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Clarifying Eligibility: NCLAT’s Ruling on Wilful Defaulters in Resolution Proceedings

Introduction

In the case of Namdev Hindurao Patil v. Virendra Kumar Jain, Liquidator, Warana Dairy and Agro Industries Ltd[i] the National Company Law Appellant Tribunal (‘NCLAT’) rendered a significant decision regarding the eligibility of a suspended director to submit a resolution plan for the resolution of Micro, Small, and Medium Enterprises (’MSME’). The appeal arose from an impugned order dated 19.04.2023 passed by the National Company Law Tribunal (‘NCLT’), Mumbai Bench, which raised pivotal questions regarding the participation of a wilful defaulter in the corporate insolvency resolution process (CIRP).

Brief Facts

  • Mr. Namdev Hindurao Patil (‘Appellant’) alleged that IDBI Bank Ltd. (‘Respondent no. 2’) wrongly declared the Appellant as a wilful defaulter (‘WD’) on 19.07.2021 and 04.10.2021.

  • This declaration initiated a series of legal battles, including a challenge before the Hon’ble Bombay High Court (‘BHC’) through a writ petition (‘WP’).

  • Despite ongoing litigation, the Appellant submitted a resolution plan (‘Plan’) on 12.05.2022, thereby further complicating the dispute.

  • The Appellant approached the NCLT and the impugned order dated 19.04.2023 was passed discarding the pleading of the Appellant, leading to the appeal before the NCLAT.

Issue

The central issue focused on whether the Appellant, deemed a WD, was eligible to submit a Plan under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The committee of creditors (‘CoC’) found the Appellant ineligible, resulting in the liquidation of the corporate debtor (‘CD’).

Held  

  • The NCLAT upheld the CoC’s decision, emphasizing the IBC's objective of protecting creditors’ rights and maintaining the CIRP’s integrity. The decision was based on s. 29A of the IBC, aimed at safeguarding creditors’ interests and preventing defaulters from compromising the company’s integrity. This provision disqualifies wilful defaulters from submitting the Plan, aligning with Reserve Bank of India (‘RBI’) guidelines.

  • The NCLAT reaffirmed that the MSME exemption under s. 240A of the IBC does not extend to WDs, rendering the CD ineligible for the CIRP. Furthermore, the absence of a judicial bar on the appellant’s WD status during the Plan submission reinforced his ineligibility under s. 29A(b) of the IBC.

Our Analysis

The NCLAT’s decision highlights the complexities of CIRP, particularly concerning the eligibility of resolution applicants and the application of s. 29(A) of the IBC. The case emphasises the crucial role played by the CoC in resolving corporate insolvency issues. This decision reinforces the IBC’s objective of balancing creditor interests with corporate revival, while also highlighting the challenges posed by legal complexities during the CIRP.




End Note

[i] [2024] 162 taxmann.com 248 (NCLAT- New Delhi) [23-04-2024]





Authored by Manmohan Bhola, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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