A recent tribunal ruling has clarified that MSME classification does not exempt resolution applicants from meeting Committee of Creditors (CoC) eligibility criteria in corporate insolvency proceedings. The decision underscores how financial thresholds operate as hard boundaries in resolution plan evaluation.
The Committee of Creditors had set specific net worth requirements for resolution applicants. One applicant argued their MSME status should provide exemption from these financial criteria. The tribunal disagreed, holding that MSME classification under relevant legislation does not supersede the eligibility framework established by creditors under the Insolvency and Bankruptcy Code.
This creates a tension worth examining. MSMEs receive preferential treatment across multiple regulatory frameworks, from procurement policies to credit schemes. The assumption that such status would carry forward into insolvency proceedings appears reasonable from an applicant’s perspective.
However, the tribunal’s reasoning reflects the Code’s structure. CoCs possess broad discretion in setting resolution plan criteria, provided these align with maximising asset value for creditors. Net worth requirements serve as a proxy for implementation capacity. An undercapitalised resolution applicant, regardless of classification, presents execution risk.
The ruling also highlights a procedural reality often overlooked in insolvency discourse. EOI rejections happen early in the process, before detailed plan evaluation. At this stage, quantitative filters matter more than qualitative assessments. A resolution professional reviewing dozens of expressions cannot conduct granular due diligence on implementation capability. Financial thresholds provide an efficient screening mechanism.
What the ruling doesn’t address is whether the net worth criteria itself was reasonable. CoCs sometimes set thresholds that inadvertently exclude viable applicants while admitting financially qualified but operationally unsuitable candidates. This creates a different kind of governance problem, where creditor committees prioritise financial metrics over industry expertise or turnaround experience.
My Boardroom Takeaway: Boards of companies facing financial distress should anticipate that resolution processes will apply strict eligibility criteria regardless of regulatory classifications elsewhere. Directors may wish to consider whether potential resolution applicants within their industry ecosystem meet likely financial thresholds, as this affects both the competitive landscape and ultimate recovery prospects for stakeholders.