Critical Analysis of Section 29A(j) w.r.t. Reliance Infratel case – By Mr. Abhimanyu Chattree

Critical Analysis of Section 29A(j) w.r.t. Reliance Infratel case

– By Mr. Abhimanyu Chattree,
(Final Year Student at Amity Law School, Delhi (Affiliated to Guru Gobind Singh Indraprastha University, Delhi)

Abstract

Insolvency and Bankruptcy Code, 2016 after attaining assent from the President, has been in place since 2016. It has evolved into a precise and speedy and prompt procedure for providing solutions with the issue of insolvency.

The Code was brought in, to provide a way out to both the Debtor as well as the Creditor which would be achieved by providing the latter with a Resolution Plan. Earlier, the said Resolution Plan could be submitted by any person, without any scrutiny, and the Resolution Applicant could even be a Promoter of the Corporate Debtor. This created an enormous loophole in the Code, and was highly criticised.

With the intention of rectifying the abovementioned escape, the Government brought in the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, and Bankruptcy Code (Amendment) Act, 2018, through which Section 29A was introduced into the Code.

Introduction

On 3^rd December, 2020, in the while deciding upon the initiation of Corporate Insolvency Resolution Process (CIRP) of Reliance Infratel Limited, the Hon’ble NCLT (Mumbai Bench), approved the Resolution Plan which was submitted by Reliance Digital Platform & Project Services Limited through its Infrastructure Projects. It would be difficult to ignore the fact that that the former is controlled by Mr. Anil Ambani, while the former is controlled by his brother, Mr. Mukesh Ambani.

From the outside, one would assume that the above scenario would be barred by Section 29A(j) of Insolvency and Bankruptcy Code, 2016, however it was approved by the Committee of Creditors unequivocally.

It would be apposite to mention that Section 29A(j) says that “a person shall not be eligible to submit a Resolution Plan if such person has a connected person not eligible under Clauses (a) to (i)”; where “related party” is also talked about.

For this purpose, it is important to discuss what a “Related Party” means. For the purpose of the present case, we should discuss this term as defined under Section 5, sub-Section 24A, Clause (a), which says, “a person who is a relative of the individual, or the relative of the spouse of the individual.”

For the purpose of ascertaining, whether the setting in the present case is barred legally with respect to Section 29A(j) or not we would have to mention some case laws for arriving at a conclusion.

It would seem, that the most significant judgment in this regard would Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. [2019] ibclaw.in 03 SC [1], where the validity of Section 29A(j) was questioned by Ld. Senior Counsel Mr. Mukul Rohatgi, arguing that, when the related person is debarred from putting forward a Resolution Plan, even when such a person has no business connection with the Corporate Debtor, neither helps the cause of the Resolution Applicant nor the Corporate Debtor, which is the sole purpose of The Insolvency & Bankruptcy Code, 2016.

With respect to the above argument, the Hon’ble Supreme Court has discussed the issue from Paragraph 73 till Paragraph 76. The Court paid emphasis to its judgment Attorney General of India and Ors. V. Amratlal Prajivandas and Ors. [2].

“44.  It would thus be clear that the connecting link or the nexus, as it may be called, is the holding of property or assets of the convict/detenu or traceable to such detenu/convict.

 There ought to be the connecting link between those properties and the convict/detenu, the burden of disproving which, as mentioned above is upon the relative/associate.”

The Supreme Court observed that it would be just to presume that there is an existence of business activity connection between the Resolution Applicant and the Corporate Debtor. However, if the “related person” is able to prove that there is no business relation between the Corporate Debtor and himself, such person cannot be possibly disqualified by Section 29A(j).

The Court further mentioned in Para 75, that the terms “Related Party” and “Related” are subject to noscitur a sociis, where they would be bound by interpretation, and in the opinion of the Bench, would include only persons who are connected with the Corporate Debtor, in terms of Business activity.

As to the question of, whether a “connected person” as provided in Explanation I, of Clause (ii) to Section 29A(j), cannot possibly refer to a person who might be in control of the Corporate Debtor sometime in the future. It was decided that such a scenario would be arbitrary, as that would not determine as to who would take control of the Company in question in the future.

Report Of The Insolvency Committee (2018)[3]

In March, 2018, the Government set up The Insolvency Law Committee to provide recommendations on matters ascending from the implementation of the Code, for submission of a Report providing recommendations pertaining to eligibility to submit a Resolution Plan.

With regards to Section 29A(j), the scope of the terms ‘person acting in concert’ may be construed to be a ‘connected person’. Therefore, the terms ‘Person acting jointly or in concert’ must be removed.

Analysis of the Section 29A(j)

The insertion of Section 29A in the Code, persons who have contributed to the defaults of the Corporate Debtor, or are objectionable due to the incapacities as specified in the section or are a ‘related party’ as per Section 5(24A) to another defaulting party, are prevented from gaining control of the Corporate Debtor since they are ineligible to submit a Resolution Plan under the Code.

This Provision acts as a guard to the creditors of the Corporate Debtor and protecting them against dishonest persons, who despite their previous acts are trying to reward themselves by defeating the object of the Code.

The Provisions acts as a provision of Diligence on the part of the Resolution Professional under Section 29A. Only an Affidavit by the Prospective Resolution Applicant would not be enough and proper Due Diligence will have to be done by the Resolution Professional which would be then reviewed by the Committee of Creditors for their Approval.

In the case of Chitra Sharma & Ors. V. Union of India & Ors. [2018] ibclaw.in 37 SC [4], giving pre-eminence to the IBC, the Supreme Court outrightly rejected the Resolution Plan of Jaiprakash Associates Limited (JAL) emphasising on the bar under Section 29A. it was stressed by the hon’ble Supreme Court, that the persons responsible for the CIRP cannot be involved in the process of Insolvency of the Corporate Debtor, as it would defeat the whole purpose of the Code.

Conclusion

Section 29A, laid down a multi-layered disqualification shield that would disqualify even crucial stakeholders to bud for the revival of the Corporate Debtor. Therefore, with the Reliance Infratel Case, it can be observed that the Hon’ble Supreme Court took a lenient approach while deciding who would be taking control of the Corporate Debtor in the Future.

While being cautious, it could be said that a middle ground could be achieved by permitting the promoters to bid for the Corporate Debtor, while ensuring that there are enough safeguards available for the latter.

The ultimate aim should always be to revive the company and avoid liquidation to preserve the right of both, the Corporate Debtors and Creditors.

Reference

[1] 2019 4 SCC 17

[2] 1994 5 SCC 54

[3] http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf

[4] [ 2018 ] 148 SCL 833 ( SC )