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Synopsis

The Supreme Court has clarified its 2019 judgement which upheld a view that in exceptional circumstances, if the 'Corporate Debtor' is MSME (Micro, Small and Medium Enterprises), it is not necessary for the promoters to compete with other ‘Resolution Applicants’ to regain the control of the 'Corporate Debtor'.

A bench of Justices Sanjay Kishan Kaul and Sudhanshu Dhulia explained the judgement in 'Saravana Global Holdings Ltd & Anr Vs Bafna Pharmaceuticals Ltd & Ors' (2019), while setting aside an order of the NCLAT and contempt proceedings initiated therein against Resolution Professionals.

In the instant case, the NCLAT held that the entity, Springfield Shelters Pvt Ltd is an MSME and had that status prior to the proceedings and thus, the benefit of the MSME Act would be available to the said entity.

The appellant, Resolution Professional sought to invite other plans and thereafter e-voting took place. On the anvil of the results of e-voting to be declared, contempt proceedings were filed by the corporate debtor and the result of the e-voting process was stayed.

Referring to the 2019 judgement, the bench said it began with the fundamental principle that the court envisages maximization of value of assets of the corporate debtor. Thereafter, it proceeded to discuss the scenario of a corporate debtor, which is an MSME, qua the ineligibility in terms of the inapplicability of Section 29A (c) & (h) of the Code to a promoter. 

It further added, "In the impugned judgment, it can hardly be disputed that there is no discussion on the special circumstances other than the reference to judgment in Bafna’s case (2019). The impugned judgment is predicated on a broad reasoning as if ipso facto there is no need to call other proposals if it is an MSME. In view of the larger context it would have, we clearly observe and hold that this is not the correct position of law."

In the factual scenario of 2019 case, the observations were made in the context of (a) before the constitution of CoCs or (b) in terms of Section 12A of the Code on the basis of an offer given by the promoter in such a case, the court said.

"This is to clarify the legal principles so that there is no confusion in future in appreciating the context of the observations made in Bafna’s Case (2019)," the bench said. 

"We are, thus, clearly of the view that the appellant cannot be faulted for calling for other proposals in which the proposal given by respondent No.1 was also to be examined, put them to voting before the CoCs and declare the results," the bench further ordered.

The court further clarified that beyond the window of two months, if the OTS is not accepted, the appellant, Resolution Professional will be free to declare the results of the e-voting qua all the proposals.

Case Title: R. RAGHAVENDRAN vs. C. RAJA JOHN & ORS.