Promoter's MSME status can be proved after insolvency begins

The resolution professional was punished for a plan the promoters submitted. But the court just changed the rule — and the date that matters.

Hari Babu Thota did what the law asked him to do. As the Resolution Professional (RP — the court-appointed manager who runs a company during insolvency) of Shree Aashraya Infra-Con Limited, he took a resolution plan from the company's promoters, got it approved by the Committee of Creditors (CoC — the lenders who decide the company's fate), and walked into the National Company Law Tribunal (NCLT — the court that handles insolvency cases) in Bengaluru expecting a routine approval. The resolution plan sat as a physical document on the NCLT dais — a thick file of pages that would soon be rejected.

Instead, the tribunal threw the plan out. The courtroom fell silent as the order was read aloud.

Worse. It declared Thota ineligible to continue as RP. It barred him from ever being a liquidator. And it referred him to the Insolvency and Bankruptcy Board of India (IBBI — the regulator that polices insolvency professionals) for disciplinary action. The IBBI referral letter — a single sheet of paper with the tribunal's seal — would follow him to his office, a career-ending document.

His crime? The promoters' MSME certificate didn't exist when the insolvency started.

When the plan hit a wall

The NCLT Bengaluru rejected the plan on 28 February 2023. The reason: the promoters were disqualified under Section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC — the law that governs corporate insolvency in India). Section 29A lists who cannot submit a resolution plan — defaulters whose accounts are non-performing assets (NPAs — loans that have stopped generating interest), people involved in preferential or fraudulent transactions, and those whose guarantees have been invoked and remain unpaid.

The tribunal relied on an earlier NCLAT order in Digamber Anand Rao Pingle, which held that MSME status must exist at the very start of the Corporate Insolvency Resolution Process (CIRP — the formal insolvency proceeding), not at any later stage. The NCLT judge's voice was flat as he read out the dismissal — the file on the plan was closed with a soft thud.

The National Company Law Appellate Tribunal (NCLAT — the appeal court for insolvency cases) upheld the decision on 2 June 2023. By then, Thota was out of a job, facing a disciplinary referral, and staring at a career-ending order. The NCLAT order, when it arrived, was a thin document — just a few pages that confirmed the earlier ruling.

The two questions the court had to answer

The Supreme Court bench — Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia — heard the appeal on 29 November 2023. The courtroom was quiet as the arguments began, the only sound the rustling of paper and the low hum of the air conditioning. Two issues stood at the centre of the case.

First: were the promoters actually disqualified under Section 29A? The NCLT and NCLAT had assumed they were. The Supreme Court looked at the facts. Section 29A(c) disqualifies a person whose account is an NPA. The promoters had no bank dues outstanding. Section 29A(g) disqualifies those involved in preferential or fraudulent transactions — the adjudicating authority had passed no such order. Section 29A(h) disqualifies those whose guarantees have been invoked and remain unpaid — no invoked guarantee existed. The bench's silence during this part of the hearing was telling — the facts were clear.

The court found zero factual disqualification.

Second: even if the promoters were otherwise eligible, did the absence of MSME status at CIRP commencement kill the plan? This was the harder question. Section 240A of the IBC gives MSMEs (micro, small and medium enterprises) an exemption from certain disqualifications under Section 29A(c) and (h). The NCLAT in Digamber Anand Rao Pingle had held that the MSME certificate must exist on the day CIRP begins. If you did not have it then, you could not use the exemption later.

Why the cut-off date matters

The Supreme Court disagreed. Justice Kaul leaned forward as he delivered the reasoning, his voice carrying through the silent courtroom.

The court held that the relevant date for determining MSME status under Section 240A is the date of submission of the resolution plan, not the date of commencement of CIRP. The reasoning was straightforward: the purpose of Section 240A is to ensure that viable MSMEs get a second chance through the insolvency process. If a company loses its MSME status between the start of CIRP and the submission of a plan — or gains it during that period — the cut-off should be the moment the plan is actually presented.

Otherwise, the exemption becomes a trap. A company that qualifies as an MSME when the plan is submitted but did not have the certificate on day one would be locked out for no good reason.

The court overruled the NCLAT's position in Digamber Anand Rao Pingle explicitly. "The law laid down therein does not reflect the correct legal position," the bench observed, the words landing with the weight of a final judgment. The observation was written into the order — a clear, unambiguous statement that changed the rule for every future case.

What the court actually did

The Supreme Court set aside both the NCLT order of 28 February 2023 and the NCLAT order of 2 June 2023. It restored the resolution plan application — IA No.192/2022 in C.P. (IB) No.196/BB/2020 — back to the NCLT for reconsideration. Any consequential action by the IBBI against Thota would not survive. The parties were directed to bear their own costs. The operative order was read out in a steady monotone — the legal equivalent of a door swinging open.

The practical effect is immediate. Resolution professionals who were penalised for submitting plans from promoters whose MSME status was questioned at CIRP commencement now have a clear path. The NCLT must reconsider Thota's plan on its merits, without the disqualification roadblock. The file that was once closed with a thud will now be reopened.

Why this matters for every insolvency practitioner

For resolution professionals, the judgment removes a sword hanging over their heads. If you receive a resolution plan from promoters who are otherwise eligible under Section 29A, and the company qualifies as an MSME when the plan is submitted, you are safe — even if the MSME certificate was issued after CIRP began. The NCLT cannot reject the plan on that ground, and the IBBI cannot refer you for disciplinary action for doing your job. The IBBI referral letter that once threatened Thota's career is now a dead document.

The judgment also settles the law on the interplay between Section 29A and Section 240A. The NCLAT's earlier position in Digamber Anand Rao Pingle is no longer good law. Any tribunal or appellate body that tries to apply that precedent will be overruled. The Supreme Court has spoken — and the date that matters is the date of the plan, not the date of the crisis.

Deeper dive: the precedents that shaped the ruling

The Supreme Court's decision in Hari Babu Thota did not emerge in a vacuum. Two landmark judgments provided the legal architecture that the bench relied upon — Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors. and Swiss Ribbons Private Limited and Anr. v. Union of India & Ors.

In Arcelormittal, decided in 2019, the Supreme Court had interpreted Section 29A in the context of corporate guarantors. The case arose from the insolvency of Uttam Galva Metallics Limited, where Arcelormittal's resolution plan was challenged on the ground that the promoters were disqualified under Section 29A(c) because their related entities had NPAs. The court held that the disqualification under Section 29A(c) applies only if the account of the resolution applicant itself — not of a related party — is classified as an NPA for more than one year. The judgment established the principle that Section 29A must be read strictly, with disqualifications confined to the specific categories listed. The bench in Hari Babu Thota drew on this strict construction approach — if the promoters had no NPA of their own, no preferential transaction order, and no unpaid invoked guarantee, they could not be disqualified. The Arcelormittal framework gave the court the analytical tools to examine each sub-section independently.

Swiss Ribbons, decided earlier in 2019, was even more foundational. The case was a constitutional challenge to the IBC itself, with petitioners arguing that Sections 29A and 240A violated fundamental rights. The Supreme Court upheld the Code, but in doing so, it made critical observations about the purpose of Section 240A. The court noted that MSMEs are the backbone of the Indian economy and that the IBC's design must accommodate their unique vulnerabilities. Section 240A was intended to ensure that genuine MSME promoters are not permanently barred from resolution merely because of technical disqualifications like NPA classification or guarantee invocation. The Swiss Ribbons court had observed that the exemption under Section 240A serves a "salutary purpose" — it allows MSMEs to restructure and survive rather than being pushed into liquidation. The Hari Babu Thota bench cited this reasoning to support its conclusion that the cut-off date for MSME status must be the date of the resolution plan, not the commencement of CIRP. If the purpose of Section 240A is to give MSMEs a second chance, then locking them out based on a certificate's timing would defeat that purpose.

The interplay between these two precedents was crucial. Arcelormittal provided the method — examine each disqualification factually, without presumption. Swiss Ribbons provided the purpose — interpret exemptions liberally to achieve the Code's objective of maximising value and enabling rehabilitation. Together, they gave the Hari Babu Thota bench the legal foundation to overrule the NCLAT's rigid approach in Digamber Anand Rao Pingle.

The NCLT judge's reasoning — a closer look

The NCLT Bengaluru's order of 28 February 2023 was not a casual dismissal. The tribunal had before it the NCLAT's decision in Digamber Anand Rao Pingle, which had held that MSME status must exist at the commencement of CIRP. The NCLT judge, bound by appellate precedent, applied that rule mechanically. The file on the resolution plan sat on the dais — a thick bundle of documents that included the MSME certificate issued after CIRP began. The judge's reasoning was simple: the certificate came too late. The promoters could not claim the benefit of Section 240A because the company did not qualify as an MSME on the day the insolvency started. The judge's voice was flat as he read out the dismissal — the file was closed with a soft thud. The order did not examine the factual merits of the disqualification under Section 29A(c), (g), or (h) because the MSME issue was treated as dispositive. That was the error the Supreme Court would later correct.

The NCLT's reliance on Digamber Anand Rao Pingle was understandable — the NCLAT was the superior tribunal, and its orders were binding on the NCLT. But the Supreme Court found that the NCLAT's position was legally unsound. The NCLT judge, in following that precedent, had not acted arbitrarily — he had simply applied the law as it stood at the time. The Supreme Court's overruling of Digamber Anand Rao Pingle meant that the NCLT's order, while wrong in retrospect, was not a product of judicial overreach. It was a product of an incorrect legal position that the Supreme Court has now corrected.

The broader impact on the insolvency ecosystem

The judgment in Hari Babu Thota sends a clear signal to resolution professionals, creditors, and tribunals. For RPs, the message is one of protection — if you act in good faith, relying on a resolution plan that meets the legal requirements at the time of submission, you cannot be penalised for a subsequent change in the company's MSME status or for the timing of the certificate. The IBBI referral that followed Thota like a shadow is now a nullity. For creditors on the Committee of Creditors, the judgment provides certainty — they can approve a resolution plan knowing that the MSME status will be assessed at the time of submission, not at the start of CIRP. This reduces the risk of plans being rejected on technical grounds after approval.

For tribunals, the judgment is a binding instruction. The NCLT and NCLAT must now apply the cut-off date of the resolution plan's submission when evaluating MSME exemptions under Section 240A. Any attempt to revive the Digamber Anand Rao Pingle position will be immediately overruled. The Supreme Court has not left room for ambiguity — the date that matters is the date of the plan, not the date of the crisis.

The resolution professional walked into court punished for a plan he did not write. He walked out with the rule rewritten — and the IBBI letter that once threatened his career now sits as a footnote in a judgment that changed the law.

THE PLAY: When assessing promoter eligibility under Section 240A, check MSME status on the date the resolution plan is submitted — not the date CIRP started.