Smart transformer (ST) has emerged as a promising solution for interfacing energy sources into the electric grid. Due to increase in DC sources and loads in the distribution grid, hybrid grids have gained popularity where there is parallel existence of AC and DC subgrids. This paper proposes a battery energy storage system (BESS) and photovoltaic (PV) integrated three stage ST-based meshed hybrid microgrid. The proposed system operates low voltage (LV) side of microgrid in islanded mode. When islanding is necessary, whether due to faults or maintenance, the mode of operation of the BESS is changed from current controlled mode (CCM) to voltage controlled mode (VCM) to maintain the voltage at the ST LVDC link. This ensures that the LV grid along with all the distributed generation (DG) converters operate undisturbed. A power management strategy for an LV side islanded operation of the distribution grid is proposed. With the control of LVAC voltage, the BESS critical state of charge (SOC) information is communicated to the LVAC side loads for connection or disconnection. Moreover, in the proposed scheme, as the islanding is done at the MVAC grid, the issues of synchronization during re-closure do not arise for all DG converters.