[Nikunj Maheshwari is a 4th year law student at the Institute of Law, Nirma University]
The National Company Law Tribunal (NCLT), Mumbai Bench has recently provided a new twist to already labrynthine insolvency proceedings of the DHFL Group. The NCLT ordered the Committee of Creditors (CoC) to consider the resolution plan submitted by Mr. Kapil Wadhawan, who is the promoter and erstwhile director of the DHFL Group, and to vote on merits. This decision of the NCLT comes at a stage where the CoC, after vetting through multiple resolution plans and manoeuvring through prolonged delays and litigation, has by a majority decided to accept the plan submitted by Piramal Group, the largest bidder. This order has provoked discourse on the applicability of section 29A of IBC even though it has been presently stayed by the NCLAT, till the disposal of the appeal.
Being a non-banking financial company, the DHFL Group was referred to insolvency by the Reserve Bank of India (RBI) under section 227 read with section 239(2)(zk) of the Insolvency and Bankruptcy Code, 2016 (IBC) in 2019. Subsequently, as the corporate insolvency resolution process (CIRP) was initiated, bids were invited from prospective buyers. During this process, Mr. Wadhawan also submitted his bid. However, the CoC rejected it, stating lack of credibility and evidence that he may not comply with the plan.
The CoC decided to accept the bid of the Piramal Group and present it for authorization of the adjudicating authority. At this subsequent stage, Mr. Wadhawan filed an interim application stating that he is willing to pay all the dues of small and retail investors. Also, his new plan offers to pay substantially higher than the selected bidder, and hence, he asserted that his plan must be considered before the CoC. To substantiate his application, he further stated that he submitted his plan earlier to the resolution professional; however, the plan never reached the desk of CoC for consideration. The adjudicating authority accepted his application and argued that the CoC must consider his plan on vote on merits. The authority further argued that his plan can be regarded as a “one time settlement”.
Appositely, a quintessential question that arises for consideration is whether such an order is legal and stands the test of section 29A of IBC? Moreover, should the NCLT have interfered with the commercial wisdom of the CoC at the closing stage of the CIRP? This post aims to analyse these issues and highlight that the order of the NCLT is misplaced.
Section 29A and its Jurisprudence
Section 29A was inserted in the IBC through an amendment in 2017. The provision lays down the eligibility criteria for a resolution applicant and closes the door for delinquent or derelict applicants who have no intention to abide by the resolution plan they submit. The non-eligibility criteria include wilful defaulters under the directions of the RBI, persons prohibited from participating in security market or trading in securities by SEBI, undischarged insolvents, persons disqualified to be a director under the Companies Act, 2013, amongst others.
Section 29A, as interpreted by the Supreme Court in Chitra Sharma v. Union of India, was introduced to “ensure that amongst others, persons responsible for insolvency of the Corporate Debtor do not participate in the resolution process.” The Supreme Court opined that the provision is in larger public interest with intent to facilitate effective corporate governance and to avoid any backdoor entry of the erstwhile management who has led the corporate entity into its distressed situation and have no intention to revive the company.
Following from this jurisprudence, the NCLT Kolkata in RBL Bank Limited v. MBL Infrastructure Limited rendered a flexible interpretation to the provision. The NCLT noted that the provision does not bars all promoters and directors from filing a resolution plan or participating in CIRP. The aim and objective of the provision is to only prohibit such persons “who on account of their antecedents may adversely impact the credibility of process under the IB Code.” Thus, the provision does not squarely apply on all promoters of the entity undergoing CIRP.
The NCLAT affirmed this stance in Sreeram E. Techno School Private Limited v. Beans and More Hospitality Private Limited. It observed that the provision is not applicable to all promoters. It is pertinent for the adjudicating authority to discern, first, whether the directors or promoters of the company are barred by the conditions mentioned in the provision; secondly whether the resolution plan submitted by them is in accordance with section 30 of the IBC, and; thirdly, whether a majority of the creditors in accordance with the IBC agrees with the resolution plan submitted by such person. If all these three conditions are met, the promoter will not be barred by section 29A of the IBC.
However, conversely, in the present case, SEBI has disqualified Mr. Wadhawan from dealing in securities, which is a ground of disqualification in terms of section 29A(f). Thus, he is ineligible to propose a resolution plan. In addition to this, multiple criminal and civil cases are pending against him, although decisions are yet pending. The NCLT’s directions to the CoC to consider and vote on his resolution plan frustrate the objective of the provision, and are in contravention of jurisprudence laid down by the Supreme Court and the NCLAT.
Intervention and Delay Approach
Over the short span of the IBC, one facet that is largely settled in Indian jurisprudence relating to insolvency is that the courts and tribunals ought to avoid unnecessary litigation and delays and, where possible, fast track the resolution process. In this regard, the Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta opined that the adjudicating authority must not intervene in the ordinary decisions of the CoC unless there is any glaring arbitrariness or visible unfairness. Thus, the authority must restrict its judicial powers and must avoid intervention in decisions involving commercial wisdom of the CoC.
In a noteworthy judgement of Vishal Vijay Kalantri v. Shailen Shah, the NCLAT was posed a question whether the CoC is obliged to accept resolution plan submitted by the promoter merely because it is better and attractive than other plans. Holding in the negative, the NCLAT argued that evaluating and choosing a resolution plan is a matter of commercial wisdom of the creditors. If they believe that the plan submitted by the promoter should not be selected despite being better, and the second best plan must override it, the adjudicating authority has no power to challenge it.
In the present case, the NCLT Mumbai’s preference for the CoC’s consideration of Mr. Wadhawan’s plan is based on the fact that he is proposing a better plan, which may satisfy the claims of small investors and that the haircut taken by other creditors would be comparatively lesser. However, the NCLAT missed the point that the CoC had previously already considered and evaluated the plan submitted by him and rejected it on the ground of “lack of credibility and evidence” that Mr. Wadhawan will be actually able to enforce the plan. On this ground, directing CoC to again evaluate the plan on merit interferes with the commercial wisdom of the CoC and defeats the sacrosanct purpose for constituting CoC under the IBC.
By interjecting at the concluding stage of the CIRP, the NCLT’s stance has led to unwarranted uncertainty. The NCLT has placed excessive faith on the intention of the plan submitted by Mr. Wadhawan instead of weighing it against the law and the decision of the CoC. The judgement not only violates section 29A of the IBC but also contradicts various judicial pronouncements. In light of the same, the order of the NCLAT is misplaced and sets a contentious precedent. It can encourage the promotors and erstwhile directors to take a backdoor entry to regain the control of corporate entity at the expense of the creditors, which was never the intention of the legislature. Thus, the order violates the basic tenets of the IBC.
– Nikunj Maheshwari
It was a good read Nikunj!
Author merely specifying probab-of Piramal Ent. who in turn will loose to acquire well settled and diversified com at very cheap rate
I think that it is a good decision. The promoters and directors should be given more opportunity at this matter.
This was a beautiful read. However, now the question to be decided is can public interest be taken into consideration since the resolution plan submitted by Mr. Kapil Wadhawan is a better plan or the commercial wisdom of the CoC would be preferred. Favouring the former one would definitely establish a precedent and its correctness would be tested in future insolvency cases.