NCLAT Delhi: Section 29A(C) Disqualifies Those Managing And Controlling Corporate Debtor Who Failed To Clear Debts
The National Company Law Appellate Tribunal ('NCLAT') New Delhi, comprising Mr. Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) held that Section 29A(c) of Insolvency and Bankruptcy Code, 2016 ('IBC') disqualifies not only those in management and control of the Corporate Debtor when its account was declared Non-Performing Asset ('NPA') but also those in...
The National Company Law Appellate Tribunal ('NCLAT') New Delhi, comprising Mr. Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) held that Section 29A(c) of Insolvency and Bankruptcy Code, 2016 ('IBC') disqualifies not only those in management and control of the Corporate Debtor when its account was declared Non-Performing Asset ('NPA') but also those in management and control of the Corporate Debtor in close proximity of time before the Resolution Plan was submitted, who failed to clear the debts of the Corporate Debtor.
Background Facts:
On 09.07.2007, Athena Demwe Power Ltd. (Corporate Debtor) was incorporated as SPV for the execution of a Demwe hydroelectric project. A Memorandum of Understanding (“MoU”) was entered into as per which Navayuga Engineering Company Ltd. (Appellant) undertook to infuse equity capital of 30% into the Corporate Debtor. However, on 31.05.2013, the Corporate Debtor's account was declared a NPA.
On 28.09.2017, the Indian Bank initiated a Corporate Insolvency Resolution Process ('CIRP') against the Corporate Debtor under Section 7 of IBC. It was claimed by the Appellant that on 22.09.2017, it transferred its entire shareholding in RIPL Infrastructure Pvt. Ltd. ('RIPL') for a consideration of Rs.1 lakh to Mr. Vijaybhaskar and Mr. Vijay Kumar. Expression of Interest was invited by the Resolution Professional and the Appellant submitted its Resolution Plan. The Committee of Creditors ('CoC') pointed out that the Appellant is not eligible to submit a Resolution Plan under Section 29A of the IBC.
On 26.05.2023, NCLT New Delhi observed that the Appellant is disqualified under Section 29A. Aggrieved by the decision, the Appellant filed the appeal to reject the Order declaring the Appellant as disqualified under Section 29A of IBC.
NCLAT Verdict:
The NCLAT Delhi dismissed the appeal and held that Section 29A(c) of IBC disqualifies not only those in management and control of the Corporate Debtor when its account was declared NPA but also those in management and control of the Corporate Debtor in close proximity of time before the Resolution Plan was submitted, who failed to clear the debts of the Corporate Debtor. The critical date for assessing ineligibility is the date of submission of the Resolution Plan.
The Appellate Tribunal placed reference to Section 29A(c) of IBC which is read as follows:
Section 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—
(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) 3[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;
It observed that the MoU did not imply that the Appellant was given the management and control after the investment of 51% equity shares. Rather, it can be noted from the second MoU that various clauses show that the management and control were in the hands of the Appellant from the date of execution of the MOU in March 2016, thus noting that investment and running the company are two different aspects.
The Appellate Tribunal also observed that the NCLT Delhi extensively examined the Appellant's role as the entity in control and management of the Corporate Debtor. Additionally, NCLT observed that the transaction dated 22.09.2017 wherein the Appellant transferred 100% shareholding to RIPL occurred after the Financial Creditor filed the CIRP Application and just six days before the order initiating the CIRP. Despite the Appellant providing a loan of Rs. 328 Crores to RIPL, the transaction was conducted for a cash consideration of Rs. 1 lakh. The analysis of RIPL's Balance Sheets and Financial Statements, etc. revealed that the transaction on 22.09.2017 was a sham transaction done to claim that the Appellant has nothing to do with RIPL.
NCLAT concluded that the intention behind giving management and control to the Appellant was the intended investment of a 51% equity share to facilitate the project's implementation since the Appellant had invested Rs. 236 Crores, the control and management were granted to ensure the Corporate Debtor's effective project execution. Thus, no error was found in NCLT Delhi's decision to disqualify the Appellant under Section 29A(c) of the IBC since the purpose behind granting control and management is evident from the clauses of the agreement.
Case Title: Navayuga Engineering Company Ltd. vs. Mr. Umesh Garg RP of Athena Demwe Power Ltd. and Ors.
Case No.: Company Appeal (AT) (Insolvency) No. 783 of 2023
Counsel for Appellant: Mr. Saurav Agarwal, Ms. Medha Sachdev, Ms. Simran Malhotra, Mr. Saurajay Nanda, Advocates, Mr. Krishnendu Datta, Sr. Advocate, Tanuj Sud, Mr. Ajay Kumar, Ms. Stuti Vatsa, Mr. Vijayant Goel, Mr. Rajat Sinha, Advocates.
Counsel for Respondent: Mr. NPS Chawla, Mr. Vibhor Kapoor, Mr. Aarsheya Sharda, Advocates for RP, and Mr. Umesh Garg, RP. Mr. Brijesh Kumar Tamber, Mr. Prateek Kushwaha, Mr. Vinay Singh Bist, Mr. Yashu Rustagi, Mr. Sahas Bhasin, Mr. Aniruddh Mukherjee, Advocates for R-3 to 8.