Eligibility of an Ex-promoter or Director to submit a resolution plan
Kantabathina Jaswanth Reddy
5th Year B.A.LLB (Hons.), Damodaram Sanjivayya National Law University
The Corporate Insolvency Resolution Process (CIRP), established through the Insolvency and Bankruptcy Code, 2016 (IBC), has emerged as an effective and time-bound framework for reviving insolvent companies. The code in consequent provisions lists out a step-wise process for resolution of an insolvent company. Central to this process is the appointment of a resolution professional and the submission of a resolution plan by eligible applicants. However, the eligibility criteria for resolution applicants have been subject to significant legislative and judicial scrutiny, particularly with the introduction of Section 29A through the IBC (Amendment) Act, 2018.
The code in its original form lacked provisions regarding ineligibility of certain personnel. Provisions relating to ineligibility of certain personnel as resolution applicants, were introduced through IBC (Amendment) Act, 2018 dated 18 January, 2018 and became effective retroactively from November 23, 2017.[1] The amendments were brought with a view to cut down on the misuses that may result due to lack of prohibition or restrictions to participate in the resolution or liquidation process, and gain or regain control of the corporate debtor.[2]
The Supreme Court, in Chitra Sharma v. Union of India, emphasized that Section 29A was designed to exclude those responsible for the debtor’s insolvency from participating in the resolution process, ensuring the integrity and fairness of the CIRP.[3]
Further, the apex court in Swiss Ribbons v. Union of India[4] upheld the constitutionality of Section 29A, noting that it targets individuals unfit to acquire, manage, or revive the business of the corporate debtor. This includes insolvent persons, willful defaulters, and those managing accounts classified as non-performing assets (NPA).
Under Section 29A of the Code, the list of ineligible individuals includes undischarged insolvents, wilful defaulters, former promoters of the Corporate Debtor subject to the fulfilment of the conditions stipulated therein, individuals affiliated with previous management and control of the Corporate Debtor, and so forth.[5]
The provision in its essence lays down a four layered ineligibility criterion for the resolution applicant. The four layers being: where the applicant itself is ineligible, where a connected person to ineligible applicant is ineligible, person related to ineligible person is ineligible and People acting jointly with or in concert with ineligible applicant are ineligible.
The ineligibility criterion enlisted in the Section 29A of the code, again became subject matter of discussion in the light of a recent pronouncement of Delhi Bench of NCLAT in the case of Vishram Narayan Panchpor v Committee of Creditors, Blue Frog Media Pvt. Ltd.[6] where the Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) addressed whether a former promoter is eligible to submit a resolution plan.
The appeal came before the principal bench of NCLAT challenging the impugned order passed by Adjudicating Authority, wherein it has been had ruled that the resolution applicant, a former director, was ineligible under Section 29A, as their participation could adversely affect the CIRP. The appellants argued that the mere status of being a former promoter or director does not ipso facto result in ineligibility unless specific disqualifications under Section 29A are met.
In adjudicating the Panchpor case, the NCLAT referred to the Supreme Court’s decision in Hari Babu Thota v. X[7]. Here, the Supreme Court held that there is no inherent disqualification for promoters under Section 29A. Instead, disqualification depends on meeting specific conditions listed in the section.
The prevailing judicial interpretation affirms that promoters or former directors are not automatically disqualified from submitting a resolution plan under the IBC. They are only ineligible if they meet specific disqualification criteria outlined in Section 29A. This nuanced understanding ensures that the resolution process remains fair and effective, barring only those whose participation would undermine the integrity of the CIRP.
Therefore, while Section 29A imposes significant restrictions, it does not blanketly exclude all promoters or former directors from the resolution process. Each case must be assessed individually against the criteria in Section 29A to determine eligibility, ensuring that the resolution process remains robust and just.
This interpretation of NCLAT comes at a crucial juncture cause, as it would be counter-productive to the original intent behind the existence of code i.e., maximization of assets and also, the insertion of 29A, if 29A’s existence results into a whole lot of intending resolution applicants being disentitled, because the recursive definitions or for any other reason.
References:
[1] Dr. Rajeev Babel, A Comprehensive guide to the Insolvency Professional Examination (1st edn, Bloomsbury, 2018).
[2] Statement of Objects and Reasons, The Insolvency and Bankruptcy Code (Amendment) Bill 2017; Arun Kumar Jagatramka v Jindal Steel & Power Ltd., (2021) ibclaw.in 46 SC.
[3] Chitra Sharma v Union of India, (2019) ibclaw.in 127 SC.
[4] Swiss Ribbons Pvt Ltd v Union of India, (2019) ibclaw.in 03 SC.
[5] The Insolvency And Bankruptcy Code, 2016 (Act 31 of 2016), s.29A.
[6] Vishram Narayan Panchpor v Committee of Creditors, (2024) ibclaw.in 26 NCLAT.
[7] Hari Babu Thota(2023) ibclaw.in 152 SC.
