NCLT Holds S.240A MSME Exemption Limited, ₹100 Crore Net Worth Rule Remains Binding in Insolvency Process [Read Order]

In a recent ruling, the National Company Law Tribunal (NCLT), Mumbai Bench, clarified that promoters of Micro, Small, and Medium Enterprises (MSMEs) are not automatically exempt from net worth eligibility criteria in insolvency proceedings and upheld the ₹100 crore net worth requirement approved by the Committee of Creditors (CoC).

The case arose out of the Corporate Insolvency Resolution Process (CIRP) initiated against Hotel Horizon Private Limited on 19 November 2024, following an application by Asset Care & Reconstruction Limited (ACRA), a financial creditor, under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016.

Once the CIRP commenced, the Interim Resolution Professional (IRP) issued a public announcement inviting claims from creditors and later invited Expressions of Interest (EOIs) from prospective resolution applicants through Form-G.

The applicants, Sagar Sharma and others, stated that the net worth requirement was inapplicable to them as promoters of an MSME, relying on Section 240A of the IBC, and that judicial precedents allow MSME promoters to regain control without competing bids.

They argued that the Resolution Professional (RP) rejection was arbitrary and that the CoC’s eligibility criteria should not apply to them. They also claimed that the RP failed to consider their willingness to match competing bids and that their exclusion was unjustified.

On the other hand The RP and CoC opposed the application, and pointed to the applicants’ persistent non-cooperation, including refusal to hand over company records and assets. They argued that the applicants were ineligible under Section 29A(e) of the IBC due to failure to file financial statements for several years, and that the MSME exemption under Section 240A does not extend to net worth criteria or Section 29A(e).

The respondents also pointed to contradictory litigation strategies by the applicants, including simultaneous challenges to the CIRP admission and attempts to participate in the resolution process. They asserted that the applicants’ conduct reflected an intent to delay and derail the insolvency process.

After considering the submissions, the tribunal noted that Section 240A provides limited exemptions and does not override the CoC’s authority to set eligibility criteria under Section 25(2)(h) of the IBC. It also noted that the applicants were present in the CoC meeting where the ₹100 crore net worth requirement was approved and raised no objections at the time.

The Tribunal observed that the commercial decisions of the CoC, taken in accordance with the Code, are not subject to judicial review unless there is a clear statutory violation and the applicants had failed to maintain books of account beyond FY 2016–17, obstructed the RP’s efforts to investigate avoidance transactions, and engaged in prolonged litigation with financial creditors.

The bench of Prabhat Kumar(Technical member ) and Sushil Mahadeorao Kochey (judicial member ) observed that “we do not find any reason to interfere with the decision of the RP and to allow the applicants to participate in the resolution process by exempting them from minimum net worth criterion”

Accordingly, the application was dismissed.

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