NCLT Hyderabad: The Term “Connected Person” Under Explanation-I Of Section 29A(J) Of IBC Relates To Resolution Applicant And Not Corporate Debtor

Background Facts:

On 24.06.2022, NCS Sugars Ltd. (Corporate Debtor), an MSME enterprise was admitted into the Corporate Insolvency Resolution Process ('CIRP'). Mr. Narayanam Nageswara Rao (Applicant), a suspended director and promoter of the Corporate Debtor, submitted a Resolution Plan, which was accepted contingent upon providing the necessary documentation.

On 24.02.2024, the Resolution Professional ('RP') issued a notice inviting fresh bids. The Applicant believed that his previous Expressions of Interest ('EOI') would remain valid unless he chose to submit a new one. Despite having submitted an earlier EOI, he submitted a fresh one. However, the CoC on 07.03.2024 in its 18^th disqualified the Applicant citing Section 29A(b) and (f) of IBC stating that:

a) The Applicant and a related party were allegedly declared willful defaulters.

b) A connected party of the Applicant was allegedly prohibited by the Securities and Exchange Board of India ('SEBI') from trading in securities and accessing securities markets.

Contentions of the Applicant:

The Applicant argued that the willful defaulter tag was currently being challenged in the High Court of Telangana, which had temporarily suspended the tag since 27.04.2023. Further, he denied that the related party was barred from the securities market. He relied upon the email exchanges between him and the RP, the RP had provided a link to the SEBI debarred list and an Excel sheet from BSE India's website, which only showed the Unique Client Code (UCC) of the Corporate Debtor as disabled. The Applicant's name did not appear on the debarred list.

NCLT Verdict:

The NCLT Hyderabad allowed the application and held that the term “connected person” referred to in Explanation-I read with Section 29A(j) of IBC relates to the Resolution Applicant and not the Corporate Debtor.

The Tribunal placed reference on Section 29A(j) which is read as:

“a person shall not be eligible to submit a Resolution Plan if such person has a connected person not eligible under Clauses (a) to (i)”.

Further explanation is given that what is the meaning of “connected person” for this section which is reproduced as under:

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.

NCLT observed that through the above explanation, it can be stated that the term “connected person” relates to the Resolution Applicant and not to the Corporate Debtor.

It observed that presently, the Resolution Applicant is an ex-director of the Corporate Debtor and thus, the CoC's contention that the Applicant is disqualified to submit Resolution Plan since the Corporate Debtor is debarred by SEBI and that the Applicant is a connected party to the Corporate Debtor is not maintainable.

It observed that the legislature while passing the Bill, has given some special relaxation under Section 29A to MSME promoters so that they are allowed to participate in the resolution process of Corporate Debtor.

In conclusion, NCLT allowed the application and set aside the CoC's decision taken in the 18^th CoC meeting dated 07.03.2024 observing and permitting the Applicant to participate as an eligible Resolution Applicant and submit a Resolution Plan.

Case Title: Mr. Narayanam Nageswara Rao vs. Mr. K. Sivalingam (RP) and Anr.

Case No.: IA. Nos. 897 & 898 of 2024 in CP (IB) No. 299/7/HDB/2018

Counsel for Applicant: Ms. Siva Praneetha, Advocate

Counsel for Respondent: Mr. Y. Suryanarayana, Advocate

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