amendment was made in Regulation 2B of the IBBI, Regulations 2016, by virtue of which the Appellants became ineligible to submit a scheme of the liquidation process of the Corporate Debtor.

# 26. Subsequently an amendment was made by the Government of India to MSME Act and changes were made in the criteria for classifying entities as MSME.

# 28. Heard the Learned Counsel appearing for the Respective parties, perused the pleadings, documents and Citations relied upon by them. 

# 29. The Learned Adjudicating Authority vide its impugned order dated 15.10.2020 observed that the Appellant was not an MSME as on the date of filing of Application under Section 10 of the IBC and does not fall under the criteria MSME. The relevant Paragraph 21 of the impugned order is reproduced here under:

• “21) Under the facts and circumstances, as discussed herein above, the Corporate Debtor at this stage cannot claim to be fall under the classification of MSME and take the benefit of MSME, in view of amendment vide notification issued on 01.06.2020, w.e.f. 01.07.2020, by having its retrospective effect when admittedly on the date of filing application under Section 10 of the Insolvency and Bankruptcy Code Corporate Debtor does not fall under the criteria of MSME, therefore, the Application is bad in the eye of law, hence, rejected.”

# 34. It is an admitted fact that the Appellant/Promoters are not eligible to file even a scheme of arrangement under Section 230 of the Companies Act, 2013 by virtue of above notification issued by the Government of India. It is also an admitted fact that the Corporate Debtor do not fall under the category of MSME and therefore, the promoter cannot file Resolution Plan in the CIRP Process.

# 35. Subsequently, the Government of India vide notification dated 01.06.2020 has carried out certain changes in criteria for classification of Micro, Small and Medium Enterprises.

# 38. The contention of the Appellants that pursuant to the said notification the Corporate Debtor fall under the category of the MSME and as per Section 240 A of the IBC they are eligible to participate and submit a scheme, to avoid liquidation of the Corporate Debtor. We have perused the notification dated 01.06.2020 and Section 240A of the IBC and in terms of above notification the Corporate Debtor falls into the category of MSME. The Appellants vehemently contend that being existing promoters now they are eligible to submit a Scheme.

# 45. This Tribunal in the matter of “S.C.Sekaran vs. Amit Gupta & Ors.” in Company Appeal (AT) (Insolvency) No. 495 and 496 of 2018 dated 29th January, 2019. By referring the Judgment of Hon’ble Supreme Court in the matter of “Swiss Ribbons Pvt. Ltd. & Anr.”vs Union of India & Ors.”, “Arcelormittal India Pvt. Ltd.vs Satish Kumar Gupta & Ors.” and in “Meghal Homes Pvt. Ltd. vs. Shree Niwas Girni K.K. Samiti & Ors.-(2007)7 SCC 753” held as under:

• “8. In view of the provision of Section 230 and the decision of the Hon’ble Supreme Court in ‘Meghal Homes Pvt. Ltd.’ and ‘Swiss Ribbons Pvt. Ltd.’, we direct the ‘Liquidator’ to proceed in accordance with law. He will verify claims of all the creditors; take into custody and control of all the assets, property, effects and actionable claims of the ‘corporate debtor’, carry on the business of the ‘corporate debtor’ for its beneficial liquidation etc. As prescribed under Section 35 of the I & B Code. The Liquidator will access information under section 33 and will consolidate the claim under Section 38 and after verification of claim in terms of Section 39 will either admit or reject the claim, as required under Section 40. Before taking steps to sell the assets of the ‘corporate debtor(s)’(companies herein), the Liquidator will take steps in terms of Section 230 of the Companies Act, 2013. The Adjudicating Authority, if so required, will pass appropriate order. Only on failure of revival, the Adjudicating Authority and the Liquidator will first proceed with the sale of company’s assets wholly and thereafter, if not possible to sell the company in part and in accordance with law.

• 9. The ‘Liquidator’ if initiates, will complete the process under Section 230 of the Companies Act within 90 days. For the purpose of counting the period of liquidation, the pendency of the appeal(s) preferred by the ‘Eight Finance Pvt. Ltd.’ that is from 12th July, 2018 and till date should be excluded. In the circumstances, while we are not inclined to interfere with the impugned order(s) both dated 25th June, 2018 direct the Liquidator to act in accordance with law and as observed above.”

# 47. Further, this Tribunal in the matter of “Siva Rama Krishna Prasad vs. S. Rajendran” in Company Appeal (AT) (Insolvency) No. 751 and 752 of 2020 dated 04th September, 2020observed as under:

• “The Adjudicating Authority has rightly observed that even after pushing the Corporate Debtor into liquidation, Promoter/Ex- Director of the Corporate Debtor can take recourse to Section 230 of the Companies Act, 2013 by submitting a scheme for revival of the Corporate Debtor, subject of course to eligibility of the applicant.”

Conclusion:

# 49. In view of the aforesaid reasons and it is settled law as per the decisions of the Hon’ble Supreme Court that the liquidation is only the last resort and as per the preamble of the IBC the main object of the Code is in resolving corporate insolvencies and not the mere recovery of monies due and outstanding.

# 50. For the foregoing reasons and relied upon the Judgments of the Hon’ble Supreme Court and this Tribunal we are of the view that the Appellant being eligible to submit a scheme by virtue of an amendment to Section 7 of Micro, Small and Medium Enterprises Development Act, 2006 vide notification dated 01.06.2020. Accordingly, we set aside the impugned order dated 15.10.2020 passed by the Adjudicating Authority in I.A. No. 496 of 2020 in CP (IB) No. 148/NCLT/AHM/2017.

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Blogger’s comments; The above judgement of NCLAT in “Rakesh Kumar Agarwal & Ors. Vs Devendra P. Jain” is somewhat in variance with the rulings given in earlier judgements. Some of them are as under; 

 

i). NCLT Ahmedabad (06.01.2021) in POSCO India Pune Processing Center Private Limited  Vs Mr. Dhaval Jitendrakumar Mistry Resolution Professional of M/s Poggenamp Nagatsheth Powertronics Private Limited   [I.A. No. 514 of 2020 in CP(IB) No. 268 of 2018] held that;

• # 4.  . . . .It is also a matter of record that during CIRP, Corporate Debtor with permission of RP registered the Corporate Debtor as MSME. However, it is expected from the RP that while discharging duty, RP must adhere to the provisions of the IB Code i.e. Section 25 of the IB Code, which does not give any power to the RP to change the nature and character of the Corporate Debtor, that too during the CIRP period.

• # 11.  . . . . In the present case, when application was filed and CIRP initiated, the Corporate Debtor was not falling in the criteria/classification of MSME, hence, the amendment benefit cannot be availed by the Corporate Debtor, when it is under CIRP by giving retrospective effect. 

ii). NCLAT (12.01.2021) in  Harkirat Singh Bedi Vs. The Oriental Bank of Commerce & Anr. [Company Appeal (AT) (Ins.) No. 40 of 2020]  held that; 

• # 39. . . . . . . .Also, the date of registration of the Corporate Debtor as MSME as on record was 5th June, 2019, i.e. after CIRP admission order dated 29th March, 2019. The application for registration of MSME by the Appellant was without authorization, being subsequent to initiation of CIRP and hence was invalid. Therefore, the Appellant is ineligible to take the benefits of section 240A under I&B Code.

iii). NCLAT (13.04.2021) in Ashish Mohan Gupta Vs. The Liquidator of M/s. Hind Motors India Ltd (In Liquidation) [Company Appeal (AT) (Insolvency) No. 875 of 2019] held that;

• # 13.  . . . .In the Summary Procedure under IBC, the Resolution Professional and Adjudicating Authority are not expected to go into accounts and investigate if and in which category an application falls under Section 7 examining Notifications under Explanation 2 or Sub-Section 9 of Section 7 of MSME Act.”

• # 14. When we find that it is not necessary for us to pursue Section 230 of the Companies Act at the stage of Liquidation, the same not being part of Procedure of IBC when the Corporate Debtor is in Liquidation, both the Appeals must fail, not having substance in the contentions raised. . . . . . . 

Here I would like to draw attention towards the “Doctrine of Binding Precedent”. The Constitution Bench of Hon’ble Supreme Court of India, while laying the contours of the “Doctrine of Binding Precedent” in Union of India v. Raghubir Singh [(1989) 2 SCC 754 on 16.05.1989 observed as under;-

• “The doctrine of binding precedent has the merit of promoting a certainty and consistency in judicial decisions, and enables an organic development of the law, besides providing assurance to the individual as to the consequence of transaction forming part of his daily affairs. And, therefore, the need for a clear and consistent enunciation of legal principle in the decisions of a Court.”

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