Ineligible Promoters Under IBC – By Ms. Aditi Bhawsar

Ineligible Promoters Under IBC

– By Ms. Aditi Bhawsar, 
(Student at National University of Study and Research in Law, Ranchi)

The Insolvency and Bankruptcy Code, 2016 (IBC) aims to simplify the existing framework for addressing insolvency and bankruptcies and protect the interest of all creditors including the stakeholders in a company. It basically focuses on two aspects i.e., the Corporate Insolvency Resolution Process (CIRP) and Liquidation Process. The Code intends to ensure the revival and continuation of corporate debtors and maximize the value of assets and also enhance the ease of doing business in the country.

The Insolvency and Bankruptcy Board of India (IBBI) has lately amended regulations concerning the backdoor entry of Ineligible Promoters. Under the amendments introduced to the liquidation process regulations, defaulting promoters who are barred from the resolution plan under section 29A of the IBC, cannot be a party in any manner to a compromise or arrangement of the corporate debtor under Section 230 of the Companies Act, 2013. However, if this provision is used to revive a company that is facing liquidation under IBC, the rules of 29A will apply in keeping with the intent of the law. The new amendment also aims to restrict secured creditors from selling or transferring assets of a company undergoing a liquidation process to any person barred from submitting an insolvency resolution plan.

Section 29A IBC & Section 230 Scheme

In the Indian corporate world, Promoters have an important role in the functioning of a company. A Promoter is a person who originates the idea for the formation of a company and gives the practical shape to that idea with the help of his resources and with that of others. A promoter handles the affairs of the company, either directly or indirectly as a shareholder, director, or otherwise. A promoter is the one who stands in a fiduciary relationship with the company, and by virtue of that relationship owes a duty of loyalty, care, and protection towards the company. However, the experts are often frightened with the thought, that defaulting promoters might misuse the Companies Act provision to get a backdoor entry into their firms, and therefore, section 29A of IBC and section 230 of the Companies Act are conflicting in spirit.

When a company makes a default in payment of dues, the Corporate Insolvency Resolution Process (CIRP) is initiated to revive the company, failing which it goes for liquidation. Under the CIRP, the ‘resolution applicant’ suggests the maximization of the value of assets of the company to revive the company and save it from liquidation. However, this became a fatal loophole in the law, when the defaulting promoters were erstwhile allowed the back-door entry at substantially discounted rates for the assets of the corporate debtor.

Section 29A of the Code is a restrictive provision and talks about the conditions in which a person becomes ineligible to become a resolution applicant. Section 29A not only restricts promoters but also other people related/connected with the promoters. While it inhibits errant promoters from bidding in the resolution process, it was unsettled if it specifically prevented them from participating in the scheme of arrangement under Section 230 of the Companies Act. Therefore, to curb such unfair practices, several amendments were made in the Code, including the recent amendment made with respect to section 230 of the Companies Act.

National Company Law Appellate Tribunal (NCLAT) has numerous times reiterated the application of section 29A of the IBC to schemes of arrangement under section 230 of the Companies Act. The NCLAT for the first time in S.C Sekaran vs. Amit Gupta [2019] ibclaw.in 02 NCLAT [i] passed an order regarding the liquidation of the company under section 230. Further in the matter of Shivram Prasad vs. S Dhanapal [2019] ibclaw.in 03 NCLAT [ii], NCLAT while deciding on the applicability of the scheme of arrangement under IBC  observed that :

During the liquidation process under section 230 of the Companies Act, the Adjudicating Authority would perform a dual role: one as the Adjudicating Authority in the matter of liquidation under the IBC and the other as a Tribunal for passing an order under Section 230 of the Act of 2013.

However, the conundrum has been recently settled in the matter of Jindal Steel and Power Limited vs. Arun Kumar Jagatramka & Gujarat NRE Coke Limited (2021) ibclaw.in 46 SC [iii], where the Supreme Court observed that :

Even during the period of liquidation, the ‘Corporate Debtor’ is to be saved from its own management, meaning thereby that the promoters who are ineligible under Section 29A are not entitled to file an application for compromise and arrangement in their favor under Section 230 to 232 of the Companies Act.

After such pronouncements, the Insolvency and Bankruptcy Board of India (IBBI), amended several regulations and included regulation 2B in the Code, which states that ”a person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to such compromise or arrangement.”

The contention behind the amendment was to prevent promoter-driven attempts of liquidating the company. As per Section 230 of the Companies Act, if the resolution process fails the liquidator can make compromises or arrangements with creditors and members upon application. There was no explicit prohibition on defaulting promoters from proposing a compromise or arrangement under the above-mentioned section and this could have resulted in such promoters acquiring control of the company.

Under section 29A a promoter is not eligible to submit a resolution plan. Though, there is no express bar on promoters to submit a scheme. This gave wiggle room to persons ineligible under Section 29A to acquire control of the corporate debtor. The rationale that prompted IBBI to initially relax the 29A rule during the scheme of the arrangement, could have been the different unforeseen circumstances where the company fails the resolution process as there are no buyers or bidders in the market, then instead of liquidating the company why not give it back to the promoters for the reason that –

• the promoter may inject money back to the liquidation value of the company
• jobs of employees remain intact and
• liquidation is an exception to the object of IBC. The aforesaid ground though seems to be the correct reasoning against the spirit of IBC because those responsible for the downfall of the company should not be allowed to regain control of the company.

However, the recent amendment by IBBI has demolished the building thought of promoters to take back control through the backdoor route i.e. during the liquidation stage.

Closing Thoughts

The amendment introduced tries to remove the lacuna in the current insolvency regime in India. However, it would be far-fetched to hold that the ineligibilities provided under Section 29A would not apply when Section 230 is sought to be invoked. However, such interpretation defeats the provisions of the IBC and must be eschewed.

Endnotes

[i] S.C Sekaran vs. Amit Gupta, [2019] ibclaw.in 02 NCLAT

[ii] Shivram Prasad vs. S Dhanapal [2019] ibclaw.in 03 NCLAT 

[iii] Arun Kumar Jagatramka vs. Jindal Steel and Power Ltd. (2021) ibclaw.in 46 SC