Section 29A: It's Time To Extend The Applicability Of Ineligibility Net

Section 29A: It

The Insolvency and Bankruptcy Code, 2016 ("Code") has brought a paradigm shift in the debt resolution process. The Code, with the objective of maximization of value of the corporate debtor for the benefit of all stakeholders has replaced the approach of 'debtor in possession' with the concept of 'creditor in control'.

Even though, it has been less than three (3) years since its coming into force, the Code has already been amended thrice to address the concerns of the stakeholders and to ensure that it is implemented in its true spirit. Additionally, the courts and tribunals have, through landmark judgments, clarified various concepts to remove the bottlenecks in the implementation of the Code. Further, the Insolvency and Bankruptcy Board of India ("IBBI") has also amended the regulations issued under the Code, from time to time, to respond to the concerns of the stakeholders.

The Code originally envisaged a two-stage process being: (a) corporate insolvency resolution process ("CIRP"), and (b) liquidation of the corporate debtor in the event of failure of the CIRP proceedings. The Code, at the time of coming into force, permitted every interested person to submit a resolution plan for a corporate debtor undergoing CIRP. Neither the Code nor the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations") specified any eligibility criteria for a potential resolution applicant proposing to submit a resolution plan. Further, there was no provision which would prohibit the liquidator from selling the properties of a corporate debtor facing liquidation proceedings to the promoters. In view of this, there were apprehensions that the defaulting promoters, who were largely responsible for the corporate debtor facing the CIRP proceedings, could undermine the process of the Code and get back the management and control of the corporate debtor at the expense of the creditors.

In order to cure this lacuna, the Code was amended in 2017 by way of an ordinance promulgated on 23 November 2017 ("Ordinance") and section 29A was inserted in the Code so as to set out the ineligibility criteria for resolution applicants. Section 29A prohibits, inter alia, the defaulting promoters and/or their connected persons from participating in the resolution process. The Ordinance also amended the provisions relating to the liquidation proceedings so as to prohibit a liquidator from selling the immovable and movable property or actionable claims of a corporate debtor in liquidation to any person who is ineligible under section 29A of the Code to submit a resolution plan. As a result, the ineligible promoters were barred from acquiring assets of a corporate debtor during the liquidation process also. Thus, section 29A was made applicable to both, CIRP and liquidation proceedings, to eventually deny re-entry of the defaulting promoters and/or their connected persons.

The introduction of section 29A boosted the confidence of the investors. However, in light of the recent developments in the insolvency law of India, there is a the requirement to extend the applicability of the ineligibility net set out under section 29A to other processes, which have been added in the debt resolution process either by way of evolution of jurisprudence and/or legislative amendments.

With effect from 6 June 2018, the provisions of section 12A were added in the Code to permit withdrawal of the CIRP proceedings. Originally, the Code did not have any provision to allow withdrawal of the CIRP proceedings once the application for commencement of the CIRP proceedings had been admitted by the Adjudicating Authority ("AA") under the Code. This, however, did not deter some benches of the AA from permitting withdrawal of the CIRP proceedings (using the power under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016), even though there were instances of other benches not permitting withdrawal of the CIRP proceedings on the ground that there was no express provision in the Code permitting such withdrawal. In order to resolve the ambiguity, the Supreme Court, in
Uttara Foods and Feeds Private Limited
v. Mona Pharmacem
[1], used its extraordinary powers under Article 142 of the Constitution of India and allowed withdrawal of the CIRP proceedings pursuant to the settlement between the applicant and the corporate debtor.

In order to address this issue, the Insolvency Law Committee ("Committee"), in its report dated 26 March 2018, recommended that withdrawal of CIRP proceedings be permitted with the approval of ninety (90) percent voting share of the Committee of Creditors ("CoC").

Keeping in view the recommendations of the Committee, section 12A was inserted in the Code by way of an Ordinance promulgated on 6 June 2018. Section 12A provides that the AA may allow the withdrawal of application admitted under section 7 or section 9 or section 10 of the Code, on an application made by the applicant with the approval of ninety (90) per cent voting share of the CoC, in such manner as may be specified. Further, the IBBI inserted regulation 30A in the CIRP Regulations which provided that an application for withdrawal under section 12A must be submitted to the interim resolution professional ("IRP") or the resolution professional ("RP"), as the case may be, before issuance of the invitation for expression of interest ("Invitation Document") from interested and eligible prospective resolution applicants to submit resolution plans for the concerned corporate debtor.

While regulation 30A of the CIRP Regulations provided that an application for withdrawal of CIRP could be filed with the IRP or RP at any time before the RP issues the Invitation Document, the Supreme Court, in Brilliant Alloys Private Limited vs. Mr. S. Rajagopal & Ors
[2], held that regulation 30A of the CIRP Regulations being directory in nature cannot override the provisions of section 12A of the Code, which does not stipulate any such condition. In view of this judgement of the Supreme Court, the IBBI amended regulation 30A which now provides that where the application for withdrawal of the CIRP proceedings is submitted after the issue of the Invitation Document, the applicant shall state the reasons justifying withdrawal after issue of such Invitation Document.

While section 12A duly addressed the issue related to withdrawal of CIRP proceedings, the legislators appear to have failed to consider the possibility of this process being used by the defaulting promoters to make a back-door entry to assume the management and control of the corporate debtor. The issue as to whether the promoters, who are otherwise ineligible under section 29A of the Code to submit a resolution plan for a corporate debtor, should be allowed to submit a settlement offer under section 12A was discussed in the case of Andhra Bank vs Sterling Biotech Ltd. (through the Liquidator) & Ors.

While discussing the applicability of section 29A to the settlement offer submitted to the CoC under section 12A, the AA held that the settlement offer being similar to a resolution plan in nature, section 29A of the Code should apply to the settlement offer made under section 12A given the legislative intent of not allowing the ineligible persons to acquire management and control of a corporate debtor. Therefore, the promoters of the corporate debtor, who were otherwise ineligible under section 29A to submit the resolution plan, should not be allowed to make a settlement offer. The National Company Law Appellate Tribunal (
"NCLAT"
), however, expressed a different view and held that section 29A would apply at the time of submission of the resolution plan and not at the time of settlement offer under section 12A, therefore, the promoters should be permitted to settle with the financial creditors
[3].

Apart from section 12A, there is another process which was added by the NCLAT by way of judicial pronouncement, which was, to permit revival of the corporate debtor under section 230 of the Companies Act, 2013 (
"CA 2013"
). In order to explore the possibility of revival of a corporate debtor facing liquidation, the NCLAT, in S.C. Sekaran vs. Amit Gupta & Ors
[4], directed the liquidator to take necessary steps in terms of section 230 of the CA 2013 before taking steps to sell the assets of the corporate debtor. Further, the NCLAT, in Y Shivram Prasad vs S Dhanpal & Ors[5], clarified that since the liquidation of the corporate debtor would be taken up under the provisions of the Code, the scheme of arrangement should be in consonance with the statement and object of the Code only.

Though the NCLAT directed the liquidator to take necessary steps under section 230 of the CA 2013 for the revival of corporate debtors, the NCLAT did not provide any guidance in respect of the eligibility of the parties who could submit a scheme of compromise or arrangement for the revival of a corporate debtor. Further, the IBBI, in a discussion paper issued on 27 April 2019, proposed that the ineligibility norms under section 29A of the Code should not apply to compromise or arrangement under section 230 of the CA 2013.

At present, there is no explicit prohibition on persons, who are ineligible under section 29A of the Code, from proposing a scheme of compromise or arrangement under section 230 of the CA 2013. As a result, the liquidators adopted different views with regard to the applicability of section 29A to the process for revival of corporate debtors under section 230 of the CA 2013. In some cases, the liquidators made it mandatory for the parties (interested to submit a scheme of arrangement) to comply with section 29A, in others, the process document inviting scheme of arrangement from interested bidders did not set out any such criteria.

However, the NCLAT, in a landmark judgement in Jindal Steel and Power Limited vs. Arun Kumar Jagatramka & Anr, appears to have put to rest the debate around applicability of section 29A to the process of revival of the corporate debtor under section 230 and held that even during the period of liquidation, for the purpose of section 230 to 232 of the CA 2013, the corporate debtor is to be saved from its own management and therefore, the promoters, who are ineligible under section 29A of the Code, are not entitled to file an application for compromise and arrangement in their favour under Section 230 to 232 of the CA 2013.

In view of the aforesaid judgement of the NCLAT, the IBBI has, in a recent discussion paper on corporate liquidation process, invited public comments on certain issues including whether the persons ineligible under section 29A of the Code to be a resolution applicant should be barred from becoming a party in compromise or arrangements under section 230 of the CA 2013.

It is pertinent to note that at the time of enactment of section 29A, the Code did not have any provisions similar to the settlement offer under section 12A or the revival of a corporate debtor under section 230 of CA 2013. This could be a reason as to why the Parliament could not envision the need to apply section 29A to the settlement offers under section 12A or revival of the corporate debtor under section 230 of the CA 2013.

Given the intent of the legislators behind enacting section 29A, section 29A should explicitly be made applicable to the process of revival of the corporate debtor under section 230 of the CA 2013 by way of an amendment in the Code or the regulations to clarify this aspect once in for all.

Further, the applicability of section 29A to the settlement proposals under section 12A should also be considered by the legislators so as to discourage every single possibility of back-door entry of the defaulting promoters and/or their connected persons. Non-applicability of section 29A to the settlement offers, which are submitted at the stage of consideration of resolution plan(s) by the CoC, may undermine the process and may reward unscrupulous persons to get back the control of the corporate debtor.

In view of the judgment of the Supreme Court, in Vijay Kumar Jain vs Standard Chartered Bank
[6], the resolution plan(s) submitted by the selected resolution applicant(s) to the RP are required to be provided to the members of the suspended board of directors (which, in most of the cases, include the promoters and/or the members of the promoter group) of the concerned corporate debtor.

Therefore, the erstwhile management, in a way, becomes aware of the terms of the resolution plans put forth by the selected resolution applicant(s). While the RP can take an undertaking from the members of the erstwhile board of directors of the corporate debtor to maintain confidentiality of the confidential information, neither the Code nor the CIRP Regulations prohibit them from using this information to prepare the settlement proposals and offer better terms than the resolution plan(s).

The question as to whether or not a proposal under section 12A should be entertained at the stage of consideration of the resolution plan has been raised before the NCLAT in Vishal Vijay Kalantri vs DBM Geotechnics & Construction Pvt. Ltd. & Anr. One should note that once the Invitation Document is issued by the RP, the interested bidders spend considerable time, cost and efforts in evaluating the potential investment opportunity, conducting due diligence of the corporate debtor etc.

If the promoters are permitted to negotiate with the CoC till the last date of submission of resolution plan(s), this might act as a deterrent for the bidders who are looking at the investment opportunities available under the Code. It is, therefore, necessary to extend the applicability of section 29A to the settlement offers which are submitted beyond a certain stage during the CIRP process so that the promoters, who are otherwise not entitled to submit a resolution plan, do not sabotage the CIRP process by engaging in parallel process to get back the control of the corporate debtor under section 12A.

For any clarification or further information, please contact

Gaurav Wahie
Partner
E: gaurav.wahie@clasislaw.com

Dinesh Gupta
Senior Associate
E: dinesh.gupta@clasislaw.com

Disclaimer: Views expressed in this article are personal views of the authors. For any clarification or further information, please feel free to contact the authors.

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[1] 2017 SCC OnLine SC 1404

[2] 2018 SCC OnLine SC 3154

[3] MANU/NL/0408/2019

[4] 2019 SCC OnLine NCLAT 517

[5] 2018 SCC OnLine NCLAT 692

[6] 2019 SCC OnLine SC 103