Section 29A of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code) has emerged as one of the key aspects in determining the Eligibility of the Potential Resolution Applicants in a tedious attempt to save the company in question under the Corporate Insolvency Resolution Process (CIRP). This brought in considerable delays right at the stage of admission of the resolution plans that would come in. The Code, in its originality, at the time of enactment did not have any provision to keep defaulting promoters or their associates out of the process, which would otherwise mean Repeating the mistakes of the Past regimes to save ‘Sick’ companies. This provision was brought forth by subsequent amendments to the law following the recommendations of the Insolvency Law Committee, formed by the Central Government, and various observations in the Landmark Judgements by the Hon’ble Supreme Court of India.

Before Section 29A was introduced by the legislature, every individual or body corporate was eligible to participate in the bidding process of the corporate debtor which was undergoing Corporate Insolvency Resolution Process, irrespective of whether the person is the promoter, director, key managerial personnel or any other person associated with the promoter, either directly or indirectly.

Therefore, the section was introduced to prevent the Corporate Debtor from going into the hands of the promoters who had contributed to the failure of the CD, to buy back the company again at a steep discount, which would in turn lead to the stakeholders to take the burden of deep haircut, when it comes to the matter of recovery.

Therefore, after various consultations with learned professionals, law makers, courts, the legislature imposed restrictions on the persons who are not eligible to submit the Resolution Plan, which are enumerated herein below:

Section 29A of the Code is a restrictive provision, which specifically lists down the person expressing their ineligibility to submit Resolution Plan. The Code explains that following persons shall not be eligible to submit resolution plan, if such person, or any other person acting jointly in concert with such person:

  1. Is an undischarged insolvent;
  2. Is a wilful defaulter in accordance with the guidelines of the RBI issued under the Banking Regulation Act, 1949;
  3. Has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in by the RBI and at least a period of 1 year has lapsed from the date of such classification; Provided that the person shall be eligible to submit a 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;
  1. Has been convicted for any offence punishable with imprisonment for 2 years or more;
  2. Is disqualified to act as a director under the Companies Act, 2013;
  3. Is prohibited by the SEBI from accessing the securities markets;
  4. 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 in respect of which an order has been made by the Adjudicating Authority under this Code;
  5. Has executed an enforceable 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;
  6. Has been subject to any disability, corresponding to clauses (1) to (8), under any law in a jurisdiction outside India; or
  7. Has a connected person, not eligible under clauses (1) to (9).

 

Some of the Judicial Interpretations underthe Code:

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

The Supreme Court while dealing with the Resolution Plan of JAL in the CIR process of JAL laid down its observation as under:

(i) JAL (Jaiprakash Associates Limited) is disqualified to submit its Resolution Plan under section 29A of the IBC under clauses© and (g) for the reason that it has an account which was classified as NPA for over a period of more than one year from the date of the commencement of the CIRP. Further JAL was also been a promoter or had been in the management or control of the CD, who has engaged in the fraudulent transactions.

(ii) JAL was also suffering from financial incompetence to complete the unfinished projects as the RBI was seeking insolvency proceedings against the JAL.

 

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

(i) The “de facto” provision has to be checked in contrary to the “de jure” provision. It is worth mention to identify the real person or the entities who are acting jointly or in concert with such a person, and who have set up such a corporate vehicle for the submission of the Resolution Plan.

(ii) “Acting Jointly” does not necessarily mean any Joint Venture but would mean acting together.

(iii) Stage of ineligibility has to be checked at the time of the submission of the Resolution Plan by the Resolution Applicant.

(iv) “Management” would cover within its ambit the Board of Directors which further includes within its parameter manager, managing director and officer as per the provisions of the Companies Act, 2013.

(v) 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.

 

3. Ruchi Soya Industries Ltd

The insolvency proceedings of Ruchi Soya Industries Ltd. is worth to mention here in the sense that it sets the example of showcasing the wide ambit of ineligibility that could be used by other bidders in the insolvency resolution process of the corporate debtor  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 objection brought forward to the notice was that 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 had approached NCLT challenging the decision of the committee of creditors approving the bid of Adani Wilmar.

Conclusion

Therefore, pursuant to the various judicial pronouncements as referred herein above, it is concluded that section 29A imposes multiple layers of relations to look into in order to prevent the back door entry of the promoter or person connected with the management of the Corporate Debtor. The intent of the legislature is to safeguard the interest of the stakeholders and make the CIR Process more economical.