Resolution Professional Responsible For Conducting Section 29A Due Diligence; Can Seek Information, Documents Or Clarification From RA: NCLT Mumbai
The National Company Law Tribunal (“NCLT”), Mumbai Bench, comprising of Shri Kishore Vemulapalli (Judicial Member) and Shri Anu Jagmohan Singh (Technical Member), while adjudicating a petition filed in M/s Blue Frog Media Pvt. Ltd., has held that a Resolution Professional is responsible to conduct due diligence relating to Section 29A of IBC, to identify ineligibility...
The National Company Law Tribunal (“NCLT”), Mumbai Bench, comprising of Shri Kishore Vemulapalli (Judicial Member) and Shri Anu Jagmohan Singh (Technical Member), while adjudicating a petition filed in M/s Blue Frog Media Pvt. Ltd., has held that a Resolution Professional is responsible to conduct due diligence relating to Section 29A of IBC, to identify ineligibility of resolution applicant, if any. Additional information, documents or clarifications can be sought from the Resolution Applicant by the Resolution Professional. The mere submission of an affidavit by the resolution applicant under Section 29A of IBC would not suffice.
“The Resolution Professional has the responsibility to conduct Section 29A due diligence. A prospective Resolution Applicant submitting an affidavit stating that he/she is eligible under Section 29A to submit resolution plan will not suffice. Adequate due diligence on the prospective Resolution Applicants and its connected persons needs to be conducted effectively and within the requisite timeline to identify ineligibility, if any. The Resolution Professional should seek clarifications or additional information or document from the prospective Resolution Applicants, if needed for conducting the due diligence.”
Background Facts
M/s Blue Frog Media Pvt. Ltd. (“Corporate Debtor”) filed a petition under Section 10 of the Insolvency Bankruptcy Code, 2016 (“IBC”) seeking initiation of Corporate Insolvency Resolution Process (CIRP) against itself. In 2021, the NCLT initiated CIRP against the Corporate Debtor.
Mr. Mahesh Mathai (“Resolution Applicant”), who is a Financial Creditor of the Corporate Debtor, submitted a resolution plan which was approved by the Committee of Creditors (CoC). An application under Section 30(6) of IBC was filed before the NCLT for approval of the plan.
The Resolution Professional noticed that the Resolution Applicant had founded the Corporate Debtor company in 2007 and was a shareholder of the same. As on 31.03.2021 the Resolution Applicant held 5,13,458 equity shares in the Corporate Debtor and was also a Director of the same from 2006 to 2018. The Resolution Applicant resigned from the post of Director before the petition to initiate CIRP against the Corporate Debtor was filed.
NCLT Verdict
The Bench observed that the Resolution Applicant was a Director of the Corporate Debtor when it was under financial distress and resigned just prior to filing of Section 10 petition under IBC. The Resolution Applicant is merely trying to get a back door entry into the company.
“It is very clear that Mr. Mathai was a director of the company when the company was under financial distress. He resigned as a director of the company on 01.03.2018 and immediately within few months a section 10 petition was filed. We hold that this is nothing but misuse of the provisions of the Code. The SRA after contributing as a director in the mismanagement of the company is now coming forth as a Resolution Applicant, trying to gain a backdoor entry into the company.”
Section 29A of IBC provides a list of persons who are ineligible to submit a resolution plan for the Corporate Debtor and the list includes related party. The resolution applicants are therefore required to submit an affidavit stating that they are eligible as per Section 29A to submit the plan.
The Bench held that the Resolution Professional is responsible to conducting due diligence relating to Section 29A of IBC to identify ineligibility of resolution applicant, if any. Additional information, documents or clarifications can be sought from the prospective Resolution Applicants. The mere submission of an affidavit by the prospective resolution applicant would not suffice.
“The Resolution Professional has the responsibility to conduct Section 29A due diligence. A prospective Resolution Applicant submitting an affidavit stating that he/she is eligible under Section 29A to submit resolution plan will not suffice. Adequate due diligence on the prospective Resolution Applicants and its connected persons needs to be conducted effectively and within the requisite timeline to identify ineligibility, if any. The Resolution Professional should seek clarifications or additional information or document from the prospective Resolution Applicants, if needed for conducting the due diligence.”
It has been further noted that Section 29A not only restricts Promoters but also people connected to them from submitting the plan, as the same can hamper the CIRP.
“Section 29A in its entirety not only restricts promoters but also the people related/connected with the promoters. It is obvious that the intention behind inserting Section 29A is to restrict those persons from submitting a resolution plan who could have an adverse effect on the entire corporate insolvency resolution process.”
The Bench held that Mr. Mahesh Mathai is ineligible to submit a resolution plan, as he was a former promotor/director of the company and has contributed to the downfall of the company.
The resolution plan has been rejected.
Case Title: M/s Blue Frog Media Pvt. Ltd.
Case No.: CP (IB) No. 4360/MB/C-I/2018
Counsel For Applicant: Mr. Avinash Khanolkar