Navigating Ineligibility: An Examination Of Section 29A In The Insolvency And Bankruptcy Code, 2016
Adhya Gupta
BBA. LL.B., University of Petroleum and Energy Studies, Dehradun
Abstract
The Insolvency and Bankruptcy Code, 2016 (IBC) aims to revive struggling corporations by inviting Corporate Bidders to invest and rescue them from insolvency. Initially, the code allowed any entity, including the corporate debtor’s promoters, related parties, or individuals implicated in misconduct or fraudulent activities leading to the default of the Corporate Debtor, to propose a resolution plan without stringent criteria. This approach garnered criticism for potential loopholes that could facilitate indirect promoter control. Subsequent amendments, notably the introduction of Section 29A through the IBC (Amendment) Ordinance, 2017, and the IBC (Amendment) Act, 2018, aimed to address these concerns.
Section 29A sets eligibility criteria for resolution applicants to prevent defaulting promoters and related parties from regaining control of distressed companies, ensuring the integrity and fairness of the resolution process. This paper examines the multifaceted implications of Section 29A within the IBC framework, including disqualifications based on direct and indirect associations with the corporate debtor. Through a combination of case studies, legislative analysis, and a review of judicial precedents, it explores practical implications, challenges, and legislative intent behind Section 29A.
The provision seeks to maintain transparency and prevent conflicts of interest by barring ineligible individuals or entities from submitting resolution plans. While evaluating the balance between restricting errant promoters and ensuring opportunities for genuine resolution applicants, this paper highlights the complexities and ambiguities in its interpretation and implementation.
Keywords: Section 29A, Ineligibility, Resolution Applicant, Corporate Revival, Promoters, Related Party.
Introduction
One of the key legal provisions outlining the eligibility of Resolution Applicants in the Corporate Insolvency Resolution Process is Section 29A of the IBC, 2016. Initially, the Code lacked mechanisms to prevent defaulting promoters from reacquiring ownership of the corporate debtor at heavily reduced prices. The implementation of Section 29A on November 23, 2017, marked a pivotal change, which was further refined by an amendment in 2018.
Before the introduction of Section 29A, any entity or corporate body, regardless of their direct or indirect ties to the main promoters or directors, could engage in competitive bidding for corporate debtors undergoing insolvency resolution. This allowed individuals who had contributed to the debtor’s default through misconduct or unethical practices to regain control by offering substantial discounts, thereby negatively affecting financial institutions like banks.
The primary aim of Section 29A was to prevent resolution plans that could undermine the CIRP. Furthermore, it sought to reduce delays caused by manipulation or exploitation of flaws in the bidding process. Thus, the provision was designed to restrict individuals who were responsible for the downfall of the corporate debtor or were considered unfit to manage the company.[1]
Who Shall Not Be A Resolution Applicant?
The term “resolution applicant” refers to an individual or entity that submits a resolution plan to the resolution professional, either individually or jointly, in response to an invitation made under Section 25(2)(h). According to Section 25(2)(h), the resolution professional is mandated to invite resolution plans from prospective applicants who meet specific criteria set by the resolution professional, with the approval of the Committee of Creditors (CoC). These criteria take into account the complexity and scale of the corporate debtor’s business operations, along with any other conditions specified by the Board.
Section 29A is a restrictive provision, which disqualifies any person on the negative list from submitting a resolution plan. Hence, to be eligible to submit a resolution plan, an individual must meet the criteria established by the resolution professional with the approval of the Committee of Creditors (CoC), and must not have any disqualifications specified under Section 29A.
Layers Of Ineligibility
A thorough examination of Section 29A illustrates that the provision establishes four layers of ineligibility, outlined as follows:
- First Layer, which pertains to instances where the individual is deemed ineligible;
- Second Layer, wherein a “connected person” is ineligible;
- Third Layer, encompasses scenarios where an individual is categorized as a “related party” of connected persons;
- Fourth Layer, where a person acting jointly/in concert with a person suffering from first layer/second layer/third layer ineligibility, becomes ineligible.
Judicial Scrutiny Of Section 29A
The case of Bank of Baroda v. MBL Infrastructures Ltd.[2] marked a significant milestone as the Supreme Court meticulously examined the provisions of Section 29A(h). The court’s verdict illuminated the complexities of this particular section. Before the introduction of Section 29A, the eligibility of a resolution applicant to submit a plan was a loophole, allowing related parties, particularly promoters involved in the company’s debt defaults, to participate. This amendment effectively bars such errant promoters from re-entering the resolution process, although it complicates proceedings and creates conflicts between the CoC and the resolution professional, as evidenced in the MBL Infrastructures Ltd. case.
In its analysis, the Supreme Court employed a detailed statutory interpretation, referencing prior judgments from both its archives and various international courts. This comprehensive approach provided a solid foundation for the Court’s interpretation of legal statutes. The Court cited a previous judgment in RBI v. Peerless General Finance,[3] stating, “The interpretation must depend on the text and context. If the text is the texture, context is what gives the colour. Neither can be ignored….No part of a statute and no word of a statute can be construed in isolation….”
The principles established in these decisions served as the cornerstone for judgments rendered by the Supreme Court in matters pertaining to the Corporate Insolvency Resolution Process (CIRP), involving entities such as ArcelorMittal, Phoenix Arc, Jindal Steel & Power Ltd., Swiss Ribbons, and Essar Steels.
In Swiss Ribbons v. Union of India,[4] the Supreme Court upheld the constitutional validity of Section 29A while narrowing the scope of the “related parties” subject to disqualification.
In JR Agro Industries Pvt. Ltd. v. Resolution Professional Swadisht Oils Pvt. Ltd.,[5] JR Agro Industries Pvt. Ltd., a resolution applicant, appealed against the decision of the Resolution Professional to reject their Resolution Plan. The Resolution Professional argued that JR Agro was disqualified under Section 29A, specifically citing clauses (e) and (j) due to JR Agro’s ownership of 43% shares in JR Organics Ltd., which made JR Organics an associate company of JR Agro as per Explanation (iii) of Section 29A. The National Company Law Appellate Tribunal (NCLAT) upheld the decision of the National Company Law Tribunal (NCLT), affirming JR Agro’s disqualification under clauses (c), (e), and (j) of Section 29A.
According to Section 30(2), the CoC diligently evaluates and validates the resolution plan before approving it, ensuring its compliance with the provisions of the IBC.[6] Furthermore, Section 29A mandates the resolution professional conduct due diligence upon receiving the plan from the resolution applicant. Following this, Section 30(4) grants the CoC the authority to approve a resolution plan with a vote comprising at least 66% of the voting share of the financial creditors.[7] Throughout the approval process, the CoC meticulously reviews the due diligence report prepared by the resolution professional. This report identifies entities that are ineligible to participate in the CIRP, thereby informing the CoC’s decision-making process.
In the case of K. Sashidhar v. Indian Overseas Bank,[8] the court emphasized the paramount importance of the commercial wisdom of the Committee of Creditors (CoC) without judicial interference. This approach ensures the timely completion of processes as mandated by the IBC. The CoC, composed of financial creditors, is presumed to have comprehensive insight into the viability of the corporate debtor and the feasibility of proposed resolution plans. Their decisions, backed by voting shares, are considered non-justiciable under legislative intent.
The approval of a resolution plan under Section 30 signifies a diligent assessment by the CoC, ensuring compliance with statutory requirements and the absence of disqualifying factors, including those under Section 29A. This underscores the CoC’s discretion to reject plans that do not meet prescribed standards, affirming its authority in decision-making processes.
In the case of M/s. Ruchi Soya Industries Ltd. v. Union of India & Ors.,[9] the endorsement of the resolution plan by the Committee of Creditors (CoC) was contested due to allegations that the top bidder was ineligible under Section 29A.
The case of Arun Kumar Jagatranka v. Jindal Steel & Power Ltd.[10] underscores the critical role of Section 29A in safeguarding the objectives of the IBC. This section prevents ineligible individuals, particularly those involved in mismanagement, from re-entering the resolution process. The ineligibility provisions in Section 29A aim to facilitate a sustainable revival and ensure that those responsible for the company’s distress, whether by intent or default, are not part of the solution process. Allowing such individuals to submit resolution plans would result in a glaring absurdity, contradicting the fundamental purpose of Section 29A and compromising the integrity of the resolution framework.
The legislative intent behind IBC is to ensure the revival and continuity of corporate debtors while protecting them from liquidation. The IBC represents a progressive legislation aimed at revitalizing struggling companies, rather than solely serving creditors’ recovery interests. This legislative framework clearly distinguishes between the interests of corporate debtors and those of their promoters or management personnel. The overarching objective is not to obstruct genuine applicants but to prevent habitual wrongdoers or financially unsound entities from participating in the resolution process. However, the application of Section 29A may inadvertently exclude potential stakeholders interested in acquiring stakes in the distressed entity.[11]
The broad interpretation of Clause (j) of Section 29A could potentially result in genuine business failures, leading to promoters permanently losing their companies. The case of Essar Steel Ltd. serves as an illustration of this concern, wherein ArcelorMittal’s bid had to be adjusted lower than the promoters’ offer. This issue is particularly exacerbated for smaller enterprises with limited bidders, often confined to just the promoters. It is important to highlight that the preamble of the IBC discourages liquidation, as emphasized by the Supreme Court.[12]
In the case of Binani Industries Limited v. Bank of Baroda,[13] Ultratech Ltd., the promoter company witnessed the rejection of its resolution plan due to non-compliance with the prescribed process document. Despite 90% of the Committee of Creditors (CoC) approving Rajputana Pvt. Ltd.’s alternative plan, the remaining 10% dissented, citing inequitable treatment compared to the first plan. The NCLAT criticized the CoC’s actions as lacking merit, emphasizing that procedural lapses should not nullify the essence of the code. It is noteworthy that the initial plan received unanimous approval during the first voting.
In the Jet Airways Ltd. case,[14] the promoter’s genuine efforts to settle debts were hindered by uncooperative creditors. Instead of prioritizing the airline’s continuity, creditors focused solely on recovering dues from the defunct Jet Airways. The forced departure of the experienced promoter, who could have potentially revived the company, reflects the apprehensive actions of creditors. Consequently, the company suffered business losses due to the creditors’ stance.
Section 29A– A Pandora’s Box?[15]
The rationale behind this provision is to mitigate conflicts of interest and safeguard the integrity of the resolution proceedings. Individuals in pivotal roles or possessing substantial influence within the organization might harbour personal agendas or could potentially exploit the resolution process for their benefit or that of their associates.[16] By barring connected persons from engaging in the resolution process as applicants, the legislation seeks to uphold transparency, equity, and neutrality, adhering to Corporate Governance principles.[17]
This measure precludes individuals who might have contributed to the company’s financial distress from exerting influence over its revival strategies for personal gain. The primary objective is to prioritize the enhancement of value for creditors and stakeholders over catering to the interests of individuals closely linked to the company’s management.[18]
Furthermore, the language employed in the clauses outlining the criteria for disqualification is ambiguous, opening avenues for frivolous and unjustified litigations. The provision refers to individuals acting “jointly or in concert,” a term lacking clarity and requiring clarification regarding its applicability. There is a substantial risk that even legitimate and sincere promoters, who may have associations with the actions of defaulting promoters, could face disqualification due to creditor influence, potentially supported by competitors of the promoters.[19]
This scenario could lead to unfair exploitation of the corporate debtor.[20] It is essential to contemplate the principle of anti-deprivation in this context.[21] The complexity is exacerbated when scrutinizing clause (j), which prohibits any “connected person,” indiscriminately broadens the scope of disqualification.
The case of Arcellor Mittal India Ltd. v. Satish Kumar Gupta[22] illustrates Section 29A as a prime example of a “see-through provision” designed to identify individuals who genuinely exert “control,” either individually or in collaboration with others. The case determined that both ArcelorMittal India Private Limited (AMIPL) and Numetal Limited were ineligible to participate in the resolution process under Section 29A. AMIPL’s proposal was rejected due to its association with a company whose account had become a non-performing asset (NPA). Similarly, Numetal’s plan was declined because one of its shareholders had ties to a promoter whose account was categorized as an NPA. This ruling underscored the critical importance of adhering to section 29A’s eligibility criteria for resolution applicants in insolvency proceedings.
In Swiss Ribbons v. Union of India,[23] it was emphasized that the legislation primarily aims to secure the revival and ongoing operations of the corporate debtor by shielding it from its management and potential liquidation. The IBC is construed as beneficial legislation intended to restore the corporate debtor’s viability, rather than solely serving as a means for creditors to recover debts. Consequently, the interests of the corporate debtor are distinctively segregated from those of its promoters or management. This delineation underscores that the resolution process is geared towards safeguarding the corporate debtor’s interests rather than being adversarial to its well-being.
Conclusion
The stipulations outlined in Section 29A have presented significant obstacles for promoters seeking to maintain ownership and control of their businesses even after defaulting on creditor payments, leading to the initiation of resolution proceedings against the enterprise. Various Supreme Court rulings have addressed this issue, particularly concerning “related parties” or “connected persons” aspiring to become resolution applicants for the corporate debtor.
In a notable case, the Supreme Court delivered a landmark judgment to elucidate the true intent and purpose behind the amendments made to Section 29A. This comprehensive consideration of issues related to the invocation of personal guarantees provided by guarantors to Corporate Debtor creditors provides crucial guidance on this contentious matter. The implications of invoking personal guarantees by creditors within the same class and the consequent disqualification of the Corporate Debtor guarantor from becoming a resolution applicant are expounded upon extensively.
While the resolution applicant prevailed in this instance due to the unique circumstances of the case, wherein the Supreme Court determined that disturbing the resolution plan at an advanced stage of implementation would not be prudent, this ruling will serve as a beacon for similar cases. Particularly, it pertains to resolution applicants, notably personal guarantors of Corporate Debtor, whose guarantees have been invoked and remain unpaid, facing inherent ineligibility at the outset or during the resolution process. It is anticipated that all stakeholders involved in the resolution process will adhere to the Supreme Court’s guidelines laid out in this judgment when assessing ineligible resolution applicants.[24]
References:
[1] Bhavya Belwal, Addressing the Conundrum around Article 29A of the IBC 2016, (2023) 3.2 JCLJ (2023) 2189.
[3] (1987) 1 SCC 424.
[5] (2018) ibclaw.in 142 NCLAT
[6] Insolvency and Bankruptcy Code, 2016, §30(2), No. 31, Acts of Parliament, 2016 (India).
[7] Insolvency and Bankruptcy Code, 2016, §30(4), No. 31, Acts of Parliament, 2016 (India).
[11] Richa Saraf & Sikha Bansal, ‘Ineligibility criteria u/s 29A of IBC: A net too wide!’ (Vinod Kothari Consultants, 15 February 2018) assessed 28 January 2024.
[12] Swiss Ribbons v. Union of India, (2019) 4 SCC 17
[14] SBI v. Jet Airways (India) Ltd., 2019 SCC OnLine NCLT 23735.
[15] Richa Saraf & Sikha Bansal, Ineligibility criteria u/s 29A of IBC: A net too wide! VINOD KOTHARI CONSULTANTS (15 March, 2024, 04:24 AM), https://shorturl.at/pBGSW.
[16] Aditi Bhawsae, ‘S.29A of IBC- Explained’ (SignalX, 4 October 2020) assessed 26 January 2024.
[17] Aditi Kashyap, ‘S.29A: A Wide Net of Ineligibities for being a Resolution Applicant’ (Clasis Law, 16 July 2018) assessed 30 January 2024.
[18] Rajiv Mawkin, ‘Ineligible Resolution Applicants- Supreme Court on S.29A of IBC’ (Indian Institute of Insolvency Professionals of ICAI, 23 April 2022) assessed 2 February 2024.
[19] Hamish Anderson, THE FRAMEWORK OF CORPORATE INSOLVENCY LAW, 174 (2017); Central Inland Water Transport Corporation Ltd v. Brojo Nath Ganguly, (1986) 3 SCC 156.
[20] In re, Jeavons, ex parte Mackay, [1873] 8 Ch.App. 643.
[21] Moon v. Franklin, (1996) BPIR 196; Whitmore v. Mason, (1861) 2 J & H 204; Belmont Park Investments Pty Ltd (Respondent) v. BNY Corporate Trustee Services Ltd., 2011 UKSC 38.
[24] Rajiv Mawkin, ‘Ineligible Resolution Applicants- Supreme Court on S.29A of IBC’ (Indian Institute of Insolvency Professionals of ICAI, 23 April 2022) assessed 2 February 2024.
