MSME Protections Cannot Override IBC Once Debt And Default Are Established: NCLT Mumbai

The Mumbai Bench of the National Company Law Tribunal (NCLT) has admitted insolvency proceedings against Amar Seeds Private Limited, holding that its status as a Micro, Small and Medium Enterprise would not bar initiation of proceedings under the Insolvency and Bankruptcy Code once financial debt and default were established.

The bench of Judicial Member Nilesh Sharma and Technical Member Sameer Kakar observed:

“While the CD's MSME status is not in dispute, the reliefs under the MSMED Act and related RBI frameworks cannot override the operation of the Code. The Code is self-contained for insolvency resolution, and CIRP can be validly initiated against MSMEs once default is established.”

Buldana Urban Cooperative Credit Society Ltd had sanctioned a loan of ₹18 crore to Amar Seeds Private Limited under a sanction letter dated April 10, 2023, following which a loan agreement was executed on April 29, 2023. A mortgage deed was also executed by the corporate debtor's guarantors to secure the transaction.

The moratorium period expired on April 29, 2024, following which repayment obligations commenced. However, Amar Seeds failed to honour its repayment obligations after expiry of the moratorium period.

Under the terms of the loan agreement, Buldana Urban Cooperative Credit Society Ltd became entitled to recall the entire loan after default in repayment of three instalments. The loan account was subsequently classified as a non-performing asset on November 30, 2024. Demand notices dated June 27, 2024 and September 19, 2024 were also issued before the insolvency plea was filed.

Amar Seeds argued that it qualified as an MSME entity and was therefore entitled to protection under the MSMED Act and RBI's Framework for Revival and Rehabilitation of MSMEs. It contended that before classifying its account as an NPA, Buldana Urban Cooperative Credit Society Ltd ought to have initiated revival and restructuring measures through the prescribed committee mechanism.

Rejecting the contention, the bench held that even alleged procedural irregularities in NPA classification would not affect the maintainability of a Section 7 application so long as default was established.

“The date relevant for the purpose of admission of the Application is the date of default and not the date of NPA. Even if procedural non-compliance occurred in declaring NPA, such non-compliance does not negate the right of an Applicant to approach the Adjudicating Authority under Section 7 of the Code so long as the Applicant is able to establish the existence of default.”

Amar Seeds also argued that the insolvency proceedings were a “counterblast” to arbitration proceedings initiated by it against Buldana Urban Cooperative Credit Society Ltd., in which it had claimed more than Rs. 24 crore towards damages and consequential losses allegedly caused by the latter's actions, omissions, and gross inaction.

The tribunal rejected the contention as misconceived.

“Proceedings under Section 7 of the Code are summary in nature, wherein the Adjudicating Authority is only required to ascertain the existence of a financial debt and occurrence of default. Disputes inter se the parties are not required to be adjudicated in such proceedings. Hence, the pendency of arbitration proceedings is irrelevant for the purpose of admission of the present Application.”

The tribunal thereafter admitted the plea and initiated CIRP against Amar Seeds Private Limited.