NCLAT Overturns NCLT's Unauthorized Addition of Public Equity Clause in MSME Resolution Plan

Introduction

In a significant ruling for insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016, the National Company Law Appellate Tribunal (NCLAT) Principal Bench in New Delhi has set aside a modification imposed by the National Company Law Tribunal (NCLT) Ahmedabad Bench to a resolution plan for the corporate debtor, M/s Techno Forge Limited. The appellate tribunal, comprising Judicial Member Justice N. Seshasayee and Technical Member Mr. Arun Baroka, emphasized that adjudicating authorities cannot introduce new conditions into a resolution plan already approved by the Committee of Creditors (CoC). Specifically, the NCLAT deleted a clause inserted by the NCLT that required the revived company to reserve 5% of its equity for public shareholders, deeming it an inadvertent and impermissible alteration. This decision, delivered on January 5, 2026, in Company Appeal (AT) (Ins) No. 643 of 2024, reinforces the sanctity of CoC-approved plans, particularly in Micro, Small, and Medium Enterprises (MSME) insolvency cases under Section 240A of the IBC. The appellants, former directors and the CFO of Techno Forge Limited, challenged the NCLT's order dated February 2, 2024, arguing it deviated from the commercial wisdom of the creditors.

This ruling comes at a time when Indian insolvency jurisprudence continues to evolve, with tribunals balancing creditor rights against broader stakeholder interests. External reports, such as those from legal news outlets, highlight how the NCLAT has reiterated that insolvency courts lack the authority to "add new conditions" to lender-approved plans, underscoring the appellate body's role in preserving the IBC's objective of swift and efficient corporate revival.

Case Background

M/s Techno Forge Limited, a registered MSME engaged in manufacturing forgings and engineering components, entered the Corporate Insolvency Resolution Process (CIRP) following a petition under Section 7 of the IBC filed by one of its financial creditors. The company, facing mounting debts primarily to banks and other lenders, saw its board suspended upon admission of the petition by the NCLT Ahmedabad Bench in C.P. (IB) No. 264 of 2018. As an MSME, Techno Forge benefited from the special provisions under Section 240A, which allows suspended directors and officers to submit resolution plans to facilitate business continuity and employment preservation.

The appellants—Ashok Mansukhlal Kapasi (former director), Vikram Ashok Kapasi (former director), and Arun Kapasi (Chief Financial Officer)—participated in the resolution process as permitted under the MSME exemption. They jointly submitted a resolution plan that was scrutinized and ultimately approved by the CoC. The CoC comprised two financial creditors: Bank of India, holding 89.11% voting share, and Paisalo Digital Limited, with 10.89% voting share. A key feature of the plan was the exoneration of personal guarantors from their liabilities, a provision opposed by Bank of India but overruled by the majority vote of the CoC, reflecting the commercial wisdom of the creditors.

The Resolution Professional (RP), Bhavi Shah, then approached the NCLT via I.A. No. 864 of 2021 seeking approval of the plan. On February 2, 2024, the NCLT approved the plan but introduced two critical modifications not present in the CoC-approved version. First, it rejected the exoneration of personal guarantors, keeping their liability intact. Second, and central to this appeal, it inserted a clause in Part G of the plan directing that 5% of the equity in the revived corporate debtor be reserved for public shareholders. This insertion effectively reduced public shareholding to 5% and was placed between existing clauses without CoC consent.

The relationship between the parties was strained by these changes. The appellants, as erstwhile promoters, saw their plan's equity structure— which called for the cancellation of existing shares and issuance of new ones solely to the resolution applicants—fundamentally altered. Bank of India and Paisalo Digital Limited, as creditors, had already voted on the original plan, while the RP acted as a neutral facilitator. The dispute arose from the NCLT's perceived overreach, leading the appellants to appeal to the NCLAT in 2024. By the time of the hearing, the personal guarantor issue was amicably resolved between the appellants and Paisalo Digital Limited via an affidavit dated August 28, 2025, and a supporting letter from the creditor dated August 14, 2025, leaving only the equity clause for adjudication.

The timeline underscores the protracted nature of such proceedings: CIRP initiation in 2018, plan approval in 2021, NCLT order in 2024, and NCLAT resolution in 2026. This case highlights the legal questions at the heart of IBC implementation: Can the NCLT modify a CoC-approved resolution plan? And in MSME cases, does public shareholding warrant mandatory reservation absent creditor agreement?

Arguments Presented

The appellants, represented by Advocate Mr. Arjun R. Sheth, mounted a straightforward challenge grounded in the statutory framework of the IBC. They contended that the NCLT's insertion of the 5% public equity clause in Part G of the resolution plan was impermissible, as it was not part of the version approved by the CoC. Emphasizing the principle of "commercial wisdom," they argued that Section 30(2) of the IBC mandates the RP to present the plan as approved, and the NCLT's role under Section 31 is limited to approval or rejection without alterations. The inserted clause, they noted, changed the plan's complexion by preserving a sliver of public shareholding, contrary to the original intent of extinguishing all existing equity (including promoters' and public shareholders') upon the effective date. Factual points included the verbatim reproduction of the plan in the NCLT order, where the new paragraph was erroneously numbered and integrated, potentially misleading future implementation. Legally, they invoked the binding nature of CoC decisions, warning that such modifications undermine creditor confidence and the IBC's goal of value maximization.

On the respondents' side, representation was limited. Advocate Mr. Atul Sharma appeared for the RP (Respondent No. 1, Bhavi Shah), while Mr. Harshal Kumar represented Paisalo Digital Limited (Respondent No. 2). Bank of India (Respondent No. 3) did not actively contest the appeal, particularly after the personal guarantor resolution. The RP's position, inferred from the proceedings, was neutral, as the application for approval was filed per CoC directive. No explicit defense of the inserted clause was mounted, likely because the judgment describes it as an "inadvertent" error rather than a deliberate policy choice. Respondents did not dispute the appellants' factual claim that the clause was absent from the CoC-approved plan, focusing instead on the overall approvability of the plan. Broader arguments from insolvency practice, as echoed in other sources, suggest that lower tribunals sometimes invoke equity or public interest to protect minority stakeholders like public shareholders, but here, no such justification was advanced to counter the statutory bar on modifications.

Key factual disputes centered on the plan's text: Original Part G called for full cancellation of existing shares without reservation, whereas the NCLT version mandated a 5% public retention. Legally, the appellants stressed precedents on the non-justiciability of CoC decisions (though not explicitly cited in arguments), while respondents implicitly relied on the NCLT's supervisory role under IBC regulations.

Legal Analysis

The NCLAT's reasoning is rooted in the foundational principles of the IBC, which prioritize the commercial autonomy of the CoC while confining the adjudicating authority's (NCLT's) powers to procedural oversight. Justice N. Seshasayee, delivering the judgment, clarified that the tribunal is not empowered to "add new conditions" to a resolution plan, as this would encroach on the creditors' domain. The court applied Section 31 of the IBC, which states that upon satisfaction that a plan complies with Sections 30(2) and 31(1), the Adjudicating Authority "shall" approve it without modification. This provision, the bench noted, ensures predictability and respects the "extensive deliberations and the wise commercial decision-making process" of the CoC.

Although the judgment does not cite specific precedents, its analysis aligns with established Supreme Court jurisprudence, such as in Essar Steel India Ltd. v. Satish Kumar Gupta (2019), which affirmed that CoC decisions are non-justiciable unless irrational or violative of law, and the NCLT cannot substitute its views. Similarly, Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta reinforced that modifications altering economic terms are impermissible. In the MSME context, Section 240A exempts small enterprises from certain disqualifications, allowing promoter participation, but does not expand NCLT's powers to protect public shareholders—a role reserved for securities regulators like SEBI, not insolvency courts.

The bench distinguished between legitimate observations in NCLT orders and substantive changes to plan terms. Here, the inserted paragraph was not in the "operative portion" but in the "narration" of the plan, yet it effectively rewrote Part G, impacting post-CIRP shareholding. The court rejected any public interest rationale for the 5% reservation, noting it was "inadvertent" and absent from CoC approval. No specific legal sections beyond IBC 30, 31, and 240A were invoked, but the ruling implicitly critiques overreach in MSME resolutions, where revival must balance creditor recovery with business continuity without diluting approved equity structures.

This analysis underscores a key distinction: While NCLT can ensure compliance with mandatory IBC provisions (e.g., distribution waterfalls under Section 53), it cannot introduce equity-based safeguards like public shareholding unless explicitly required by law. The decision promotes uniformity in IBC application, preventing ad-hoc interventions that could deter resolution applicants.

Key Observations

The NCLAT judgment is replete with pivotal excerpts that illuminate its strict interpretation of the IBC. One key observation is the bench's description of the NCLT's error: "The mistake in the Order is obvious. The resolution plan as approved by the CoC does not have a clause for reserving 5% equity to public and this is found not in the operative portion of the Order but in the text of the narration of the resolution plan."

Another direct quote emphasizes the impact: "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." This highlights how even minor textual changes can alter commercial outcomes.

On the binding nature of CoC approval, the judgment states: "Part G of the resolution plan... [provides that] On the effective date existing issued, subscribed and paid-up share capital held by promoters and a group of promoters shall stand cancelled and considered extinguished." The inserted clause disrupted this, as noted: "Shares held by the public (Public Shareholding) shall be reduced to 5% of their shareholding."

Finally, the bench's conclusion reinforces procedural purity: "It is therefore, imperative that this term which is not part of the original resolution plan may have to be deleted." These quotes, attributed to Justice N. Seshasayee, encapsulate the tribunal's commitment to unaltered plan implementation.

Additional sources, like reports on the ruling, quote the bench: "A bench of Judicial Member Justice N Seshasayee and Technical Member Arun Baroka said the clause had found..." (though truncated, it aligns with the inadvertence finding), integrating seamlessly to show the decision's broader resonance in legal circles.

Court's Decision

In its operative order, the NCLAT allowed the appeal and modified the NCLT's order dated February 2, 2024, in I.A. No. 864 of 2021 in C.P. (IB) No. 264 of 2018, "to the extent that it must be now read without the inserted 'paragraph 2' as extracted in paragraph 4 above." No costs were imposed, and the personal guarantor issue stood resolved amicably, leaving the equity clause deletion as the sole remedy.

Practically, this means the resolution plan for Techno Forge Limited will proceed as originally approved by the CoC: full extinguishment of existing shares, issuance of new equity solely to the applicants, and no mandatory 5% public reservation. The revived company can thus restructure without diluted ownership, potentially enhancing its attractiveness to investors and ensuring MSME revival aligns with creditor priorities.

The implications are far-reaching for future IBC cases. It serves as a cautionary note to NCLTs against inadvertent or substantive modifications, potentially reducing appeals and expediting resolutions. In MSME contexts, where over 60 million enterprises contribute significantly to India's GDP, this upholds Section 240A's intent to encourage promoter-led turnarounds without judicial overreach. Stakeholders like public shareholders may need to seek remedies through other forums, such as SEBI's minimum public shareholding norms under the Companies Act, 2013, rather than insolvency proceedings.

Broader effects include strengthened creditor confidence, as CoC decisions gain further insulation from tinkering. For legal practitioners, the ruling signals a return to basics: Scrutinize plan texts meticulously during approvals to avoid "narrative" errors spilling into operations. If emulated, it could streamline the resolution ecosystem, reducing delays—critical since average CIRP timelines already exceed 300 days—and fostering a more predictable insolvency regime. Ultimately, this decision bolsters the IBC's efficacy in corporate rehabilitation, ensuring that revival trumps revisionism.