NCLAT Delhi: Ex-Promoter, Who Resigned Before CIRP Commencement, Is Eligible To Submit Resolution Plan

Background Facts:

On 19.05.2021, NCLT Mumbai admitted the CIRP application by Blue Frog Media Pvt. Ltd. (Corporate Debtor) under Section 10 of IBC. Mr. Mahesh Mathai ('Respondent 2') Ex-Director of the Corporate Debtor submitted a Resolution Plan. On 08.11.2021, the Resolution Plan was approved by the Committee of Creditors (CoC) on 08.11.2021 by 91.86% vote share.

The present appeal has been filed against NCLT Mumbai Order dated 18.08.2023 rejecting the application for approval of the Resolution Plan by Respondent 2 citing he is not eligible to submit a Resolution Plan under Section 29A of IBC.

NCLAT Verdict:

The NCLAT New Delhi allowed the appeal and held that an Ex-Promoter/Director who resigned from Corporate Debtor before initiation of CIRP u/s 10 of IBC is eligible to submit a Resolution Plan under Section 29A of IBC.

NCLAT placed reference to Section 29A of IBC which read as follows:

29A. Person not eligible to be resolution applicant. --A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person-- (a) is an undischarged insolvent;

(b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949;

(c) at the time of submission of the resolution plan 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 accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 1949) [or the guidelines of a financial sector regulator issued under any other law for the time being in force,] and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:

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;

Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.

Explanation. I.--For the purposes of this proviso, the expression "related party" shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares 12[or completion of such transactions as may be prescribed,] prior to the insolvency commencement date.

Explanation. II.--For the purposes of this clause, where a resolution applicant 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 and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from the date of approval of such resolution plan by the Adjudicating Authority under this Code;]

(d) has been convicted for any offence punishable with imprisonment--

(i) for two years or more under any Act specified under the Twelfth Schedule; or

(ii) for seven years or more under any other law for the time being in force:

Provided that this clause shall not apply to a person after the expiry of a period of two years from the date of his release from imprisonment:

Provided further that this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I;

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

Provided that this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I;

(f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;

(g) 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;

Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction;

(h) has executed [a 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 [and such guarantee has been invoked by the creditor and remains unpaid in full or part];

(i) [is] subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or

(j) has a connected person not eligible under clauses (a) to (i)

[Explanation. I] -- For the purposes of this clause, the expression connected person means--

(i) any person who is the promoter or in the management or control of the resolution applicant; or

(ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or

(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):

[Provided that nothing in clause (iii) of Explanation I shall apply to a resolution applicant where such applicant is a financial entity and is not a related party of the corporate debtor:

Provided further that the expression related party shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares 12[or completion of such transactions as may be prescribed,] prior to the insolvency commencement date;]

[Explanation. II.--For the purposes of this section, "financial entity" shall mean the following entities which meet such criteria or conditions as the Central Government may, in consultation with the financial sector regulator, notify in this behalf, namely:--

(a) a scheduled bank;

(b) any entity regulated by a foreign central bank or a securities market regulator or other financial sector regulator of a jurisdiction outside India which jurisdiction is compliant with the Financial Action Task Force Standards and is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding;

(c) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor, where the terms shall have the meaning assigned to them in regulation 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999 (42 of 1999);

(d) an asset reconstruction company registered with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(e) an Alternate Investment Fund registered with the Securities and Exchange Board of India;

(f) such categories of persons as may be notified by the Central Government.]

The Appellate Tribunal noted on the plain reading Section 29A provides that a person shall not be eligible to submit a plan if such person, or any other person acting jointly or in concert with such person is covered by any of the clauses mentioned from (a) to (g). Further, Section 29A(c) is invoked when at the time of submission of the Plan, the person 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, is classified as Non-Performing Assets ('NPAs').

It observed that presently no bank is creditor of the Corporate Debtor as per Form-H all creditors are only individual. There is no material evidence pointing that Respondent 2 or the Corporate Debtor is NPA on the date of submission of the Resolution Plan and thus, Section 29A is not applicable. It also placed reference on Supreme Court's decision in Hari Babu Thota vs. Shree Aashraya Infra-Con Ltd. wherein CoC approved a Resolution Plan submitted by the promoter and held that the Plan cannot be rejected by Adjudicating Authority on the ground of disqualification under Section 29A of IBC.

The Appellate Tribunal also observed that Section 29A does not make promoters and directors ineligible to submit a Resolution Plan unless they are ineligible under clauses (a) to (g). Presently, the ineligibility is being held only on the ground that Respondent 2 was a promoter of the Corporate Debtor till 2018 when he resigned. Further, any of the clauses (a) to (g) can't be attracted.

In conclusion, NCLAT set aside NCLT Mumbai's Order which held that Respondent 2 is ineligible to submit a Resolution Plan and directed NCLT to dispose of the application citing approval of the Resolution Plan from CoC.

Case Title: Vishram Narayan Panchpor RP of Blue Frog Media Pvt. Ltd. vs. Committee of Creditors (Blue Frog Media Pvt. Ltd.) and Anr.

Case No.: Company Appeal (AT) (Insolvency) No. 1489 of 2023 & I.A. No. 5342 of 2023

Counsel for Appellant: Mr. Anuj Tiwari, Mr. Aditya Shukla, and Mr. Rahul Kumar, Advocates.

Counsel for Respondents: Mr. Kunal Godhwani, Advocate

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