Stay or interim suspension of wilful defaulter status enable eligibility for promoter u/s 29A of IBC | SEBI debarment of Corporate Debtor u/s 29A(b) shall not be attracted on the Promoter Director

Stay or interim suspension of wilful defaulter status enable eligibility for promoter u/s 29A of Insolvency and Bankruptcy Code, 2016

Promoter Director of Corporate Debtor, participating as a Resolution Applicant, shall not be covered under definition of connected person given in Explanation to Section 29A and SEBI debarment of Corporate Debtor u/s 29A(b) shall not be attracted on the Promoter Director

Narayanam Nageswara Rao v.  K Sivalingam (RP for NCS Sugars Ltd.) & Anr.

Reported in (2024) ibclaw.in 525 NCLT

NCLT Hyderabad Bench

In a unique precedent, Hon’ble NCLT Hyderabad Bench comprising of Dr. Venkata Ramakrishna Badarinath Nandula, Hon’ble Member (Judicial) Shri Charan Singh, Hon’ble Member (Technical), in an application filed by suspended promoter director of Corporate Debtor to set aside decision of CoC, allowed the same and further held the applicant who was found to be disqualified under Section 29A(b) and 29A(f) read with S29A(j) as eligible and be permitted to participate as a Resolution Applicant.

As per the facts of the case deduced from the Order, the MSME Corporate Debtor was admitted into CIRP on 24.06.2022. RP had initially issued Form G on 06.10.2022 and thereafter another Form G was issued on 24.02.2024. The RP / CoC, after conducting due diligence, disqualified the Applicant citing following:

1. Applicant and related party of the Applicant have been declared as wilful defaulters (S.29A(b))
2. That a connected party of the Applicant (i.e Corporate Debtor) has been prohibited by the Securities and Exchange Board of India from trading in securities and accessing securities markets. (S.29A(f))

The Applicant filed an application before Hon’ble NCLT challenging the decision of Committee of Creditors from disqualifying him under Section 29A.

Contentions of the Applicant:

1. Applicant being a suspended director of corporate debtor which is an MSME unit, intends to participate in the CIRP of the corporate debtor by submitting a resolution plan but respondents are not qualifying him as potential resolution applicant on the unsustainable grounds.
2. First allegation is currently being challenged in the High Court of Telangana, and an order suspending the willful defaulter tag has been temporarily suspended since 27.04.2023, thus, making the disqualification of the applicant invalid. Therefore as on date of submission of plan this disqualification is not applicable to him.
3. Allegation regarding the Securities and Exchange Board of India (SEBI) prohibiting the Applicant or its alleged connected party (Corporate Debtor) lacks supporting documentation. Further, Applicant asserts he has no knowledge of any such order against the Corporate Debtor or himself. Stating the above reliance was placed on Section 11(4)(b) of the SEBI Act, 1992, which mandates that any order restraining individuals from accessing the securities market or prohibiting them from dealing in securities must be accompanied by written reasons.
4. In the e-mail sent by Resolution Professional to the Applicant containing a link to the SEBI debarred list and an attached Excel sheet from BSE India’ s website, only Unique Client Code (UCC) of the Corporate Debtor was disabled and applicant’s name does not find place in the said list. Since applicant’s name is not there in the debarred list of SEBI, it does not affect Applicant’s trading access to stock exchanges
5. Disablement of Unique Client Code (UCC) of the Corporate Debtor only prevents the Corporate Debtor from trading, not the Applicant. This disablement was based on SEBI’s recommendation to stock exchanges, not a direct order against the Applicant. A direct order from SEBI is required under Section 29A(f).
6. That the CoC attributed disqualification criteria arbitrarily, exceeding the scope outlined in Section 29A of the Code.

Contentions of the RP:

1. Firstly, the Applicant and connected parties were categorized as willful defaulters by banks, with outstanding amounts totalling crores of rupees.
2. It’s important to note that interim suspension of wilful defaulter categorization is temporary, and the final verdict from the High Court is still pending.
3. Secondly, the Corporate Debtor, connected to the Applicant, is barred from accessing the securities market and appears on SEBI’s debarred entities list on various stock exchange websites such as NSE/BSE/MCXSX.
4. The absence of a specific order from SEBI restraining the Applicant from accessing the securities market doesn’t negate their disqualification. Section 29A(f) indeed requires such a prohibition order from SEBI, as outlined in Section 11(4)(b) of the SEBI Act, 1992. Notices of disablement issued by stock exchanges were based on a circular from NSEL, which clearly marked certain entities, including NCS Sugars Limited, as defaulters, resulting in the immediate disabling of their Unique Client Codes in consultation with SEBI and other exchanges.
5. Since applicant’s name is not there in the debarred list of SEBI, he may not be covered under Section 29 A(f) but since corporate debtor’s name is there in the debarred list and he being a connected party to the CD, he will be disqualified under Section 29 A(j) being a connected party to the corporate debtor.
6. Despite the Applicant’s status as an MSME promoter, they are still subject to disqualifications under Section 29A(b) and 29A(f) read with Section 29A(j) of the Code.
7. The decision to exclude the Applicant as an eligible resolution applicant was made by the CoC based on commercial considerations and the Applicant’s antecedents, as recorded in the minutes of the CoC meeting

Question

Whether the decision of the Committee of Creditors disqualifying of the Applicant warrants the interference of Tribunal? If so, for what relief?

Observation and Conclusion

Hon’ble NCLT, while examining Section 29A(j) and Explanation to Section 29A on “connected persons” stated that

“….from the explanation as above, we find that the same speaks about connected person to the resolution applicant and not to the corporate debtor. The Resolution applicant herein, being an ex-director of the corporate debtor, we are of the view that contention of the respondent that the applicant is disqualified to submit resolution plan as CD is debarred by SEBI and that the applicant is a connected party to the CD is not maintainable. Further, we should always bear in mind that legislature while passing the Bill, has given some special relaxation under Section 29(A) to MSME promoters so that they are allowed to participate in the resolution process of corporate debtor.”

Decision

In this backdrop, Hon’ble NCLT held that the impugned decision made by the Committee of Creditors disqualifying the Applicant, needs its interference and set aside the decision taken by the CoC in the Committee of Creditors meeting and declared that the Applicant is eligible to submit a Resolution Plan and consequently, permitted the Applicant to participate as a Resolution Applicant.

Case Reference: Mr. Narayanam Nageswara Rao v. Mr. K. Sivalingam (RP) Anr. (2024) ibclaw.in 525 NCLT.