Understanding Section 29-A of IBC’16 regarding ineligibility criteria to submit Resolution Plan

Insolvency and Bankruptcy Code, 2016 (IBC) looks after consolidating such laws relating to corporate insolvency resolution process of corporate persons, individuals as well as partnerships in a timely manner and simultaneous revival of such insolvent companies by application of resolution plan.[1]

The prospective provisions of IBC have been drafted in consonance with the aims and objectives which it wants to achieve in the form of getting maximum value of company’s assets, ensuring availability of credit at all phases and finally securing and protecting the interests of all the concerned stakeholders.

One of the important amendments that happened in the year 2018 was insertion of Section 29A that talks of Persons that aren’t eligible to submit resolution plans and therefore aren’t resolution applicants.

A thorough and plain looking at this Section gives us following types of ineligibility:

  • First, where the person himself is ineligible.
  • Second, where any connected person related to first is ineligible.
  • Third, Related party of the above such connected person.
  • Fourth, in which any person jointly, conjointly or acting in concert through or attached to any of the above three types, are ineligible.[2]

These are actually the disqualifications, and to see as to whether these are too much or are deviating from the overall objectives of IBC, can be traced from the analysis of the concerned amendments that are listed below.

IBC (Amendment) Act, 2018:

A general looking at this section makes us to believe that the purpose of Section 29A is to verify that the person who is actually bidding for that insolvent company is genuinely qualified to re-run that company, and to make it solvent, and accordingly throwing out such persons, who acting fraudulently or not financially solvent engage in such process, thereby defeating the overall purpose of CIRP, which basically means that excluding unqualified persons in the form of promoters, connected or related party to promoter, and so on don’t bid either by themselves to again get the company in their hands, which in the process of salvaging, would otherwise become defunct and that unqualified persons/ party will get the control and related benefits out of that process.

That means that the mind of drafters was altogether majorly concentrated towards the ultimate holders and controllers of the company, i.e. Directors and Promoters, which is also otherwise correct as those responsible for the company’s debts either directly or indirectly should not get the control, because what earlier was seen that these promoters would siphon off creditor’s money, and when company used to incur losses consecutively, they would use such siphoned off money or assets by paying those creditors at discounted price and thereby getting ultimate control.

In the case of Chitra Sharma v. Union of India[3], Jaiprakash Associated Ltd. approached court for continuing their projects and putting stay on the initiated liquidation process. Here Parliament was aware of this fact that because of the misconduct of the persons that contributed to company’s default, the same gap was mis utilized accordingly. And it doesn’t wanted such persons to gain the control of the said company.

For e.g. u/s 29A Clause (c), a person during submission of resolution plan is found to have an account being classified as NPA as per RBI is further subjected to participate for a limited and specified period. And so are the other clauses that enumerates a long lists of persons and entities, which makes us satisfied that the Parliament has therefore tried its level best to rectify such gap or loophole which allowed misgoverned persons to re-enter. Also section 30 of IBC says that resolution plan of ineligible persons disqualified u/s 29A won’t be undertaken by CoC.

Therefore by utilising the wordings and happenings of this case, the Hon’ble S.C. made it clear that the objective of Section 29A was to prevent such persons who because of their own misconduct led to company’s defaults.

The similar type of situation arose in Jaypee Infratech Case[4], wherein the subsidiary companies of Jaypee were themselves bidding for it, and such kind of practices made the law makers thought that if such practices continued to exist, the overall objective of company’s insolvency will get defeated as then the company would again be in the vicious hands of such promoters or directors, without an adequate payment to creditors and credibility to all stakeholders.

But despite having Section 29A, the said section was in itself creating hurdles or obstacles for prospective bidders to bid, and to resolve such issues, and in relation to such issues, a committee was formed in Nov’17 known as ILC, and came with their report in March’18.

The committee made following recommendations:[5]

  • Persons acting in concert or acting jointly was interpreted widely, as it is too wide, and the definition having adopted from SEBI (SAST) Regulations also lead to wide application of the term applicants and connected persons under clause (j).
  • With respect to NPAs, the ARCs, AIFs, etc. to be classified as NPAs under 29A(c), wherein the possibility of NPA acquisition was considered from previous CIRP, and for 3 years, such NPAs having been acquired from such CIRP not to come under clause (c).
  • Classification of NPAs not to be restricted to BR Act of 1949, and NPAs to further include all such accounts which have been declared as NPA under respective financial regulators in India.
  • Considering section 29A(d), the conviction of 2 years or more for any offence not to be included under such disqualification as it can also include certain minor offences that have no relation in company’s running, and therefore a list of relevant laws to be provided thereby restricting its scope.
  • Similar to provision of RPA, 1951, the disqualification period needs to be reduced from indefinite to 6 years in this section.
  • To insert a proviso in the same clause as in case of stay order, the disqualification won’t be there, and also in addition to it, in case of disqualification from directorship or such prohibitions as under SEBI, the ineligibility won’t be applicable if appeal filed against disqualification or till expiry of period of filing appeal.
  • With respect to Section 29A(g) that deals with preferential, or fraudulent or such transactions, herein the acts of predecessors not to come as an obstacle or hurdle to those that are in management or in control of submitting resolution plans.
  • With respect to Section 29A(h), the committee held that with respect to disqualification of guarantors, the intention is not to disqualify all such guarantors, and herein the word ‘enforceable guarantee’ needs to be deleted, and said guarantee to be invoked by creditor and to remain unpaid partly or fully for coming under disqualification under the above clause.

[1] The Report of the Bankruptcy Law Reforms Committee. Volume 1: Rationale and Design. Bankruptcy Law Reforms Committee, 2015, chap. 9.

[2] Taxmann, Insolvency and Bankruptcy Code, 2016, 2016 (2019).

[3] W.P. (C) 744 of 2017.

[4] Vishwanathan L, and Das A, ‘The `Jaypee Judgement’ – Assessing It’S Impact On The Indian Financing Landscape’ (India Corporate Law, 2020) <https://corporate.cyrilamarchandblogs.com/2020/03/the-jaypee-judgement-assessing-its-impact-on-the-indian-financing-landscape/> accessed 7 April 2021

[5] Ashish Makhija M, Case Digest On Insolvency And Bankruptcy Code, 2016 (Bloomsbury 2020)

*****

Disclaimer: The above mentioned opinion constitutes solely of the author and doesn’t in any way or form represent any organization’s or person’s ideas, and the same is written by taking help from relevant sources concerning Insolvency Law.

Author Bio

Qualification: CS
Company: N/A
Location: Shubham Phophalia, Gujarat, India
Member Since: 08 May 2021 | Total Posts: 54
I am Shubham from Batch 2016-21 of GNLU. I am in my final year of 5 years integrated BA LLB course from GNLU, Gandhinagar, and I have completed Company Secretary Course meanwhile with 3rd Rank in Ahmedabad, Gujarat in CS Professional. I am a keen reader and enthusiastic listener of Corporate laws an View Full Profile

My Published Posts

More Under Corporate Law

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

June 2021
M T W T F S S
 123456
78910111213
14151617181920
21222324252627
282930