The National Company Law Appellate Tribunal (NCLAT) delivered an order on 26 May 2025 in the matter of ETCO Denim Pvt. Ltd., reaffirming the paramount status of the Committee of Creditors (CoC) in the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal held that the commercial wisdom of the CoC is non-justiciable except on limited grounds and addressed the contentious issue of Micro, Small and Medium Enterprise (MSME) registration during the Corporate Insolvency Resolution Process (CIRP).
Background
ETCO Denim Pvt. Ltd. was admitted into CIRP under the IBC. During the resolution process, the corporate debtor's MSME registration became a contested issue. Under Section 240A of the IBC, read with the MSME Development Act, 2006, certain protections apply to MSMEs in insolvency proceedings — including the prohibition on requiring personal guarantees from promoters as a condition of the resolution plan and the entitlement of promoters to submit a resolution plan.
The appeal before the NCLAT challenged the resolution plan approved by the CoC, contending that the plan failed to adequately account for the corporate debtor's MSME status and that the CoC's commercial decision was arbitrary. The case raised a fundamental question: to what extent can the adjudicating authority or the appellate tribunal scrutinise the business judgment of the CoC in approving a resolution plan?
Key Holdings
The NCLAT laid down the following principles:
CoC commercial wisdom is paramount: The Tribunal reiterated that the commercial wisdom exercised by the CoC in approving or rejecting a resolution plan is not open to judicial review on merits. Courts and tribunals may interfere only where the CoC's decision is shown to violate the provisions of the IBC, relevant regulations, or the principles of natural justice.
Limited grounds of interference: Judicial scrutiny of a CoC-approved resolution plan is confined to verifying compliance with Section 30(2) of the IBC — including adequacy of provision for operational creditors, adherence to statutory priorities, and conformity with the terms of the invitation for expression of interest.
MSME registration during CIRP: The Tribunal held that where a corporate debtor possesses a valid MSME registration at the time of commencement of CIRP, the protections under Section 240A apply. The registration status is to be determined as of the insolvency commencement date, not at a subsequent stage of the proceedings.
Promoter participation rights: Consistent with the MSME framework, promoters of a corporate debtor classified as an MSME retain the right to submit a resolution plan under Section 29A, notwithstanding restrictions that would otherwise apply to promoters of non-MSME corporate debtors.
Implications for Practitioners
This order consolidates the judicial position that CoC commercial wisdom operates as a near-sacrosanct principle in IBC jurisprudence. Practitioners challenging resolution plans will find the threshold for judicial intervention remains extremely high — essentially limited to procedural irregularity or statutory non-compliance rather than the merits of the commercial decision itself.
The MSME registration timing issue addressed in this order has practical significance for resolution professionals and creditors. The insolvency commencement date as the reference point for MSME status means that subsequent changes in the corporate debtor's turnover, investment, or registration status during CIRP do not affect the applicability of MSME protections. Practitioners should ensure that MSME status is verified and documented at the earliest stage of CIRP.
For promoters of MSME corporate debtors, the affirmation of their right to submit resolution plans under Section 29A is commercially significant. This keeps the door open for promoter-led resolution in smaller enterprises, a policy objective the legislature intended when enacting Section 240A.