NCLAT Rules Insolvency Courts Cannot Impose Public Shareholding Conditions on CoC-Approved MSME Resolution Plans

Kaustav Chowdhury
2 days ago
5 min read

The National Company Law Appellate Tribunal (NCLAT), Principal Bench at New Delhi, has struck down a condition inserted by the National Company Law Tribunal (NCLT) into a resolution plan approved by the Committee of Creditors (CoC) for a Micro, Small and Medium Enterprise (MSME) corporate debtor. The condition in question required 5 percent of the corporate debtor's equity to be reserved for public shareholders, a term that had no basis in the resolution plan as approved by the lenders.

In Ashok Mansukhlal Kapasi & Ors. v. Bhavi Shah (RP of Techno Forge Ltd.) & Ors. [Company Appeal (AT) (Ins) No. 643 of 2024, decided on 5 January 2026, Citation: 2026 LLBiz NCLAT 1], a bench comprising Judicial Member Justice N. Seshasayee and Technical Member Arun Baroka held that insolvency courts have no authority to rewrite the commercial terms approved by the CoC. The ruling reinforces the sanctity of the CoC's commercial wisdom in the insolvency resolution process and limits the Adjudicating Authority's power to the narrow statutory mandate under the Insolvency and Bankruptcy Code, 2016 (IBC).

Background: The Techno Forge Limited CIRP

Techno Forge Limited, a company registered as an MSME, was undergoing a Corporate Insolvency Resolution Process (CIRP) before the NCLT, Ahmedabad Bench. The CoC consisted of two financial creditors, with Bank of India holding the dominant voting share.

Under Section 240A of the IBC, MSME promoters who are not disqualified under certain specified clauses of Section 29A are permitted to submit resolution plans for their own enterprises. This carve-out reflects the legislative intent to keep viable MSMEs running rather than pushing them towards liquidation. Taking advantage of this exemption, the suspended directors and chief financial officer of Techno Forge Limited submitted a joint resolution plan, which was approved by the CoC through a majority decision.

The resolution plan included a term providing for the exoneration of the personal guarantors of the corporate debtor. While one creditor objected, the objection was overruled by the majority vote. The resolution professional then placed the CoC-approved plan before the NCLT for approval under Section 31(1) of the IBC.

The NCLT's Modifications and the Core Dispute

The NCLT cleared the resolution plan but introduced two modifications. First, it kept the liability of personal guarantors alive, declining to give effect to the exoneration clause. Second, it added a clause stating that public shareholding would be reduced to 5 percent, requiring a portion of the corporate debtor's equity to be reserved for public shareholders.

These modifications were challenged before the NCLAT. During the pendency of the appeal, the parties settled the guarantor dispute, leaving only the public shareholding condition for consideration. The appellants argued the 5 percent clause had no basis in the CoC-approved plan and materially altered the post-resolution shareholding structure.

NCLAT's Reasoning and Ruling

The NCLAT examined the CoC-approved resolution plan and found it contained no provision reserving equity for public shareholders. The bench noted that the 5 percent shareholding clause did not appear in the operative part of the NCLT's order but surfaced only in the narration of the plan.

Calling the error "obvious," the bench held that an insolvency court has no authority to rewrite the commercial terms approved by the CoC. The NCLAT observed: "This wrong or inadvertent insertion of a clause in the resolution plan changes the complexion of the plan as regards the existence of the CD post CIRP. It is therefore, imperative that this term which is not part of the original resolution plan may have to be deleted."

The tribunal emphasised that the equity structure directly affects the post-resolution control of the corporate debtor, and such an insertion could fundamentally alter the economics of the approved plan. Allowing the appeal, the NCLAT modified the NCLT's order and directed it be read without the inserted paragraph.

Legal Framework: Limits on the Adjudicating Authority

The ruling draws on established IBC jurisprudence that confines the Adjudicating Authority to a narrow set of statutory checks. Under Section 31(1), the Adjudicating Authority must satisfy itself that the CoC-approved resolution plan meets the requirements specified in Section 30(2), which relate to provision for operational creditors, compliance with applicable laws, and effective implementation. These requirements do not extend to rewriting commercial or distributional terms.

The Supreme Court has repeatedly affirmed this position. In K. Sashidhar v. Indian Overseas Bank, the Court held that the commercial wisdom of the CoC is paramount and non-justiciable, except to the limited extent of ensuring compliance with Section 30(2). Neither the NCLT nor the NCLAT may substitute its own judgment for the commercial assessment of the financial creditors.

Significance for MSME Insolvency Resolution

This decision carries particular significance for MSME resolution plans. Section 240A of the IBC exempts MSME promoters from the disqualifications set out in clauses (c) and (h) of Section 29A, allowing them to bid for their own enterprises during the insolvency process. This exemption recognises that MSMEs often have limited interest from external resolution applicants, and their promoters may be best placed to revive the business. However, the exemption becomes meaningless if the Adjudicating Authority can impose conditions that dilute the promoters' control over the post-resolution entity.

The NCLAT's ruling makes clear that the MSME-specific exemptions under the IBC must be given their full effect. Once the CoC has exercised its commercial wisdom and approved a plan, the Adjudicating Authority cannot add conditions that go beyond the statutory checklist under Section 30(2), regardless of whether the corporate debtor is an MSME or otherwise.

Broader Implications for Resolution Plan Approvals

Beyond the MSME context, the decision reinforces a broader principle applicable to all resolution plan approvals under the IBC. Tribunals cannot modify or supplement the terms of a CoC-approved plan, even inadvertently. The NCLAT stressed that an insertion, even if unintentional, that materially alters the plan cannot be sustained. This is consistent with the Supreme Court's position that once the CoC approves a resolution plan, the successful resolution applicant cannot be asked to negotiate further.

The case also serves as a cautionary note for tribunals to exercise care while drafting their orders. Errors in recounting the terms of the plan, even if they appear only in the narrative portions of the order, can create confusion and lead to costly appellate litigation.

Key Takeaways

The NCLAT has held that insolvency courts cannot add conditions, such as a public shareholding requirement, to a resolution plan that has already been approved by the Committee of Creditors.

The Adjudicating Authority's role under Section 31(1) of the IBC is limited to verifying compliance with the requirements in Section 30(2). It does not extend to modifying or supplementing the commercial terms of the plan.

MSME promoters are permitted to submit resolution plans for their own enterprises under Section 240A of the IBC, and tribunals cannot impose conditions that undermine this statutory exemption.

Even inadvertent insertions in the NCLT's order that alter the terms of the approved plan are impermissible if they change the complexion of the plan.

The commercial wisdom of the CoC remains paramount and non-justiciable, as affirmed by the Supreme Court in K. Sashidhar v. Indian Overseas Bank and subsequent decisions.