“Breach of Promise is no less an act of insolvency than a refusal to pay one’s debt” – Mahatma Gandhi

 “The insolvency law provides a new lifeline for stressed companies to save them from premature death”- IBBI Chairman M S Sahoo

Executive Summary

The Insolvency and Bankruptcy Code, 2016 (‘IBC Code, 2016’) is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016 and by Rajya Sabha on 11 May 2016. The Code received the assent of the President of India on 28 May 2016. Certain provisions of the Act have come into force from 5 August and 19 August 2016. The bankruptcy code is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome. The IBC has 255 sections and 11 Schedules.

The Insolvency and Bankruptcy Code 2016 (‘Code’) aims for resolution of insolvency as opposed to liquidation. The law was framed with the intention to expedite and simplify the process of insolvency and bankruptcy proceedings in India ensuring fair negotiations between opposite parties and encouraging revival of the company by formulation of a resolution plan.

IBC has been designed to explore revival opportunities for an ailing corporate entity. Thus, it gives various opportunity to a Corporate Bidder to come forward, invest money, acquire and purchase desirous corporate under insolvency process and get the company out from the quagmire.

Eligibility Verification

One of the main objectives of the code is to provide the corporate debtor with a resolution plan. Earlier, a resolution applicant could have been any person who submits a resolution plan to the resolution professional and a resolution plan could be a plan proposed by any person for insolvency resolution of the corporate debtor. There was no specific criteria or qualification, due to which any party including the promoters of the corporate debtor or any related party could propose a resolution plan. This scheme was highly criticized on the basis that the wide scope permitted by the code served as a loophole and paved a way for the promoters to gain a back-door entry to the management of the corporate debtor.

01 Introduction

Section 29A of the Insolvency and Bankruptcy Code, 2016 has emerged as one of the key statutes in determining the eligibility of Resolution Applicants in the Corporate Insolvency Resolution Process. The Code, in its original form had not incorporated any provisions to prevent defaulting promoters from buying-back the corporate debtor, which could occur potentially at steep discounts. Subsequently, through an amendment to the Code, Section 29A was inserted with retrospective effect from November 23, 2017. A second amendment to the Code, effective from June 6, 2018, included amendments to Section 29A.

Before 29A, every individual or body corporate can participate in a bidding process of Corporate Debtor which is subject to Corporate Insolvency Resolution Process irrespective he is original promoter, director or person connected to them directly or indirectly. So, persons who, by their misconduct or fraudulent motives, contributed to the default of the Corporate Debtor, can regain the control of their company again by bidding in heavy discounts while banks and other financial institutes taking haircuts.

Thus, this section was introduced to disqualify those who had contributed in the downfall of the corporate debtor or were unsuitable to run the company.

02 Legal Provisions

As per Clause (h) of Section 25(2) of the Code, the Resolution Professional (“RP”) shall invite resolution applicants who fulfill such criteria as may be laid down by him with the approval of committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified by the Board, to submit a resolution plan or plans,

Definitions Section (5) of Code defines the meaning of resolution applicant which states that:-

5(25) “resolution applicant” means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25;

From the above, definition one thing is clear that resolution applicant can either its own self or with other persons can submits a resolution plan to the RP.

When we talk about who will be Person? Section 5(23) defines the Person which includes:-

  • An individual;
  • A Hindu Undivided Family;
  • A Company;
  • A Trust;
  • A Partnership;
  • A Limited Liability Partnership;
  • any other entity established by a statute
  • and includes a person resident outside India

Section 29A is a restrictive provision- any person falling in the negative list is not eligible to submit a resolution plan.

Therefore, a person in order to be eligible to submit a resolution plan –

> shall fulfil the criteria laid down by the resolution professional with the approval of the committee of creditors; and

> shall not suffer from any disqualification mentioned under section 29A.

As per Regulation 38(1B) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP” Regulations, 2016”) resolution plan shall include a statement giving details if the resolution applicant or any of its related parties has failed to implement or contributed to the failure of implementation of any other resolution plan approved by the Adjudicating Authority at any time in the past.

03 Ineligibility of Resolution Applicant

Section 29A of the Code put some barriers for resolution applicant to submit resolution plan. The persons either acting individually or jointly or in concert with such persons fall under any of the disqualification list will not be allow to submit any resolution plan.

A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person—

a. is an undischarged insolvent;

b. is a wilful defaulter in accordance with the guidelines of the RBI issued under the Banking Regulation Act, 1949;

c. Clause c of section 29A debars a person or a person acting jointly or in concert with such person who-

    • has an account classified as NPA;
    • is a promoter of a corporate debtor the account of which has been classified as NPA;
    • is in the management of a corporate debtor the account of which has been classified as NPA
    • is in control of a corporate debtor the account of which has been classified as NPA;

At least a period of 1 year should have elapsed from the date of classification till the insolvency commencement date. Therefore, any company (including the promoters/persons in the management of or control of such company) which has its account classified as NPA for last 1 year will not be able to file a resolution plan however, the Code provides for a carve out that such person shall be eligible to submit the resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan. See also, clause (j) of Section 29A.

Clause c of section 29A shall not apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.

d. the person has been convicted for any offence punishable with imprisonment for 2 (Two) years or more;

The person shall be eligible to submit resolution plan after expiry of 2 years from the date of his release from imprisonment.

e. is disqualified to act as a director under the Companies Act, 2013;

f. is prohibited by SEBI from trading in securities or accessing the securities markets;

g. Clause g of section 29A debars the person who has been

    • a promoter or
    • in the management or
    • control

of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and an order has been made by the adjudicating authority under the provisions of the Code;

Proviso of this clause allows the resolution applicant if such preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has been taken place prior to the acquisition of corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction;

h. The negative list includes persons who might have guaranteed the obligations of the corporate debtor which is currently in insolvency. As the provision goes:-

has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part;

Going by the construction of the clause, it appears that the guarantee should be in favour of that creditor who has applied for insolvency resolution of the corporate debtor.

i. a person who has been subject to the above listed disabilities under any law in a jurisdiction outside India;

j. A person who is connected to the persons as defined under the Explanation, shall be disqualified if the other person suffers disability under clause (a) to (i) of section 29A

Connected Persons means :-

i. any person who is the

        • promoter or
        • in the management or
        • control of the resolution applicant; or

ii. Clause (ii) basically seeks to debar persons from submitting resolution plans in which persons suffering from disabilities mentioned under Section 29A are proposed as promoters or in the management of or in the control of the corporate debtor during implementation of the resolution plan. It includes-

        • would-be promoter;
        • person, would-be in the management; and
        • person, would-be in control

of the corporate debtor, who suffer from disqualification under section 29A.

For example, A wants to submit resolution plan for XYZ Ltd. A proposes that B shall be in the management of XYZ Ltd. during the implementation of the resolution plan. However, B is a person suffering disability under Section 29A. A, therefore becomes ineligible to submit resolution plan.

iii. the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):

Related Party has been defined under section 5(24) and 5(24A) of the IBC Code, 2016 but for the purpose of Section 29A Related Party shall not include financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date.

There are four layers of ineligibility as:

person itself is ineligiblility

As per section 240A provisions of clause c and h of section 29A shall not apply to the resolution applicant in respect of corporate insolvency resolution process of any micro, small and medium enterprises.

Micro, Small and Medium enterprises” means any class or classes of enterprises classified as such under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.

04 Judicial Precedents

I. Chitra Sharma & Ors. v. Union of India & Ors

The Supreme Court while dealing with the proposal of JAL to submit a resolution plan for CIRP of JIL, observed the following:

  • JAL is disqualified under Section 29A of the IBC under sub-clauses (c) and (g), as it has an account which has been classified as a non-performing asset for a period of over one year from the date of commencement of the CIRP of JIL and is also a person who has been a promoter or in the management or control of the corporate debtor, who has engaged in a fraudulent transaction;
  • JAL also lacks the financial capacity to complete the unfinished projects, as the Reserve Bank of India is seeking to initiate insolvency proceedings against JAL.

II. Arcellor Mittal Private Limited vs Satish Kumar Gupta [Essar Steel India Limited]

  • It is a “see through provision” and the “de facto” position of person has to be checked as opposed to “de jure” It is important to discover as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan. [para 29]
  • “acting jointly” does not mean a JV necessarily, it is in the sense acting together
  • Stage of ineligibility attaches at the time of when the resolution plan is submitted by a resolution applicant.
  • “management” u/c (c) ordinarily vests in the board of directors and include MD, manager and officer as per CA, 2013.
  • The expression “control”, in Section 29A(c), denotes only positive control, which means that the mere power to block special resolutions of a company cannot amount to control. “Control” here, as contrasted with“management”, means de facto control of actual management or policy decisions that can be or are in fact taken. Observation of SAT in Subhkam Ventures (I) Private Limited v. SEBI shall apply to 29A.
  • 29A(f) – if a person is prohibited by a regulator of the securities market in a foreign country from trading in securities or accessing the securities market, the disability under sub-clause (i) would attach.

III. Ruchi Soya Industries Ltd

The insolvency proceedings of Ruchi Soya Industries Ltd. is a noteworthy example showcasing the wide ambit of ineligibility that could be used by other bidders to challenge the eligibility of the resolution applicants. In this case, the committee of creditors declared Adani Wilmar as the highest bidder and a resolution plan was being finalized. Meanwhile, a claim of ineligibility was raised by Patanjali Ayurveda, the second highest bidder against Adani Wilmar contesting its eligibility under Section 29A of the Code. The peculiarity of this case is that Adani Wilmar is claimed to be ineligible because the spouse of the managing director of Adani Wilmar is the daughter of a defaulting promoter. Patanjali Ayurveda has approached NCLT challenging the decision of the committee of creditors approving the bid of Adani Wilmar.

05 Conclusion

Section 29A of the Code enacted multiple layers of relations and try to stop back door entry of promoter or connected to the promoter group of the Corporate Debtor for acquisition of the company at discount fall. This section one sided put some barriers for defaulting directors and another side safeguards the interest of other stakeholders may make IBC and CIRP Process much more economically by investing in target company.

The enactment of the section might also disbar crucial stakeholders to bid for the revival of the company. Therefore, certain amount of forbearance by the courts in deciding the issue of ineligibility is the need of the hour to maximize the objectives of the Code.

The Code was designed to find the best possible way out for a sick entity- it was meant to be more inclusive in approach and there was definitely no intention to avoid promoters from submitting resolution plans. However, the reach of Section 29A extends to four layers (as explained above), and may lead to exactly opposite results. It is quintessential to ensure that the citadel of insolvency resolution does not have holes into it but at the same time, it is also important to ensure that the citadel is not inaccessible, with no steps, doors or windows.

Author Bio

Qualification: CS
Company: Suraj Sharma Practicing Company Secretary
Location: New Delhi, New Delhi, IN
Member Since: 02 Apr 2020 | Total Posts: 3

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