Banking Companies Not Required To Exhaust MSME Revival Option Before Filing Petition U/S 7 Of IBC: NCLT, Mumbai

The NCLT, Mumbai Bench comprising Shri Prabhat Kumar and Justice Shri V.G. She sought a declaration that being a Micro, Small, and Medium Enterprise within the meaning of Micro, Small and Medium Enterprises Development Act, 2006 and the Notification dated 29.05.2015 issued by the Central Government under Section 9 of the Act, as well as circulars and guidelines issued by the Reserve Bank of India under Section 10 thereof providing for a mechanism for resolution of stress, no proceedings for recovery under the Securitisation and Reconstruction of Financial Stress and Enforcement of Security Interest Act, 2002 would lie against the Corporate Debtor, except in the manner contemplated under the Notification; and the Act in so far as not having created a special forum/tribunal to adjudicate inter-se rights and obligations, the jurisdiction of the civil Court is not ousted. Per contra, Counsel for Financial creditor submitted that the proceedings under section 7 are not recovery proceedings, but are in realm of Resolution proceedings; the decision in case of Pro Knits deals with initiation of recovery proceedings under SARFAESI Act and not resolution under IBC; the said Notification is not applicable to Technology Development Board as it is not a financial institution or Banking Company; section 238 of the IBC supersedes the Notification as being later in time; and IBC also provides alternate mode of resolution of stress of debt of a corporate debtor. The Tribunal noted that the Supreme Court in Pro Knits held that “if at the stage of classification of the loan account of the borrower as NPA, the borrower does not bring to the notice of the concerned bank… that it is a Micro, Small or Medium Enterprise… such an Enterprise could not be permitted to misuse the process of law for thwarting the actions taken under the SARFAESI Act by raising the plea of being an MSME at a belated stage.” The Tribunal observed that the question before Supreme Court in Pro Knits was not whether the provisions of MSME Act overrides the provisions of IBC, which is a later legislation. The Explanation to Section 7 also makes it clear that the Code may be triggered by such persons in respect of a default made to any other financial creditor of the corporate debtor, making it clear that once triggered, the resolution process under the Code is a collective proceeding in rem…" The Tribunal observed that the restructuring contemplated in para 5 of the notification is another mode for revival and rehabilitation of the MSME Corporate Persons in addition to IBC.