The National Company Law Tribunal (NCLT), Mumbai Bench, has held that an entity's status as a Micro, Small and Medium Enterprise (MSME) does not give it priority over secured creditors in insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).
The Bench comprising Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar observed that the IBC does not grant MSMEs any special status in the distribution of payments, except for the specific benefits provided under Section 240A.
“Nonetheless, the payment to the applicant shall be dealt with in accordance with the provisions of such resolution plan, once approved u/s 31 of the Code. IBC does not extend any superior status to MSME entities, except as provided in section 240A of the Code,” the tribunal held.
The case arose from an application filed by A. Navinchandra Steels Pvt. Ltd. seeking ₹99.93 crore, along with statutory interest, from Shree Ram Urban Infrastructure Ltd. The applicant had obtained a decree from the Bombay High Court in 2016 and argued that its MSME registration entitled it to priority in recovering the dues under the MSMED Act.
The applicant also alleged that Indiabulls Housing Finance Ltd., a secured creditor, had fraudulently taken over and sold the corporate debtor's principal asset. It argued that Section 26E of the SARFAESI Act, which gives priority to secured creditors, came into force only in 2020, whereas the Bombay High Court had passed the decree in its favour in 2016.
Rejecting the applicant's claim for priority, the NCLT observed that the IBC classifies debts as financial, operational and other debts, and further distinguishes between secured and unsecured debts. This classification is based on the nature of the debt and not on who the creditor is or how it is classified under another law.
The tribunal further observed that the MSMED Act and the IBC operate in different spheres. It held that when a company is undergoing insolvency proceedings, the payment of its dues has to be governed by the IBC, which overrides conflicting provisions of other laws.
The tribunal also clarified that it could not direct the secured creditor to pay the applicant from the proceeds of its security interest. Any money received by the corporate debtor from such proceeds would have to be distributed under the IBC. Since no resolution plan was in place, the tribunal could not direct payment to the applicant at this stage. Its dues would be dealt with under the resolution plan once approved.
For Applicant: Advocate Samuel
For Respondent: Advocate Ativ Patel