[Garima Mehra and D Sharma are both Advocates]
One of the primary objectives of the Insolvency and Bankruptcy Code, 2016 (the “Code”)) is to facilitate the adoption of a resolution plan for the corporate debtor. The resolution plan is to serve as a benefit to not only the creditors but also to the already stressed corporate debtor. Originally, section 5(25) of the Code defined a resolution applicant as any person who submits a resolution plan to the resolution professional and section 5(26) defined a resolution plan as a plan proposed by any person for insolvency resolution of the corporate debtor as a going concern. The said definition of the resolution applicant did not prescribe any 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 of things was, thereafter, criticized on the basis that the wide scope permitted by the Code served as a loophole for recalcitrant promoters to gain a back door entry to the management of the corporate debtor.
With a view to curb the said loophole, the Government brought forth the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 and later the Insolvency and Bankruptcy Code (Amendment) Act, 2018 wherein section 29A was inserted into the Code. Section 29A laid down a broad range of disqualifications for a person to be an eligible resolution applicant. Further, section 5(25) has been amended to read that a resolution applicant is one who submits a resolution plan to the resolution professional upon an invitation made under section 25(2)(h). Section 25(2)(h) was amended to the effect that the resolution professional invite resolution plans from such applicants who fulfil the criteria laid down by the resolution professional with the approval of the committee of creditors keeping in consideration the complexity and the scale of business of the corporate debtor. Therefore, a prospective resolution applicant in order to be eligible to submit a resolution plan shall not only meet the criteria laid down by the resolution professional under section 25(2)(h) but shall also not fall under any of the categories laid down by section 29A for disqualification.
Section 29A as it stands amended by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 lays down a very broad range of disqualification criteria for prospective applicants which are both complex as well as multi-layered leaving a wide scope for litigation. Section 29A (a) to (i) lists the various disqualifications for prospective applicants as follows:
(a) a person who is an undischarged insolvent;
(b) a person who is a willful defaulter as per the guidelines of the Reserve Bank of India (“RBI”);
(c) a person with an account that has been classified as a non-performing asset (“NPA”) or is a promoter of the corporate debtor whose account has been classified as an NPA or is in management of such corporate debtor or is in control of such corporate debtor. This provision requires that the account should have been classified as an NPA at least for a duration of one year preceding the initiation of insolvency resolution process. A person disqualified under this provision would become eligible upon clearing all the outstanding dues with interest prior to submission of a resolution plan;
(d) a person who has been convicted of an offence punishable with imprisonment for a period of two years or more;
(e) a person who is disqualified from being a director in accordance with the Companies Act of 2013;
(f) a person who has been prohibited by the Securities and Exchange Board of India from trading in securities or accessing the stock markets;
(g) a person who is a promoter or is management of a corporate debtor which has been adjudicated to have carried out a transaction which is preferential or undervalued or extortionate or fraudulent;
(h) a person who has issued a personal guarantee for the corporate debtor to the specific creditor whose application under the Code against the corporate debtor has been admitted;
(i) A person subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or
(j) a person who has a connected person not eligible under clauses (a) to (i) above.
Section 29A also states that persons who are acting jointly or in concert with a person who is disqualified under the above provisions are also disqualified from making a resolution application. Further, the terms “acting jointly or in concert” have brought in ambiguity due to lack of a clear explanation or definition leaving ample scope for litigation. However, the larger ambiguity is attributable to sub-clause (j) of 29A which states that any person who is a ‘connected person’ and who is disqualified under sub clauses (a) to (i) shall also be disqualified from making a resolution application, which adds another major layer of disqualified persons. The explanation provided for the above sub-clause describes a connected person as a person who is a promoter or in management or control of the resolution applicant or will be a promoter or in management of control of the corporate debtor during the implementation of the resolution plan. The explanation further states that a subsidiary company or a holding company or an associate company or a related party to such person would also be considered as a connected party, thereby effectively adding one more major layer to the category of disqualified applicants. Further, the term ‘related party’ within the context of the above provision has not been defined and has been left open to interpretation, once again leaving ample scope for litigation. However, the legislation has consciously exempted scheduled banks, asset reconstruction companies and alternative investment funds from the scope of section 29A.
Further, in recognition of the importance of micro, small and medium enterprises (MSMEs) to the Indian economy and the unique challenges faced by them, the applicability of section 29A has been restricted only to disqualify wilful defaulters from bidding for MSMEs. More particularly, this is recognition of the fact that usually only promoters of an MSME are likely to be interested in acquiring it.
Nevertheless, Section 29A has excessively enlarged the scope of disqualification to the extent of drastically reducing the prospective resolution applicants on the basis of what could be labelled as generalized criteria for disqualification wherein it does not differentiate between a genuine applicant and one with antecedents. A similar view was expressed by the National Company Law Tribunal (“NCLT”) in the matter of RBL Bank Ltd v. MBL Infrastructure Ltd wherein it was expressed that it cannot be the intention of the legislature to disqualify the promoters as a class but to rather exclude those class of persons who may affect the credibility of the resolution process given their antecedents.
Unfortunately, the recent ruling of the NCLT, Mumbai, in the matter of Wig Associates that the ineligibility in section 29A does not apply to ongoing insolvency proceedings has created more confusion and ambiguity because it defeats the very purpose of the Code. Section 29A of the IBC was introduced to disqualify persons from being resolution applicants. If persons who by their conduct had contributed to the financial distress of the corporate debtor or are otherwise deemed not to be fit and proper to gain control over distressed assets, the Code rightly disqualifies them.
It has to be considered that the multiple layered broad criteria of disqualification by way of being connected parties or related parties or acting jointly may exclude prospective applicants with experience in the specific industry or familiarity with the corporate debtor which is also equally important to ensure revival of the corporate debtor. It has to be appreciated that the objective of the Code calls for a more balanced approach keeping in view of both the effective revival of the ailing corporate debtor and recovery for the creditors. It is, therefore, necessary that application of section 29A be objectively reviewed by the judiciary to ensure that capable and bonafide resolution applicants are not barred from participating due to the excessive safeguards.
– Garima Mehra & D Sharma
Good Move.