Shreya Jain

Insights of the case

The Hon’ble National Company Law Appellate Tribunal, recently, vide its order dated 18.11.2019 in the matter of State Bank of India v Anuj Bajpai[1], has held that the disqualified persons under Section 29A of the Insolvency and Bankruptcy Code, 2016 (“Code”), are completely and irrevocably barred from having access to the assets of the Corporate Debtor. Details of the Order has been discussed below:

Facts of the case

In the instant case, the application was initially filed before the Hon’ble National Company Law Tribunal (“NCLT”), Mumbai Bench, wherein the Bench, vide its order dated 08.04.2019 (Anuj Bajpai v State Bank of India)[2], partly allowed the “Secured Creditor”, i.e, State Bank of India (“SBI”) to opt out of the liquidation process but restricted the said SBI from selling the assets of the Corporate Debtor to disqualified persons under section 29A.

However, SBI challenged the said order, pointing out that there remains no bar on whom should such creditor sell of the said asset after opting out of the liquidation process.

Analysis

Before diving into the water, first the water itself should be tested. Therefore, the definition of secured creditor and security interest has been produced as below:

2 (30)“secured creditor” means a creditor in favour of whom security interest is created

Further, the term security interest provides that-

2(31)“security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee;

Therefore, a secured creditor is the person who has provided credit in favour of the debtor and further, has secured such aid given to the corporate debtor by imbibing a right, title or interest on any of the asset of the corporate debtor. Hence, such asset so secured is now a shield for the creditor which may come in handy in case the debtor has defaulted. The creditor shall always have an option of falling back on the secured asset and realise the amount due from the debtor by selling off that particular asset. When the debtor comes under the purview of Insolvency, such secured creditor shall then have to choose between one of the divided roads which are:

 “52(1)(a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or

52(1)(b) realise its security interest in the manner specified under this section

….

52(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.”

Further, Section 29A of the Code deals with a negative list of the eligibility criteria of the resolution applicant which inter alia includes any person who is the promoter or in the management or control of the resolution applicant; or any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan;

Therefore, section 29A explicitly bars the management and promoters of the corporate debtor in participating in the resolution of the corporate debtor for a smoother operation of the whole process. The NCLAT in this recent ruling has extended the essence and applicability of this Section by expanding the scope and making the same applicable in case of Section 52 of the Code.

The provision of Section 52 of the Code initially provided a vague picture, but after this recent judgement, there is a whole new aspect to the said section. If looked at the provision of this section, it may be noted that if a secured creditor realises its security interest, such creditor may easily sell the asset back to the promoter himself (ineligible under section 29A of the Code), which may, in essence kill the whole motive of Section 29A of the Code. Further, it is to be noted that the Liquidator has to first verify the security interest of the creditor before giving the permit to the secured creditor realise such interest as laid down in Section 52(3) of the Code. Therefore, the liquidator can certainly look into the matter and figure out that the secured creditor is proposing to sell of the asset back to the promoter who is ineligible under section 29A of the Code. After taking the view of the whole picture it is only clear that Section 29A can be used as an ancillary to Section 52. Hence, the Hon’ble NCLAT ordered that persons disqualified under section 29A shall remain to be prohibited even when the secured creditor has realised his security interest under section 52 and is planning to sell his/her asset under 52(4) of the Code.

Conclusion

The erstwhile smoky screen of section 52 has now been cleared with the help of extension of Section 29A of the Code, implying that once the resolution process of the corporate debtor begins, the persons disqualified under Section 29A are completely left out of the picture from having access to the assets of the corporate debtor, however, there remains no bar of Section 29A when the assets are sold before liquidation process begins.

[1] https://nclat.nic.in/Useradmin/upload/20572042075dd3e35176572.pdf

[2] https://nclt.gov.in/sites/default/files/final-orders-pdf/Sanaa%20Syntex%20Private%20Limited%20MA%2033-2019%20%20CP%20172-2017%20NCLT%20ON%2008.04.2019%20FINAL.pdf

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