Juristic Persons and the Embargo under Section 29A(d) of the Insolvency and Bankruptcy Code, 2016

[Rishabh Sinha is a 4th year B.A. LL.B. (Business Law Hons.) student at National Law University, Jodhpur]

Introduction

The National Company Law Appellate Tribunal (NCLAT) recently interpreted section 29A(d) of the Insolvency and Bankruptcy Code, 2016  (the Code) in Renaissance Steel India Pvt. Ltd. v. Electrosteels Steel India Ltd(10 August 2018). In this case the appellant had challenged the eligibility of Vedanta Limited to submit a resolution plan for the purposes of the Corporate Insolvency Resolution Process of the debtor. The ground for challenge was the conviction of a sister subsidiary company named Konkola Copper Mines[1] for an offence punishable with imprisonment of three years under the laws of Zambia, which qualified the definition of ‘connected persons’ for attracting the embargo provided under section 29A(d) of the Code. The primary reason for the NCLAT to dismiss the appeal was that the offence in question (offence under the laws of Zambia) prescribed imprisonment or fine whereas section 29A(d) of the Code only covers an offence punishable with imprisonment. On the basis of this distinction, the NCLAT upheld the eligibility of Vedanta Limited as the resolution applicant.

A plain reading of sections 29A(d), 29A(j) and the explanation to section 29A of the Code indicates that a person or any other person acting jointly or in concert with such person or ‘connected person’, shall not be eligible to submit a resolution plan if such a person (1) has been convicted of an offence; and (2) the said offence is punishable with imprisonment for two years or more.

This post shall present a case for including a corporate or juristic person under the ambit of section 29A and shall counter arguments which were not raised before the NCLAT against the inclusion of juristic persons under section 29A.

Issue

There are two major issues with respect to interpretation of the expression ‘person’ in section 29A:  (A) whether section 29A would only apply to ‘natural persons’ and not to ‘juristic persons’; and (B) whether the inclusion of juristic persons under section 29A gives rise to an ambiguity related to the interpretation and application in every clause of the statutory provision.

Analysis

[A] Section 29A would apply to both ‘natural persons’ and ‘juristic persons’ – Literal vs. Purposive Construction Debate.

Literal Interpretation

The Supreme Court has recognized in the case of Standard Chartered Bank and Ors. Vs. Directorate of Enforcement and Ors.that even though a corporate person can be prosecuted for criminal offences, such corporate persons are not capable of being subjected to imprisonment.

Since a ‘juristic person’ can never be imprisoned, a conjoint reading of sections 29A(d) and 3(23) would reveal that section 29A(d) would never apply to ‘juristic persons’ because context requires the term ‘person’ in section 29A(d) to be read as a natural person who can be imprisoned. Additionally, there is no provision in section 29A(d) requiring that the corporation can also be punished “with fine”and only mentions “imprisonment” (which cannot be imposed on a corporation). 

Purposive Interpretation

The author submits that section 29A must be interpreted in light of the mischief it sought to curtail.The ‘Statement of Objects and Reasons’ appended to the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 provide that persons who, with their misconduct, contributed to defaults of companies or are otherwise undesirable, may misuse this situation due to lack of prohibition or restrictions to participate in the resolution or liquidation process, and gain or regain control of the corporate debtor. Excluding corporate entities from section 29A(d) of the Code would be a flawed interpretation being contrary to the ‘Statement of Objects and Reasons’ for the introduction of section 29A, which exclude all undesirable persons from the ‘Resolution Process’. This may undermine the processes laid down in the Code.

As the jurisprudence has evolved over the years in India as well as in other jurisdictions, there is no dispute that a company is liable to be prosecuted and punished for criminal offences. The earlier authorities to the effect that “corporations” cannot commit a crime, is now diluted and the generally accepted modern rule is that except for such crimes which a corporation is held incapable of committing by reason of the fact that they involve mens rea, a corporate body can be criminally prosecuted.

In Sunil Bharti Mittal v. CBI, the Court held that the concept of vicarious liability and lifting of corporate veil is now not an alien concept even in criminal jurisprudence. A corporate entity always acts through human agency and such human agency can always be “imprisoned”. This was reiterated inK Sitaram & Anr. v. CFL Capital Financial Service Limited & Anr.where the Court held:

“If a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company that too when the criminal act is that of conspiracy. Thus, an individual who has perpetrated the commission of an offence on behalf of the company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. Second situation in which an individual can be implicated is in those cases where the statutory regime itself attracts thedoctrine of vicarious liability, by specifically invoking such a provision.”

This means that in a case where a “person acting jointly or in concert”[natural person acting on behalf of the corporate person] is “convicted with imprisonment” while acting on behalf of the company, for two years or more, the corporate or juristic person would be subject to the embargo under section 29A(d). A conjoint reading of sections 29A (d), (j) and the explanation to section 29A also elaborates the same scheme.

[B] Section 29A(d) is inclusive Of Corporate ‘Persons’ and hence there is no ambiguity pertaining to section 29A with respect to its application.

An argument may arise pertaining to the scope of section 29A that if it is to apply indiscriminately against a natural and a juristic person, then one will reach a conclusion that a company can act as a director in another company, by virtue of section 29A (e) of the Code which reads as follows:

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

The term ‘person’ as defined under section 3(23) of the Code includes both an individual[2]and a company[3].  A plain reading of the ten grounds for disqualification under section 29A reflects that the definition of person under section 3(23) cannot be read indiscriminately into the section 29A(e). Such a construction shall render section 29A absurd and legally incoherent.

However, the author submits that this is not an ambiguity in law arising due to the purposive constructive of the term ‘person’. The argument of the author is that the term ‘person’ under section 29A is inclusive of both individual and a company. The same does not mean that both the definitions have to be mandatorily read into every clause of section 29A.Additionally, section 149(1) of the Companies Act, 2013 is the specific law governing the matter and provides that only natural person can act as a director in a company. Hence, the definition of person for the purposes of section 29A(e) shall only mean a natural person.

Considering that, the author concludes that section 29A is inclusive of corporate or juristic persons and hence there is no ambiguity pertaining to section 29A (d) and (e) with respect to its interpretation and application.

Rishabh Sinha 

[1] ‘Vedanta Resource PLC’ had two subsidiaries Vedanta Limited and Konkola Copper Mines.

[2] Section 3(23)(a), Insolvency and Bankruptcy Code, 2016.

[3] Section 3(23)(c), Insolvency and Bankruptcy Code, 2016.

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