The Mumbai Bench of the National Company Law Tribunal (NCLT) has delivered a crucial ruling regarding the applicability of interest under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) in the context of the Insolvency and Bankruptcy Code, 2016 (IBC). This ruling significantly impacts how operational creditors can combine interest and principal amounts under the MSMED Act to meet the limit under the IBC.
Case Background
The case involved SHAARC Projects Limited, the Operational Creditor, and Hindustan Construction Company, the Corporate Debtor. SHAARC Projects had supplied goods and rendered construction-related services to Hindustan Construction between 2012 and 2015. During this period, various sales bills were raised by SHAARC Projects.
In 2017, the Operational Creditor filed an application under Section 9 of the IBC to initiate the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The claimed Operational Debt amounted to Rs 1,15,95,819, which included the principal amount and interest under the MSMED Act.
Legal Arguments
SHAARC Projects argued that MSME interest could be claimed even if it was not included in the invoices. They cited provisions of the MSMED Act, including Sections 15, 16, and 17, and a 2018 Notification by the Ministry of Corporate Affairs. The Corporate Debtor contended that the application was not maintainable. They argued that the Operational Creditor had incorrectly combined the MSMED interest with the principal amount to meet the IBC threshold.
Additionally, Hindustan Construction pointed out that SHAARC Projects was registered as an MSME only in 2017. At this time, the appointed date fell between 2013 and 2014. Therefore, they argued, MSMED interest could not be charged for a period when SHAARC Projects was not registered as an MSME.
NCLT’s Decision
After considering the arguments, the NCLT, comprising Justice Reeta Kohli and Madhu Sinha, ruled that an Operational Creditor cannot combine interest under the MSMED Act with the principal amount to meet the IBC threshold if the MSME certificate was obtained after the appointed date. This decision was based on Section 16 read with Section 2(b) of the MSMED Act.
The NCLT’s ruling emphasized that the interest under the MSMED Act could not be retroactively applied to meet the IBC threshold. This decision underscores the importance of timely MSME registration for enterprises seeking to benefit from the provisions of the MSMED Act in insolvency proceedings.
Implications of the NCLT Ruling
This ruling has significant implications for operational creditors and corporate debtors. It clarifies that interest under the MSMED Act cannot be used to meet the IBC threshold if the MSME registration was obtained post the appointed date. This decision highlights the necessity for enterprises to ensure their MSME status is established and recognized at the appropriate time to benefit from the MSMED Act provisions.
For operational creditors, this ruling underscores the importance of timely registration under the MSMED Act. Without timely registration, they cannot claim interest under the MSMED Act for periods before their MSME status was officially recognized. This can affect the amount they can claim in insolvency proceedings.
Also read: MSME Delayed Payments: Guide to Filing a Complaint on MSME Samadhaan
The NCLT’s ruling is a critical clarification on the interplay between the MSMED Act and the IBC. It emphasizes the need for timely MSME registration to leverage the benefits of the MSMED Act in insolvency cases. Operational creditors must ensure their MSME status is established promptly to claim interest under the MSMED Act effectively.
This NCLT ruling also serves as a reminder for corporate debtors to scrutinize the claims made by operational creditors under the MSMED Act. They must ensure that such claims are valid and within the permissible period of MSME registration. The decision brings clarity and reinforces the importance of adhering to procedural timelines in the context of insolvency proceedings.