Introduction

Micro, Small and Medium Enterprises represent the backbone of India’s economic structure, serving as crucial drivers of employment, manufacturing output, and entrepreneurial innovation. These enterprises contribute significantly to the nation’s gross domestic product while providing livelihood opportunities to millions across the country. Despite their substantial economic contribution, MSMEs face numerous operational challenges including limited access to formal credit channels, technological constraints, inadequate infrastructure, and difficulties in accessing competitive markets. These vulnerabilities become particularly acute during periods of economic distress, potentially threatening their long-term viability and sustainability.

The Insolvency and Bankruptcy Code enacted in 2016 represents a watershed moment in Indian corporate law, establishing a unified framework for addressing insolvency and bankruptcy proceedings across corporate entities, partnership firms, and individual debtors [1]. The legislation aims to maximize asset value during insolvency proceedings, promote entrepreneurial culture, balance stakeholder interests, and establish the Insolvency and Bankruptcy Board of India as the regulatory authority overseeing these processes. Recognizing the distinctive position and requirements of MSMEs within India’s economic landscape, the Code incorporates specific provisions that extend preferential treatment to these enterprises during insolvency resolution proceedings.

Understanding MSME Classification and Registration Framework

Legislative Framework and Definition

The Micro, Small and Medium Enterprises Development Act of 2006 establishes the foundational legal framework for defining, classifying, and promoting MSMEs throughout India [2]. This legislation mandates provisions for registration, promotional measures, developmental initiatives, and facilitation mechanisms specifically designed for MSME advancement. The classification criteria underwent significant revision through a notification issued by the Ministry of Micro, Small and Medium Enterprises on June 1, 2020, which fundamentally altered how enterprises qualify under different MSME categories. The revised framework introduced composite criteria based on both investment in plant, machinery, or equipment and annual turnover, eliminating the previous distinction between manufacturing and service sector enterprises [3].

Current Classification Criteria

Under the revised classification effective from July 1, 2020, micro enterprises are defined as those with investment not exceeding one crore rupees and annual turnover below five crore rupees. Small enterprises fall within the bracket of investment between one crore and ten crore rupees, with turnover ranging from five crore to fifty crore rupees. Medium enterprises represent the largest category, encompassing entities with investment between ten crore and fifty crore rupees, and annual turnover spanning from fifty crore to two hundred and fifty crore rupees. This expanded threshold represents a substantial upward revision from earlier limits, reflecting evolving market conditions and economic realities.

Registration Mechanism and Benefits

The government established the Udyam Registration Portal to facilitate streamlined online registration for MSMEs [3]. While registration remains voluntary rather than mandatory, it unlocks numerous benefits including collateral-free credit facilities, subsidies for patent registration, exemptions from overdraft interest rates, eligibility for industrial promotion subsidies, and crucially, protection mechanisms against delayed payment issues. The registration process requires enterprises to provide their Aadhaar number, Permanent Account Number, and Goods and Services Tax Identification Number, creating a comprehensive digital database of registered MSMEs across the country.

Special Provisions for MSMEs under the Insolvency and Bankruptcy Code

The Genesis of Section 240A

The Insolvency and Bankruptcy Code introduced special dispensations for MSMEs through the incorporation of Section 240A via the Insolvency and Bankruptcy Code (Second Amendment) Ordinance, 2018, which became effective from June 6, 2018 [4]. This provision emerged from recommendations made by the Insolvency Law Committee constituted under the chairmanship of Shri Injeti Srinivas, which examined implementation challenges arising from the Code’s operation. The Committee’s comprehensive report acknowledged that MSMEs constitute the foundation of India’s economy, serving as primary drivers of employment, production, economic growth, entrepreneurship, and financial inclusion. The legislative intent behind Section 240A reflects a pragmatic recognition that pushing MSMEs into liquidation would adversely affect employee livelihoods and workers dependent on these enterprises.

Exemptions from Section 29A Disqualifications

Section 29A of the Insolvency and Bankruptcy Code, inserted through amendments effective from November 23, 2017, establishes comprehensive disqualification criteria preventing certain categories of persons from submitting resolution plans [5]. The provision aims to prevent individuals responsible for a company’s financial distress from regaining control through the insolvency resolution process at discounted valuations. However, Section 240A carves out specific exemptions for MSMEs by providing that provisions of clauses (c) and (h) of Section 29A shall not apply to resolution applicants in respect of corporate insolvency resolution processes or pre-packaged insolvency resolution processes involving MSME corporate debtors.

Clause (c) of Section 29A disqualifies persons having accounts classified as non-performing assets for one year or more from becoming resolution applicants [5]. This disqualification extends to accounts of corporate debtors under the management or control of such persons, or where such persons function as promoters. Clause (h) disqualifies persons who have executed enforceable guarantees favoring creditors of the corporate debtor, where such guarantees have been invoked and remain unpaid either fully or partially. By exempting MSMEs from these specific disqualifications, Section 240A enables MSME promoters who may have encountered financial difficulties or provided personal guarantees to participate in resolution proceedings for their own enterprises.

Rationale for Preferential Treatment

The exemptions under Section 240A reflect practical realities regarding MSME operations and resolution dynamics. MSME businesses typically depend heavily on their promoters for management expertise, technical knowledge, market relationships, and operational continuity. Finding suitable external resolution applicants for MSME entities often proves difficult given the specialized nature of their operations, limited scale, and niche market positioning. The Insolvency Law Committee Report of 2018 explicitly recognized that MSME businesses primarily attract interest from their own promoters, with external resolution applicants frequently showing limited enthusiasm for acquiring such enterprises [6]. Without the exemptions provided under Section 240A, many MSMEs would inevitably proceed to liquidation rather than successful resolution, resulting in job losses and value destruction.

Central Government’s Enabling Powers

Beyond the specific exemptions from Section 29A clauses, Section 240A also empowers the Central Government to issue notifications in public interest directing that provisions of the Insolvency and Bankruptcy Code shall either not apply to MSMEs or shall apply with specified modifications [4]. This grants the government substantial flexibility to extend additional relief or exemptions tailored to MSME requirements based on evolving circumstances and sectoral needs. Any such notifications must be tabled before both Houses of Parliament for a cumulative period of thirty days, ensuring legislative oversight over executive actions affecting MSME insolvency proceedings.

Judicial Interpretation: The Hari Babu Thota Landmark Judgment

Factual Background

The Supreme Court of India rendered a landmark judgment on November 29, 2023, in the matter of Hari Babu Thota versus Pritha Srikumar Iyer, addressing critical questions regarding the temporal application of Section 240A [7]. The corporate debtor, Shree Aashraya Infra-Con Limited, entered corporate insolvency resolution proceedings on April 6, 2021. Subsequently, the corporate debtor obtained registration as an MSME on July 15, 2021, after the commencement of insolvency proceedings but before submission of the resolution plan. The promoters of the corporate debtor submitted a resolution plan claiming benefits under Section 240A, which received approval from the Committee of Creditors. However, the National Company Law Tribunal dismissed the application on February 28, 2023, holding that since the MSME certificate was obtained after CIRP commencement, it could not confer eligibility benefits under Section 240A. The National Company Law Appellate Tribunal affirmed this decision, relying on its earlier judgment in Digamber Anand Rao Pingle.

Supreme Court’s Analysis and Ruling

The Supreme Court Division Bench comprising Justice Sanjay Kishan Kaul and Justice Sudhanshu Dhulia examined the interplay between Sections 29A and 240A comprehensively [7]. The Court noted that Section 29A was inserted to cure mischiefs of persons responsible for companies’ financial situations attempting to regain control through resolution plans. However, Section 240A begins with a non-obstante clause, specifically exempting MSMEs from clauses (c) and (h) of Section 29A due to the distinctive nature of MSME business operations. The Court emphasized that while Section 29A aims to prevent unscrupulous promoters from exploiting the insolvency framework, Section 240A recognizes that MSMEs require different treatment given their unique operational characteristics and limited attractiveness to external resolution applicants.

The Supreme Court held that the crucial date for determining eligibility under Section 240A is the date of resolution plan submission, not the date of CIRP commencement [7]. This interpretation flows from the statutory language of Section 29A(c) itself, which uses the expression “has an account” referring to the time of resolution plan submission rather than CIRP initiation. The Court referenced statements made by the Finance Minister while introducing the amendment bill, which emphasized that the date of making a bid should serve as the relevant cut-off date for determining eligibility. The judgment clarified that corporate debtors obtaining MSME status after CIRP commencement but before resolution plan submission remain eligible to claim Section 240A benefits, thereby enabling their promoters to participate in resolution proceedings despite disqualifications that might otherwise apply under Section 29A.

Impact and Implications

The Hari Babu Thota judgment established definitive jurisprudence on a contentious issue affecting numerous MSME insolvency cases nationwide [7]. By overruling the National Company Law Appellate Tribunal’s decision in Digamber Anand Rao Pingle, the Supreme Court provided clarity that tribunals had previously lacked when adjudicating similar matters. The judgment represents a significant victory for MSME promoters while maintaining the integrity of the insolvency framework. It acknowledges that MSMEs deserve special consideration without completely abandoning the accountability principles underlying Section 29A. The ruling enables MSME promoters to strategically obtain MSME certification during insolvency proceedings, provided they do so before submitting resolution plans, thereby preserving opportunities for promoter-led resolutions that might otherwise become impossible.

Regulatory Framework and Procedural Aspects

Information Memorandum Requirements

The Insolvency and Bankruptcy Board of India has progressively strengthened disclosure requirements relating to MSME status within insolvency proceedings. Regulation 36 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, mandates preparation of Information Memoranda by resolution professionals, providing comprehensive information about corporate debtors to prospective resolution applicants [8]. Recent amendments require explicit disclosure of corporate debtors’ MSME status within Information Memoranda, addressing instances where MSME classification was contested during resolution processes. This enhanced disclosure framework reduces uncertainty and potential delays arising from disputes over MSME classification.

Pre-Packaged Insolvency Resolution Process

The Insolvency and Bankruptcy Code introduced the Pre-Packaged Insolvency Resolution Process as a specialized mechanism exclusively available for MSMEs [4]. This streamlined process allows corporate debtors to negotiate resolution plans with creditors before formally initiating insolvency proceedings, reducing timelines and costs associated with traditional corporate insolvency resolution processes. The pre-packaged framework reflects legislative recognition that MSMEs require expedited resolution mechanisms tailored to their operational scale and resource constraints, enabling faster turnaround while preserving business continuity and employment.

Challenges and Considerations

While Section 240A provides crucial relief for MSMEs, implementation challenges persist. Determining whether enterprises genuinely qualify as MSMEs requires verification of investment and turnover criteria, which may be contested by creditors or resolution professionals. The timing of MSME registration becomes critical given the Supreme Court’s ruling that certification must precede resolution plan submission. Resolution professionals must conduct thorough due diligence to verify MSME status and ensure compliance with disclosure requirements. Additionally, concerns exist regarding potential misuse of Section 240A exemptions by promoters seeking to circumvent Section 29A disqualifications through strategic MSME registration during insolvency proceedings.

The broader policy question involves balancing MSME protection with creditor interests and insolvency framework integrity. While Section 240A aims to prevent unnecessary MSME liquidations, it simultaneously creates pathways for promoters with troubled financial histories to regain control of distressed enterprises. Courts and tribunals must carefully scrutinize each case to distinguish genuine MSME resolution scenarios from attempts to exploit exemptions. The regulatory framework continues evolving to address these challenges while preserving the fundamental objective of facilitating MSME revival rather than liquidation.

Conclusion

The Insolvency and Bankruptcy Code’s special treatment of MSMEs through Section 240A represents a nuanced legislative approach recognizing the distinctive position these enterprises occupy within India’s economic framework. By exempting MSMEs from specific Section 29A disqualifications while maintaining other eligibility criteria, the Code strikes a balance between facilitating resolution opportunities for MSME promoters and preserving insolvency process integrity. The Supreme Court’s landmark judgment in Hari Babu Thota has provided essential clarity regarding the temporal application of Section 240A, establishing that MSME certification obtained after CIRP commencement but before resolution plan submission confers eligibility benefits.

These provisions collectively acknowledge practical realities regarding MSME operations, including their heavy dependence on promoter expertise, limited attractiveness to external resolution applicants, and critical role in employment generation and economic growth. As India’s insolvency jurisprudence continues maturing, the framework governing MSME insolvency will require ongoing refinement to address implementation challenges while preserving the fundamental objective of maximizing MSME survival rates during financial distress. The success of Section 240A ultimately depends on balanced application by tribunals, effective oversight by resolution professionals, and responsible exercise of government powers to modify provisions based on evolving MSME sector needs.

References

1. Insolvency and Bankruptcy Code, 2016.
2. The Micro, Small and Medium Enterprises Development Act, 2006. Ministry of Micro, Small and Medium Enterprises, Government of India. 
3. Ministry of MSME. (2020). Notification on Revised MSME Classification. Press Information Bureau, Government of India. 
4. Section 240A, Insolvency and Bankruptcy Code, 2016. 
5. Section 29A, Insolvency and Bankruptcy Code, 2016. 
6. Insolvency Law Committee Report. (2018). Report of the Insolvency Law Committee. Ministry of Corporate Affairs, Government of India. 
7. Hari Babu Thota v. Pritha Srikumar Iyer, Civil Appeal No. 4422 of 2023, Supreme Court of India (2023). Available at: https://ibclaw.in/hari-babu-thota-supreme-court/
8. Insolvency and Bankruptcy Board of India. (2024). Discussion Paper on Disclosure of MSME Status in Information Memorandum. 

Download Booklet on MSME Laws in India – Compliance & Growth Opportunities

Published and Authorized by Rutvik Desai

The post MSMEs and Insolvency: A Special Treatment under the Insolvency and Bankruptcy Code appeared first on Bhatt & Joshi Associates.

The protection of secured creditors rights under IBC in India has undergone a remarkable transformation over the past three decades.. From the sluggish and ineffective civil litigation mechanisms of the early 1990s to the modern, time-bound insolvency resolution framework, this evolution reflects India’s commitment to strengthening its financial sector. This journey chronicles how India moved from a “defaulters’ paradise” to a creditor-driven insolvency regime that balances stakeholder interests while prioritizing economic recovery [1]. The story begins with the Narasimham Committee recommendations of 1991, which identified fundamental weaknesses in India’s debt recovery mechanisms. Prior to reforms, secured creditors faced enormous challenges in enforcing security interests as civil courts were overburdened, proceedings dragged on for years, and borrowers could easily obtain stay orders preventing meaningful recovery action [2].

The Pre-Reform Era: Civil Litigation and Its Limitations

Before specialized legislation, secured creditors in India relied primarily on civil litigation to recover dues through suits filed under the Transfer of Property Act, 1882, and the Code of Civil Procedure, 1908. This process was inherently lengthy, resource-intensive, and uncertain. Borrowers could exploit numerous procedural mechanisms to delay proceedings indefinitely, with appeals filed at multiple levels and interim orders frequently stalling enforcement actions. The average time for debt recovery through civil courts often exceeded ten years, by which time secured assets had typically depreciated significantly [1]. The delays posed existential threats to financial institutions as assets would deteriorate over time, making them less valuable or worthless. Borrowers in default could continue operating businesses or using assets without making payments, while creditors remained powerless to intervene. The absence of time limits and ease with which proceedings could be prolonged created a culture where defaulting on loans carried minimal consequences, discouraging lending and hampering economic development.

The RDDBFI Act, 1993: Establishing Debt Recovery Tribunals

Recognizing acute reform needs, Parliament enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, following Narasimham Committee I recommendations [3]. This legislation represented the first significant departure from civil litigation by establishing specialized Debt Recovery Tribunals and Debt Recovery Appellate Tribunals to exclusively handle debt recovery matters involving banks and financial institutions, with the objective of expediting resolution. The RDDBFI Act conferred powers on DRTs mirroring those of civil courts under the Code of Civil Procedure, 1908, enabling them to summon witnesses, receive evidence, and pass recovery orders. The Act sought to create a streamlined alternative by limiting appeals and establishing time-bound procedures [3]. However, despite well-intentioned reforms, DRTs soon faced challenges. The volume of cases quickly overwhelmed tribunals, leading to significant backlogs. Jurisdictional limitations meant only certain creditor categories could approach DRTs, and threshold limits excluded many smaller claims. Moreover, DRTs still required court-like proceedings with full dispute adjudication, meaning the fundamental time-consuming nature of litigation persisted. While the RDDBFI Act marked an important step forward, it became clear that additional measures were necessary since the Act did not empower secured creditors to take possession of secured assets without tribunal intervention.

The SARFAESI Act, 2002: Empowering Secured Creditors Rights

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, commonly known as the SARFAESI Act, marked a paradigm shift in India’s approach to debt recovery. Enacted following Narasimham Committee II recommendations in 1998, the SARFAESI Act addressed the fundamental inadequacy of previous legislation by empowering secured creditors to enforce security interests without court or tribunal intervention [4]. This revolutionary provision allowed banks and financial institutions to take possession of secured assets, manage them, sell them, or transfer them to Asset Reconstruction Companies for recovery of dues. Under the SARFAESI Act, when a borrower’s account is classified as a non-performing asset, the secured creditor may issue a notice under Section 13(2) specifying the amount due and demanding payment within sixty days. If the borrower fails to discharge liability within this period, the creditor may exercise measures under Section 13(4), including taking possession of the secured asset, taking over management of the borrower’s business, appointing a manager, or requiring third parties to pay amounts due to the borrower [4].

The constitutional validity of the SARFAESI Act was challenged in the landmark case of Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311 [5]. Petitioners contended that Sections 13, 15, 17, and 34 of the Act were arbitrary and violated fundamental rights guaranteed under Articles 14 and 19(1)(g) of the Constitution. They argued the Act conferred unchecked powers on banks without adequate judicial oversight, and that the requirement under Section 17(2) for borrowers to deposit seventy-five percent of the outstanding amount before filing an appeal was unconscionable and effectively denied access to justice. The Supreme Court, in a detailed judgment delivered on April 8, 2004, upheld the constitutional validity of most provisions of the SARFAESI Act. The Court emphasized Parliament’s supremacy in determining legislative necessity and rejected arguments that the SARFAESI Act was redundant given the RDDBFI Act’s existence. The Court noted the two statutes addressed different aspects of the recovery problem, with SARFAESI specifically targeting secured creditors and non-performing assets through a distinct mechanism [5]. However, the Supreme Court struck down Section 17(2), finding the seventy-five percent pre-deposit requirement unreasonable and arbitrary as it effectively denied borrowers the right to appeal by imposing an impossibly high threshold. This aspect demonstrated the Court’s commitment to balancing creditor rights with borrower protections. Following this decision, Parliament amended Section 17 to introduce a more reasonable graduated deposit structure, ensuring aggrieved borrowers retained meaningful access to appellate remedies before Debt Recovery Tribunals [5].

The Insolvency and Bankruptcy Code, 2016: A Unified Framework

Despite improvements brought by the SARFAESI Act, India’s insolvency landscape remained fragmented. Multiple overlapping laws governed insolvency and bankruptcy, including the Companies Act, 2013, and the Sick Industrial Companies (Special Provisions) Act, 1985. Different adjudicating authorities had overlapping jurisdictions, leading to conflicting decisions and procedural chaos. The lack of a unified framework meant creditors faced uncertainty about which forum to approach and which law would govern their claims [6]. In response, the Ministry of Finance constituted the Bankruptcy Law Reforms Committee in 2014 under T.K. Viswanathan’s chairmanship. The Committee examined international best practices and drafted comprehensive insolvency and bankruptcy legislation. After extensive consultations, the Committee submitted its report with a draft bill in November 2015, emphasizing the need for a creditor-driven process, time-bound resolution, and unified legal framework. Following refinements incorporating public comments, Finance Minister Arun Jaitley introduced the Insolvency and Bankruptcy Code, 2016, in the Lok Sabha. The Code received parliamentary approval and came into force as a watershed moment in Indian insolvency law [6].

The IBC established a completely new paradigm for handling corporate insolvency. When a corporate debtor defaults on obligations, a financial creditor, operational creditor, or the corporate debtor itself may initiate Corporate Insolvency Resolution Process by filing an application before the National Company Law Tribunal. The threshold for admission is deliberately low, requiring only proof of default without any insolvency test. Once admitted, the NCLT declares a moratorium, prohibiting all legal proceedings against the corporate debtor and preventing enforcement of security interests, including actions under the SARFAESI Act. This moratorium ensures the CIRP proceeds without external interference and all claims are consolidated under a single proceeding [6]. The NCLT appoints an Interim Resolution Professional who assumes control of the corporate debtor’s management, displacing existing promoters and directors. The Resolution Professional constitutes a Committee of Creditors comprising all financial creditors, which becomes the primary decision-making body during CIRP. The Committee of Creditors evaluates resolution plans submitted by prospective resolution applicants and votes to approve a plan that maximizes the value of the corporate debtor’s assets. The entire process must be completed within a maximum period of three hundred and thirty days, including any time spent in legal proceedings [6].

The constitutional validity of the IBC was challenged in Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17 [7]. Petitioners raised several constitutional questions, including whether the distinction between financial creditors and operational creditors violated Article 14 of the Constitution, whether operational creditors’ exclusion from voting rights in the Committee of Creditors was discriminatory, and whether various other provisions were arbitrary. The Supreme Court, in a judgment delivered on January 25, 2019, upheld the constitutional validity of the IBC, endorsing it as beneficial legislation designed to address the non-performing assets crisis. The Court rejected arguments that differential treatment of financial and operational creditors was discriminatory, reasoning that financial creditors have a fundamentally different relationship with corporate debtors compared to operational creditors. Financial creditors typically advance large sums as loans and maintain ongoing assessments of the corporate debtor’s financial health, making them better suited to evaluate resolution plans. The Court found this classification rationally connected to the objective of efficient insolvency resolution and therefore constitutionally valid [7].

The Waterfall Mechanism and Secured Creditors Rights under IBC

One of the most critical features of the IBC is the waterfall mechanism established under Section 53, which prescribes the order of priority for distribution of proceeds in liquidation. This mechanism is equally applicable during CIRP when evaluating whether a resolution plan provides fair treatment to different classes of creditors [8]. Under Section 53, the first priority is accorded to insolvency resolution process costs and liquidation costs, which must be paid in full before any distribution to other stakeholders. The second priority tier provides for workmen’s dues for the twenty-four months preceding the liquidation commencement date, and for debts owed to secured creditors, ensuring their rights under IBC. These two categories rank pari passu, meaning they share equally in the available proceeds at this level. The third priority is given to employees’ dues for the twelve months preceding liquidation commencement. Operational creditors rank at the sixth level, followed by government dues and statutory obligations at the seventh level. Any remaining debts to secured creditors who enforced their security interest but did not recover the full amount due are paid at the eighth level [8].

This waterfall structure assigns significant priority to secured creditors, recognizing their role in providing credit to the economy. However, in recent years, judicial interpretations have introduced complexity. In State Tax Officer v. Rainbow Papers Ltd. (2023) 9 SCC 545, the Supreme Court held that government authorities holding a statutory charge over assets qualify as secured creditors under the IBC. This decision created significant concern among financial institutions and creditors, as it appeared to dilute the priority afforded to secured lenders. In response, the Ministry of Corporate Affairs issued a consultation paper in January 2023 proposing amendments to clarify that government dues should be treated as secured only if the security interest arose from a transaction with the corporate debtor, rather than from a statutory charge created by operation of law [8].

Interaction Between SARFAESI and IBC

The relationship between the SARFAESI Act and the IBC has been a subject of considerable judicial interpretation. Section 238 of the IBC provides that the Code shall have overriding effect over all other laws. During Corporate Insolvency Resolution Process, Section 14 of the IBC imposes a moratorium that specifically prohibits any action to foreclose, recover, or enforce any security interest created by the corporate debtor, including actions under the SARFAESI Act [9]. However, the interplay becomes more nuanced in the context of liquidation. Under Section 52 of the IBC, secured creditors have the option to either relinquish their security interest to the liquidation estate, in which case they participate in the waterfall mechanism at the second priority level, or they may choose to realize their security interest by enforcing it outside the liquidation estate. This dual option provides flexibility to secured creditors while ensuring that the insolvency process remains creditor-driven and value-maximizing [9].

Conclusion

The evolution of laws protecting secured creditors rights under IBC in India represents one of the most significant legal and economic reforms of the past three decades. From the inefficient civil litigation system of the pre-reform era, through the establishment of Debt Recovery Tribunals, the revolutionary SARFAESI Act, and finally the comprehensive Insolvency and Bankruptcy Code, India has progressively strengthened its framework for debt recovery and insolvency resolution. This journey reflects a fundamental shift from a debtor-friendly regime to a creditor-driven system that balances the interests of all stakeholders while prioritizing economic value maximization. The SARFAESI Act empowered secured creditors to enforce their security interests without court intervention, dramatically reducing the time and cost of recovery. The IBC further refined this approach by creating a time-bound, collective resolution mechanism that seeks to rescue viable businesses while ensuring fair treatment for creditors. Landmark judgments such as Mardia Chemicals and Swiss Ribbons have upheld the constitutional validity of these legislative reforms while ensuring that borrower protections and fundamental rights are not compromised. Today, India’s insolvency and bankruptcy framework is recognized internationally as a significant achievement, with the country having risen substantially in the World Bank’s Ease of Doing Business rankings, particularly in the resolving insolvency metric.

References

[1] ClearTax. “SARFAESI Act, 2002 – Applicability, Objectives, Process, Documentation.” Available at: https://cleartax.in/s/sarfaesi-act-2002 

[2] Metalegal. “A Bank’s Comrade: An Overview of the SARFAESI Act.” May 12, 2025. Available at: https://www.metalegal.in/post/a-bank-s-comrade-an-overview-of-the-sarfaesi-act 

[3] IJLSSS. “History And Evolution Of The IBC.” June 21, 2025. Available at: https://ijlsss.com/history-and-evolution-of-the-ibc/ 

[4] Taxmann. “Overview of the SARFAESI Act – Background | Provisions.” March 22, 2025. Available at: https://www.taxmann.com/post/blog/overview-of-the-sarfaesi-act 

[5] Lawful Legal. “Mardia Chemicals Ltd. v. Union of India (2004): A Landmark Judgment on SARFAESI Act.” March 4, 2025. Available at: https://lawfullegal.in/mardia-chemicals-ltd-v-union-of-india-2004-a-landmark-judgment-on-sarfaesi-act-2/ 

[6] Vajira Mandravi IAS Academy. “SARFAESI Act 2002, History, Objectives, Provisions, Challenges.” October 10, 2025. Available at: https://vajiramandravi.com/current-affairs/sarfaesi-act-2002/ 

[7] IBC Laws. “Swiss Ribbons Pvt. Ltd. V. Union of India: The Constitutionality of IBC Upheld.” Available at: https://ibclaw.in/swiss-ribbons-pvt-ltd-v-union-of-india-the-constitutionality-of-ibc-upheld-understanding-the-procedural-aspect-and-the-after-effects-by-ms-manisha-arora-and-mr-pranav-ashutosh/ 

[8] IBC Laws. “Waterfall Mechanism: Basic structure of the Insolvency and Bankruptcy Code, 2016.” Available at: https://ibclaw.in/waterfall-mechanism-basic-structure-of-the-insolvency-and-bankruptcy-code-2016-by-harshit-gupta/ 

[9] IBC Laws. “Rights of Secured Creditors under the Insolvency and Bankruptcy Code, 2016.” Available at: https://ibclaw.in/rights-of-secured-creditors-under-the-insolvency-and-bankruptcy-code-2016-by-advocate-sabhay-choudhary/ 

The post Evolution of Law for Protecting Secured Creditors Rights under IBC – Journey from Suit Proceedings to Corporate Insolvency Resolution Process appeared first on Bhatt & Joshi Associates.

In October 2019, the e-commerce giant Flipkart India faced an unprecedented legal challenge when the National Company Law Tribunal admitted it into corporate insolvency proceedings following a petition by one of its suppliers. This case highlighted the growing importance of operational creditors under India’s insolvency framework and demonstrated how even profitable companies can face insolvency proceedings for payment defaults. The subsequent intervention by the Karnataka High Court brought into sharp focus the jurisdictional boundaries between tribunals and constitutional courts in insolvency matters.

Background of the Dispute

The dispute originated from a commercial relationship between Flipkart India and CloudWalker Streaming Technologies, a Mumbai-based company that imported and supplied LED televisions. CloudWalker entered into supply agreements with Flipkart in 2016, wherein the latter expressed keen interest in selling CloudWalker’s LED TV products, citing their superior technology and competitive advantages over other suppliers in the market.

According to CloudWalker’s petition before the NCLT, Flipkart placed substantial purchase orders for LED televisions worth Rs 103.62 crores. However, problems arose when Flipkart allegedly delayed accepting delivery of the ordered goods, initially citing lack of warehouse space. CloudWalker agreed to temporarily store the goods in their own warehouse, but Flipkart reportedly never collected the delivery despite making several excuses. The total outstanding operational debt claimed by CloudWalker amounted to Rs 26.95 crores, which included Rs 13.95 crores for the product cost, Rs 5.25 crores as customer charges, and Rs 7.75 crores as interest accumulated until March 2019.

The Legal Framework: Section 8 and Section 9 of the Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 [1] established a time-bound framework for resolving corporate insolvency in India. Under this framework, operational creditors are entities to whom operational debts are owed, including suppliers of goods and services. The procedural mechanism for operational creditors to initiate insolvency proceedings is governed by Sections 8 and 9 of the Code.

Before filing an application under Section 9, an operational creditor must first comply with Section 8, which requires delivery of a demand notice or invoice to the corporate debtor. The corporate debtor then has ten days to either make payment or notify the operational creditor about the existence of any dispute. Only if the operational creditor receives neither payment nor notice of dispute within this period can they file an application before the NCLT for initiating corporate insolvency resolution process.

The Supreme Court in Macquarie Bank Limited v. Shilpi Cable Technologies Ltd. [2] clarified that certain documentary requirements under Section 9(3)(c) are directory rather than mandatory in nature. The Court held that a certificate from a financial institution confirming non-payment, while important evidence, is not a threshold bar or condition precedent for triggering insolvency proceedings. This interpretation facilitated operational creditors, particularly foreign ones, in accessing the insolvency framework without facing unnecessary procedural hurdles.

CloudWalker’s Petition and Statutory Compliance

CloudWalker Streaming Technologies filed its application under Section 9 of the Insolvency and Bankruptcy Code before the Bengaluru bench of the NCLT in July 2019. The petition alleged that Flipkart had committed default on payment obligations despite repeated demands. CloudWalker claimed it had sent a demand notice under Section 8 to Flipkart, but received no response regarding either payment or existence of any dispute.

In its petition, CloudWalker asserted that the corporate debtor, Flipkart, was commercially insolvent and unable to pay its debts. The supplier argued that Flipkart had consistently and persistently failed, omitted, and neglected to discharge its admitted and acknowledged debt and liability. CloudWalker maintained that the corporate debtor company was not economically viable and posed a threat to commercial morality, justifying the need for insolvency proceedings.

Flipkart’s Defense and Contentions

Flipkart contested the petition vigorously before the NCLT, arguing that the application was not maintainable either in law or on facts and was liable to be rejected with exemplary costs. The e-commerce company presented evidence showing it had already paid Rs 85.57 crores toward the invoices raised by CloudWalker against total purchase orders worth Rs 103.62 crores.

Flipkart maintained that it was a profit-making company with sufficient financial strength and was actively conducting business operations. The company characterized the allegation that it lacked money to pay its liabilities or debts as baseless, frivolous, bereft of truth, and filed with malafide intentions. Flipkart further contended that an amount of Rs 42.96 crores payable to CloudWalker had been withheld due to deficiency in services provided by the supplier.

The central thrust of Flipkart’s defense was the existence of a pre-existing dispute regarding the quality and quantity of goods supplied, the terms of payment, and the calculation of amounts due. The company argued that CloudWalker was misusing the insolvency and bankruptcy framework as a debt recovery mechanism, which was contrary to the legislative intent behind the Code.

NCLT’s Order Admitting Insolvency Proceedings

On October 24, 2019, the Bengaluru bench of the NCLT, after examining the submissions and evidence presented by both parties, admitted CloudWalker’s petition and ordered the initiation of Corporate Insolvency Resolution Process against Flipkart India. The tribunal observed that Flipkart could not deny the existence of debt and that the company had defaulted on committed debt obligations.

The NCLT appointed Mr. Deepak Saruparia, a former Managing Director of Bank of Rajasthan, as the Interim Resolution Professional to conduct the corporate insolvency resolution process. The tribunal also imposed a moratorium under Section 14 of the Insolvency and Bankruptcy Code, which prohibited pending case judgments, sale of assets and property, and required the board of directors to extend full cooperation to the IRP. The NCLT directed that a report be filed on November 25, 2019, regarding the progress of the resolution process.

The moratorium provisions under Section 14 are crucial to the insolvency framework as they provide a standstill period during which creditors cannot enforce their claims individually. This allows for an orderly resolution process where all creditors can be treated fairly through the committee of creditors mechanism.

Karnataka High Court’s Intervention

Immediately upon the NCLT’s order being made available on November 5, 2019, Flipkart approached the Karnataka High Court by filing a writ petition under Articles 226 and 227 of the Constitution of India. The petition, presented before Justice B. Veerappa, challenged the jurisdiction of the NCLT to admit the company into corporate insolvency resolution process. Senior Advocate Dhyan Chinnappa appeared for Flipkart and made submissions contending that the NCLT had travelled beyond its jurisdiction in admitting the company into CIRP.

On October 25, 2019, just one day after the NCLT’s oral order, the Karnataka High Court exercised its extraordinary writ jurisdiction and granted a stay on the NCLT’s order. The High Court’s swift intervention prevented the insolvency process from proceeding further. The writ petition was taken up for hearing again on October 31, 2019, when the High Court directed continuation of the stay until the next date of hearing.

The legal basis for the High Court’s intervention deserves examination. Senior Counsel for Flipkart argued that the petition filed by CloudWalker was merely a claim for damages which the NCLT could not have adjudicated upon. The counsel submitted that there existed substantial disputes regarding the transaction, making the case inappropriate for resolution through the insolvency framework.

Jurisdictional Questions: High Court vs. NCLT

The Flipkart case raised important questions about the interplay between the jurisdiction of High Courts under Articles 226 and 227 of the Constitution and the statutory appellate mechanism under the Insolvency and Bankruptcy Code. The Code provides for a three-tier adjudicatory mechanism: the NCLT as the adjudicating authority, the National Company Law Appellate Tribunal as the appellate authority, and the Supreme Court as the final authority.

The Supreme Court in Embassy Property Developments Pvt. Ltd. v. State of Karnataka [3] had clarified the scope of High Court intervention in NCLT matters. The Court held that although the availability of a statutory alternative remedy generally bars writ jurisdiction, High Courts can entertain writ petitions when the challenge relates to lack of jurisdiction rather than wrongful exercise of available jurisdiction.

The Supreme Court observed that the NCLT, being a creature of special statute to discharge specific functions, cannot be elevated to the status of a superior court having power of judicial review over administrative action. When the NCLT acts without jurisdiction or as coram non judice, the High Court is justified in entertaining writ petitions despite the availability of statutory appeal before NCLAT.

In the context of the Flipkart case, the Karnataka High Court appears to have taken the view that entertaining the writ petition was appropriate given the circumstances. The case demonstrated that despite the complete code framework under the IBC, constitutional courts retain their supervisory jurisdiction over tribunals in exceptional situations.

The Concept of Pre-Existing Dispute

One of the central issues in the Flipkart-CloudWalker dispute was whether there existed a pre-existing dispute that would preclude admission of the insolvency petition. Section 9(5)(ii)(d) of the Code mandates that the NCLT must reject an application if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility.

The threshold for establishing a pre-existing dispute has been subject to judicial interpretation. The NCLT must satisfy itself that there exists a plausible contention requiring further investigation and that the dispute is not patently feeble or spurious. However, the tribunal is not required to undertake a detailed adjudication of the dispute at the admission stage.

Flipkart’s contention that substantial amounts had already been paid and that the balance was withheld due to service deficiencies suggested the existence of a dispute. However, CloudWalker argued that despite correspondence and demands, Flipkart had not formally raised the dispute before receiving the Section 8 demand notice, thereby failing to establish a pre-existing dispute within the meaning of the Code.

Moratorium and Its Implications

The moratorium imposed by the NCLT under Section 14 of the Code has far-reaching consequences for the corporate debtor. During the moratorium period, the institution of suits or continuation of pending suits or proceedings against the corporate debtor is prohibited. Additionally, no action can be taken to foreclose, recover, or enforce any security interest created by the corporate debtor. The transfer, encumbrance, alienation, or disposal of any assets or legal rights or beneficial interests of the corporate debtor is also restricted.

In the Flipkart case, the moratorium would have significantly impacted the company’s operations and its relationships with other creditors and stakeholders. The stay granted by the Karnataka High Court prevented these consequences from materializing, allowing Flipkart to continue its business operations under its existing management without the restrictions imposed by the moratorium.

Operational Creditors vs. Financial Creditors

The Flipkart case highlights the position of operational creditors under the IBC framework. While both operational and financial creditors can initiate insolvency proceedings, there are important procedural differences. Operational creditors must comply with the additional requirement under Section 8 of sending a demand notice, whereas financial creditors can directly approach the NCLT under Section 7.

Furthermore, financial creditors play a dominant role in the committee of creditors, with voting rights proportionate to their financial debt. Operational creditors, on the other hand, have limited participation rights and no voting rights in the committee of creditors unless their aggregate dues exceed ten percent of the debt.

Despite these limitations, Section 9 provides operational creditors with an important mechanism to recover dues and enforce payment discipline. The provision recognizes that suppliers and service providers are integral to the business ecosystem and deserve protection when corporate debtors default on operational debts.

Impact on E-Commerce Sector

The Flipkart insolvency proceedings, though stayed by the High Court, sent ripples through the e-commerce industry. The case demonstrated that even large, well-funded companies backed by international investors like Walmart could face insolvency petitions from suppliers over payment disputes. This highlighted the importance of maintaining transparent commercial relationships and resolving disputes promptly.

For suppliers and vendors working with e-commerce platforms, the case illustrated that the IBC framework could be utilized to enforce payment obligations. However, the swift stay granted by the High Court also showed that companies with substantial resources could effectively challenge insolvency admissions through superior courts.

Resolution and Current Status

Following the Karnataka High Court’s stay order, Flipkart issued a statement clarifying that it was not undergoing corporate insolvency resolution process and was continuing its operations on a going concern basis under its present management. The company emphasized that it maintains amicable relationships with its customers, vendors, and service providers.

The case was characterized by Flipkart as ongoing commercial litigation which the company was challenging. While the specific outcome of the writ petition and the ultimate resolution of the dispute between Flipkart and CloudWalker are not extensively documented in public records, the stay order effectively suspended the insolvency proceedings initiated by the NCLT.

Broader Implications for Insolvency Jurisprudence

The Flipkart case contributes to the evolving jurisprudence on corporate insolvency in India. It raises questions about the threshold for admitting insolvency petitions, the interpretation of pre-existing disputes, and the balance between creditor rights and debtor protections. The case also demonstrates the interplay between statutory tribunals and constitutional courts in the insolvency framework.

For operational creditors, the case serves as both encouragement and caution. While Section 9 provides a powerful tool for debt recovery, successful admission of a petition requires careful compliance with procedural requirements and the absence of genuine pre-existing disputes. Corporate debtors, on the other hand, can take comfort from the fact that improper or premature admissions can be challenged through constitutional remedies.

Conclusion

The Flipkart-CloudWalker insolvency dispute represents a significant case study in the application of the Insolvency and Bankruptcy Code to operational debt defaults. The NCLT’s admission of the petition demonstrated the tribunal’s willingness to hold even large corporations accountable for payment obligations. However, the Karnataka High Court’s prompt stay order illustrated that constitutional courts continue to exercise supervisory jurisdiction over tribunal decisions, particularly when jurisdictional questions arise.

The case underscores the importance of maintaining proper documentation, responding promptly to statutory notices, and resolving commercial disputes through appropriate mechanisms rather than allowing them to escalate into insolvency proceedings. As India’s insolvency framework matures, cases like Flipkart’s contribute to the development of jurisprudence that balances the interests of creditors, debtors, and the broader economy.

For the e-commerce sector and suppliers, the case provides valuable lessons about the legal remedies available under the IBC and the importance of maintaining transparent commercial relationships. The framework created by the Code continues to evolve through judicial interpretation, striking a balance between providing creditors with effective recovery mechanisms while protecting viable businesses from precipitate insolvency proceedings.

References

[1] Ministry of Law and Justice. (2016). The Insolvency and Bankruptcy Code, 2016. Retrieved from https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_11_00055_201631_1517807328273&orderno=9 

[2] Macquarie Bank Limited v. Shilpi Cable Technologies Ltd., Civil Appeal No. 15135 of 2017, Supreme Court of India (2017). Retrieved from https://indiankanoon.org/doc/185937110/ 

[3] Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors., (2019) SCC OnLine SC 1542, Supreme Court of India. Retrieved from https://ibclaw.in/whether-nclt-can-exercise-jurisdiction-over-matters-of-public-domain-in-ibc-proceedings-supreme-court-clarifies/?print=print 

[4] Business Today. (2019). NCLT orders Flipkart insolvency for Rs 27 crore default; company gets stay. Retrieved from https://www.businesstoday.in/latest/corporate/story/flipkart-faces-insolvency-litigation-for-rs-27-crore-default-gets-a-stay-237616-2019-11-06 

[5] Business Standard. (2019). Karnataka HC stays NCLT proceeding against co in insolvency case: Flipkart. Retrieved from https://www.business-standard.com/article/pti-stories/karnataka-hc-stays-nclt-proceeding-against-co-in-insolvency-case-flipkart-119110601630_1.html 

[6] LiveLaw. (2019). Karnataka HC Stays Insolvency Proceedings Against Flipkart. Retrieved from https://www.livelaw.in/corporate/nclt-bengaluru-initiates-insolvency-proceedings-against-flipkart-149547 

[7] The News Minute. (2019). NCLT Bengaluru initiates insolvency proceedings against Flipkart, HC stays order. Retrieved from https://www.thenewsminute.com/article/nclt-bengaluru-initiates-insolvency-proceedings-against-flipkart-hc-stays-order-111837 

[8] Moneylife. (2019). Karnataka HC Stays NCLT Order against Flipkart. Retrieved from https://www.moneylife.in/article/karnataka-hc-stays-nclt-order-against-flipkart/58599.html 

[9] IBC Laws. Writ Jurisdiction of High Court over matters decided by NCLT under IBC. Retrieved from https://ibclaw.in/writ-jurisdiction-of-high-court-over-matters-decided-by-nclt-by-rapaka-sravya/ 

Published and Authorized by Prapti Bhatt

The post Flipkart’s Corporate Insolvency Case Journey: NCLT Order and High Court Intervention appeared first on Bhatt & Joshi Associates.