NCLAT Delhi: Former Director Deemed Ineligible To Submit Resolution Plan For MSME Corporate Debtor Due To Wilful Defaulter Status

NCLAT Delhi: Former Director Deemed Ineligible To Submit Resolution Plan For MSME Corporate Debtor Due To Wilful Defaulter Status

The National Company Law Appellate Tribunal (NCLAT) Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member), and Mr. Indevar Pandey (Technical Member), has ruled that a former director cannot propose a resolution plan for the resolution of a Micro, Small, and Medium Enterprises (MSME) corporate debtor if they have been declared a wilful defaulter at the time of submitting the resolution plan.

On July 19, 2021, and October 4, 2021, IDBI Bank Ltd. (Respondent 2) declared Mr. Namdev Hindurao Patil (Appellant), a Suspended Director and one of the Resolution Applicants of Warana Dairy and Agro Industries Ltd. (Corporate Debtor), as a wilful defaulter. The appellant contested this declaration by filing a Writ Petition before the Bombay High Court.

The resolution professional allowed the appellant to present the resolution plan, contingent upon the resolution of the appellant's challenge before the Bombay High Court. On May 12, 2022, the appellant submitted Form G along with his resolution plan. Subsequently, the High Court dismissed the challenge as withdrawn through an order dated August 24, 2022. The appellant then initiated a regular civil suit, and on September 19, 2022, the civil judge granted a stay.

During its 21st meeting held on October 6 and October 7, 2022, the Committee of Creditors (CoC) determined the appellant's ineligibility to submit the resolution plan due to his classification as a willful defaulter. Consequently, the CoC opted not to assess the resolution plan on its merits and instead resolved to initiate the liquidation process for the corporate debtor.

Following this, the civil judge dismissed the suit as non-maintainable through an order dated December 19, 2022. Subsequently, the appellant filed a civil appeal with the district Court in Kolhapur, challenging the decision of the civil judge. However, this appeal was also dismissed via an order dated April 1, 2023. Presently, the appellant has filed a second appeal, which is awaiting adjudication before the Bombay High Court.

The appellant has filed an appeal against NCLT Mumbai's Order dated April 19, 2023, which directed the corporate debtor into liquidation.

The NCLAT in Delhi rejected the appeal and ruled that a former director is ineligible to propose a resolution plan for the resolution of an MSME corporate debtor if they have been declared a wilful defaulter at the time of submitting the resolution plan.

The Appellate Tribunal observed that Section 29A of the Insolvency and Bankruptcy Code, 2016 ('IBC') is designed to protect the rightful creditors of the corporate debtor by thwarting dishonest individuals from profiting at the creditors' expense and subverting the goals of the IBC.

The Tribunal emphasized that the introductory clause of Section 29A explicitly states that "a person shall not be eligible to submit a resolution plan if such person" falls under any of the disqualifications enumerated in clauses (a) to (i) of Section 29A. This implies that Section 29A disqualifies individuals who have played a role in or contributed to the deterioration of the corporate debtor, making them unsuitable to take charge of its management.

The NCLAT observed that, in accordance with RBI guidelines, individuals who possess the financial means to repay but neglect to do so, resulting in their classification as willful defaulters, are barred from submitting a resolution plan under Section 29A of the IBC.

Moreover, MSMEs were provided with partial exemptions from certain provisions of Section 29A of the IBC.

This exemption was conferred to ensure that potential resolution applicants would not be discouraged from participating, thereby facilitating the resolution of MSME corporate debtors and averting their liquidation. The fundamental aim of the IBC is the resolution of corporate debtors rather than their liquidation, hence the exemptions provided to MSMEs regarding Section 29A.

Promoters of MSMEs are only exempted from clauses (c) and (h) of Section 29A, while all other eligibility criteria under Section 29A remain applicable. Clause (b) of Section 29A is not exempt. Additionally, the exemption outlined in Section 240A of the Code, which specifies the application of the IBC to MSMEs, does not extend to Section 29A(b), the focal point of the ongoing appeal.

The NCLAT further highlighted that, as Section 240A of the Code does not grant any exemption to the appellant from the application of Section 29A(b) of the Code, the appellant had no legal grounds to contest the determined ineligibility by the CoC and NCLT Mumbai. Additionally, there was no judicial stay in favor of the appellant regarding their status as a willful defaulter on May 12, 2022.

In conclusion, the NCLAT observed that the NCLT Mumbai, through its Order dated April 19, 2023, appropriately adjudicated and determined the appellant's ineligibility to submit the resolution plan.