Hari Babu Thota vs Pritha Srikumar Iyer & Others: Supreme Court Clarifies MSME Promoter Eligibility Under Section 240A

Case Citation: Civil Appeal No. 4422/2023, decided on November 29, 2023
Bench: Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia

Executive Summary

The Supreme Court has definitively settled that the cut-off date for determining MSME promoter eligibility under Section 240A of IBC is the date of submission of resolution plan. It is not the commencement of CIRP. This landmark judgment overrules the NCLAT decision in Digamber Anand Rao Pingle case. It provides crucial clarity for Limited Insolvency exam candidates. Practitioners also benefit from this clarity.

Case Background and Key Facts

Corporate Debtor: Shree Aashraya Infra-Con Limited
Resolution Professional: Hari Babu Thota (Appellant)
CIRP Commencement: April 6, 2021
Key Issue: Whether promoters can present resolution plans for companies that obtained MSME certification after CIRP commencement but before plan submission

The Resolution Professional presented a plan propounded by promoters and approved by the Committee of Creditors. However, both NCLT rejected the plan on February 28, 2023. NCLAT also rejected it on June 2, 2023. They did so solely because the MSME certificate was obtained post-CIRP commencement.

Comprehensive Related Cases Analysis

Supreme Court Precedents

1. Arcelormittal India Private Limited v. Satish Kumar Gupta & Others

• Relevance: Established that Section 29A(c) disqualification attaches “at the time of submission of resolution plan”
• Key Principle: The expression “has” in Section 29A(c) is in praesenti, contrasting with “has been” which refers to anterior point of time
• Exam Focus: Understanding temporal aspects of disqualification criteria

2. Swiss Ribbons Private Limited v. Union of India & Others

• Relevance: Provided legislative rationale for Section 240A insertion
• Key Principle: MSMEs form foundation of economy; exemption prevents liquidation where other resolution applicants unlikely
• Exam Focus: Policy objectives behind MSME exemptions

NCLAT Decision Overruled

Digamber Anand Rao Pingle v. Shrikant Madanlal Zawar & Others (NCLAT)

• Previous Position: MSME certificate obtained post-CIRP commencement cannot provide Section 240A benefits
• Supreme Court’s Ruling: Declared incorrect – cut-off date is plan submission, not CIRP commencement
• Impact: Multiple pending cases affected by this clarification

Detailed Statutory Framework

Section 29A of IBC 2016

Insertion: Act 8 of 2018 w.e.f. November 23, 2017
Objective: Prevent persons responsible for corporate debtor’s financial distress from regaining control

Key Disqualification Clauses:

• Section 29A(c): NPA accounts with one-year lapse period
• Section 29A(g): Promoters involved in preferential/fraudulent transactions
• Section 29A(h): Unpaid guarantees in favor of creditors

Section 240A of IBC 2016

Insertion: w.e.f. June 6, 2018 (retrospective effect)
Key Provision: “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 CIRP of any MSME”

Legislative Rationale (ILC Report 2018):

• MSMEs are bedrock of Indian economy
• Limited interest from external resolution applicants
• Prevention of liquidation affecting employees and workers

MSMED Act 2006 – Section 7 Classification

Micro Enterprises:

• Manufacturing: Investment ≤ ₹25 lakhs in plant & machinery
• Services: Investment ≤ ₹10 lakhs in equipment

Small Enterprises:

• Manufacturing: ₹25 lakhs < Investment ≤ ₹5 crores
• Services: ₹10 lakhs < Investment ≤ ₹2 crores

Medium Enterprises:

• Manufacturing: ₹5 crores < Investment ≤ ₹10 crores
• Services: ₹2 crores < Investment ≤ ₹5 crores

Regulatory Framework

CIRP Regulations 2016

Regulation 36A: Special provisions for MSME resolution plans
Regulation 13: Resolution Professional’s duties and responsibilities
Regulation 38: Committee of Creditors’ approval requirements

Key IBBI Circulars

• Clarifications on MSME certification processes
• Resolution Professional’s role in plan evaluation
• Due diligence requirements for Section 29A compliance

Practical Applications for Practitioners

Resolution Professional Responsibilities

1. Due Diligence: Comprehensive Section 29A eligibility verification
2. Plan Presentation: Authority to present promoter-proposed plans for MSMEs
3. Timing Consideration: Ensure MSME certification before plan submission
4. Committee Coordination: Facilitate CoC approval processes

Promoter Strategy Considerations

1. Early MSME Registration: Obtain certification during CIRP if eligible
2. Section 29A Compliance: Verify eligibility under non-exempted clauses
3. Plan Structuring: Leverage Section 240A benefits strategically
4. Timeline Management: Focus on submission date rather than CIRP commencement

Creditor Perspectives

1. Plan Evaluation: Consider MSME-specific benefits and limitations
2. Recovery Analysis: Assess promoter plans against liquidation scenarios
3. Voting Strategy: Balance recovery prospects with going-concern value

Research Tips for Legal Professionals

Case Law Research Strategy

1. Primary Sources: Always refer to original Supreme Court judgments
2. Comparative Analysis: Study pre and post-amendment case law
3. NCLAT Decisions: Verify if overruled by higher courts
4. Sectoral Precedents: Focus on industry-specific applications

Statutory Interpretation Techniques

1. Temporal Analysis: Distinguish between “has” and “has been” provisions
2. Notwithstanding Clauses: Understand exemption scope and limitations
3. Legislative History: Review ILC Reports for policy understanding
4. Ministerial Statements: Consider parliamentary debates for clarification

Practical Documentation

1. MSME Certificates: Verify authenticity and timing
2. Financial Records: Ensure investment criteria compliance
3. CoC Resolutions: Document approval processes thoroughly
4. RP Reports: Maintain detailed eligibility assessments

Limited Insolvency Exam Focus Areas

Core Concepts to Master

1. Section 240A Application: Timing and scope of MSME exemptions
2. Cut-off Date Principle: Plan submission vs CIRP commencement
3. Section 29A Interaction: Which clauses remain applicable to MSMEs
4. Resolution Professional Authority: Plan presentation powers and limitations

Exam Strategy Points

1. Case Citation Accuracy: Memorize key Supreme Court decisions
2. Statutory Provisions: Understand exact wording of Sections 29A and 240A
3. Timeline Analysis: Practice questions on cut-off date calculations
4. Practical Applications: Prepare for scenario-based questions

Common Exam Traps

1. Digamber Pingle Reference: Remember this is now overruled
2. Complete Section 29A: Only clauses (c) and (h) exempted for MSMEs
3. Certification Timing: Post-CIRP but pre-submission is acceptable
4. Authority Questions: RP can present promoter plans

Conclusion and Key Takeaways

The Hari Babu Thota judgment represents a significant victory for MSME promoters and provides much-needed clarity on Section 240A application. The Supreme Court’s emphasis on the “notwithstanding clause” and plan submission date as the cut-off provides practitioners with clear guidance for future cases.

Bottom Line for Practitioners: MSME promoters can obtain certification during CIRP and still qualify for Section 240A benefits, provided certification occurs before resolution plan submission. This opens strategic opportunities for promoter-led resolutions in the MSME sector.

For Limited Insolvency Candidates: Focus on understanding the interplay between Sections 29A and 240A, the significance of timing in eligibility determination, and the Supreme Court’s rationale for protecting MSME sectors from unintended consequences of the IBC framework.

For comprehensive analysis focused on the limited insolvency exam, check out our Limited Insolvency Exam eBook. It includes 72+ landmark cases and useful tips, not just for exams, but also for practitioners who may find it extremely useful in real life case handling. The sample is available here.

Prakash K Pandya

Practising Advocate, SIMI accredited Mediator and Insolvency Professional based at Mumbai, India. Have keen interest in International insolvency and mediation. Earlier practised as Company Secretary for over 25 years and now practising as Advocate since 2020.

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