Persons Not Eligible To Be Resolution Applicant - Section 29A - IBC
Author: LawSphereX
Category: Corporate & Insolvency
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PERSONS NOT ELIGIBLE TO BE RESOLUTION
APPLICANT: SECTION 29A - IBC
Mahesh Parimi, Jagarlamudi Chandramouli College of Law (JCCL), Guntur
ABSTRACT
Section 29A of the Insolvency and Bankruptcy Code, 2016, serves as a gatekeeping provision that restricts ineligible persons, including defaulting promoters and connected parties, from submitting resolution plans during the Corporate Insolvency Resolution Process (CIRP). Introduced to uphold the integrity of the resolution process, it ensures that those responsible for a corporate debtor’s financial distress do not regain control. This paper analyses the legislative intent, judicial interpretations, layered structure of ineligibility, and practical limitations of Section 29A. It concludes by highlighting the need for a more nuanced and balanced application to protect both the resolution process and stakeholder interests.
Keywords: Insolvency and Bankruptcy Code, Section 29A, Corporate Insolvency Resolution Process, Resolution Applicant, Disqualification, Promoters, Connected Persons, Related Party, Resolution Professional, Economic Viability, Clean Slate Principle.
INTRODUCTION
The objective of the Insolvency and Bankruptcy Code (IBC) is to endeavour to resolve a corporate debtor (CD) going through a Corporate Insolvency Resolution Process (CIRP), rather than liquidating it. The option of liquidation is only considered as a final resort available to the stakeholders. The procedure to resolve a corporate debtor was included in the CIRP. After an invitation for “Expression of Interest” by the Resolution Professional (RP), the Prospective Resolution Applicants, who are interested in taking over the corporate debtor, will express their interest in resolving the CD, with the RP.
Now it is the role of the RP to filter out all the prospective resolution applicants, who are not eligible to be resolution applicants under Section 29A, and to disallow the disqualifying applicants, the RP also needs to make sure that the prospective resolution applicants are complying to all the other requirements as may be applicable under the IBC. NEED FOR SECTION 29A Section 29A was inserted through the Insolvency and Bankruptcy Code (Amendment) Act,
2018. Taking effect retrospectively from November 23, 2017. Before the incorporation of this
provision, no specific eligibility criteria were prescribed for resolution applicants, anyone who is competent to contract may make an application for the resolution of corporate debtors. The lack of governing rules regarding the eligibility to submit a resolution application detrimentally affected the basic objective of the IBC i. e. to resolve the corporate debtor as a going concern, which in turn affected the rights of the creditors and other stakeholders. Before the inclusion of Sec 29A, the defaulting promoters of corporate debtors were eligible to submit a resolution application to resolve corporate debtors. The eligibility of promoters, defaulters, and other low to no credible persons would detrimentally affect the working of the code i. e. to change the promoters or management under whom the corporate debtor was in this situation in the first place.
The lack of restrictive provisions might also be used as a tool for promoters and their relatives or related parties and connected persons to gain back the corporate debtor at a discounted price along with an added advantage of a clean slate principle i. e. exclusion of existing claims and liabilities against the corporate debtor, as the haircut was taken by the creditors and other stakeholders. LEGISLATIVE INTENT The intention of the Parliament in making this inclusion was to make sure that the promoters, who are the reasons for this position of the corporate debtor in the first place, shall not be allowed to manage or control the corporate debtor anymore and in any way.
The legislative intent was not just to restrict promoters but also other non-credible and defaulting or disqualified persons from taking control of the corporate debtor, as the probability of them defaulting in implementing the resolution plan was very high. The legislative intent was made clear and unambiguous by extending this restrictive provision to other similar actions such as - a) The restrictive provisions extend to potential buyers of the business of CD, where such CD is under liquidation process and the liquidator proposes to sell the business on a going concern basis.
b) These provisions extend to potential buyers of individual assets of the CD, provided that, the liquidator makes such sale as part of the liquidation process or the sale of such asset by a secured creditor by virtue of his security interest, where the secured creditor opted to realise his security interest as per Sec 52 of IBC. c) These provisions also extend to any person who enters into a scheme of compromise or arrangement with the CD under Section 230 of the Companies Act 2016. All the specified actions above shall comply with the restrictive provisions under Section 29A. The requirement for such actions to adhere to the provisions of Sec 29A shows the intention of the legislature to disallow the defaulting promoters, persons with no credibility and disqualified persons to take over or take part in the corporate debtor either directly or indirectly.
LITERAL INTERPRETATION OF THE STATUTE The language of the statute states that a person shall not be eligible to submit a Resolution Plan if such person or any other person acting jointly, i. e. both acting as one, or in concert, i. e. persons with similar intentions or objectives, with such person. As enumerated in clause (c) of Sec 29A a person who has an account or an account of a person for which such person is a promoter or in management or in control, classified as an NPA and at least a period of one year has lapsed from the date of such classification till the commencement of CIRP of CD. Provided that the person will be eligible if such a person makes payment of the due amount which was priorly classified as NPA. Provided further that nothing in this clause shall apply for a resolution applicant where such applicant is a financial service provider and not a related party to CD.
The definition of an NPA refers to a debt overdue for a period exceeding 90 days. If such classification exists for one year or more, then the promoters and management of the defaulting company will become ineligible to submit a resolution plan. The objective of the legislature that brought this restrictive provision into force is to restrict the promoters from regaining control of the CD. A resolution applicant for an MSME will not be ineligible even if they are in control of an account that has been classified as an NPA for over a year. There is no need of intention for such default and a person holding an NPA account is not considered as a willful defaulter.
A “willful default” needs to be accompanied by the siphoning of funds or disposal of assets given as security to the creditor to defraud such creditor, or a default despite having the capacity to honor obligations towards the creditor. Clause (d) of Sec 29A stipulates that a person who has been convicted for any offence punishable with imprisonment for two years or more under any act specified under the 12th schedule or punishable with imprisonment of seven years or more under any other law. Provided that this will not apply if a period of two years has lapsed from the time of acquittal of such person. The intention behind dividing the threshold of punishment based on the variation in applicable laws is to identify the culpability of the mind of the applicant based on relevance to this particular situation.
To make it clear, a lot of offences are punishable with more than two years but it is not the intent of the legislators to disqualify the prospective resolution applicant for commission of every petty offence which is irrelevant in judging the intention and credibility of the prospective resolution applicant. The relevant laws to judge the intention of the offender to defraud the creditors are incorporated in a schedule and all other laws are referred to in general. As this clause is personal in nature, it will not be applicable to connected persons of the prospective resolution applicant. Under clause (g), any person who is a promoter or in the management or control of a corporate debtor in which preferential, undervalued, an extortionate credit or a fraudulent transaction has taken place in respect of which an order has been passed by the AA, is not eligible.
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 court and such person not otherwise contributed to any of those transactions. Clause (h) stipulates that any person who has been a guarantor where the guarantee has been invoked by the creditor and remained unpaid either in part or in full, then such guarantor is not eligible to submit a resolution plan. This condition is closely linked to the CIRP as it involves the non-payment of dues or defaults, which set the IBC’s machinery in motion.
The true intent and object of the legislature behind the insertion of Clause (h) of Section 29A is that personal guarantors of Corporate Debtor, whose guarantees have been invoked and remain unpaid, face inherent ineligibility as they are considered defaulters.
A person who has a connected person not eligible under any of the clauses of Sec 29A is not eligible to submit a resolution plan, “connected persons” means - a) A person who is a promoter or in management or control of resolution applicant b) A person who shall be the promoter or in management or control of CD during the implementation of the resolution plan c) The holding company, associate company, subsidiary company to related party of the persons referred in (a) & (b) A financial service provider regulated by a financial sector regulator, not being a related party, is not ineligible to submit a resolution plan and a financial service provider being a related party solely on the basis of conversion of debt into equity pursuant to a debt restructuring scheme or through conversion of convertible debt, is also not ineligible under clause (j) of Section 29A.
JUDICIAL SCRUTINY In Bank of Baroda v. MBL Infrastructures Ltd1, the Supreme Court (SC) examined the provisions of Section 29A clause (h). The SC’s verdict brought to light the complexities of Section 29A. In its analysis the SC, emphasising a detailed statutory interpretation while referring to a previous judgement RBI & Ors v. Peerless General Finance2, stated that "The interpretation must depend on the text and context. If the text is the texture, context is what gives the colour. Neither can be ignored.... No part of a statute and no word of a statute can be construed in isolation.... ". The principles established in this decision served as a cornerstone for various other subsequent judgements of the SC. In the case of Chitra Sharma v.
Union of India3, Jaypee Associates Ltd (JAL), the parent company of Jaypee Infratech Ltd (JIL) applied to be a resolution applicant for the resolution of JIL. The Supreme Court observed that the promoters were disqualified to be resolution applicants within the ambit of Sec 29A. The SC held that adherence to section 29A is
1 2022 SCC OnLine SC 48
2 1992 (2)SCC 343
3 Civil Appeal No. 5185 of 2024
mandatory and a willful defaulter is disqualified from participating in the CIRP. It emphasised that the defaulting promoters who contributed to the financial distress of the CD should not benefit from the resolution process. In Arcelor Mittal India Pvt Ltd v. Satish Kumar Gupta4, the issue was whether the resolution applicants circumvented the disqualification under Sec 29A by divesting their investment in entities with NPAs after the CIRP had begun, the SC held that the provisions applied to those who own or control NPAs at least a period of one year from the date of such classification and till the commencement of CIRP of CD, it further stated that divesting investment to avoid disqualification under sec 29A was an attempt to undermine the intent of the law. In RBL Bank Ltd v. MBL Infrastructures Ltd.
5, the AA took a view that the guarantor to a corporate debtor would be ineligible to be a resolution applicant under this provision only if the guarantee provided by such guarantor has been invoked by the creditor in whose favor such guarantee was provided. If the guarantee has not been invoked by the creditor at the time of making the resolution application then such guarantor was not barred by this provision to become a resolution applicant. In Swiss Ribbons vs. Union of India6, the Supreme Court upheld the constitutional validity of Sec 29A. While affirming its validity, the Court also narrowed the ambit of "related parties" to ensure that only those genuinely connected to the disqualification criteria would be barred, thus striking a balance between legislative intent and equitable considerations. In JR Agro Industries Pvt. Ltd. v. RP Swadisht Oils Pvt.
Ltd7, the petitioner, who is a resolution applicant, appealed against the decision of the Resolution Professional to reject their Resolution Plan. In the arguments before the Adjudicating Authority the RP stated that the petitioner was disqualified under Section 29A(c),(e)&(J), due to the petitioner’s 43% equity ownership in JR Organics Ltd. , which made JR Organics an associate company of the petitioner as per Explanation (iii) of Section 29A. The National Company Law Appellate Tribunal upheld the decision of the National Company Law Tribunal, affirming JR Agro's disqualification u/s 29A(c), (e) &(j). In the case of Arun Kumar Jagatranka v. Jindal Steel & Power Ltd. 8, the Supreme Court
4 [2018] 12 S.C.R. 362
5 (2018) ibclaw.in 41 NCLT
6 [2019] 3 S.C.R. 535
7 (2018) ibclaw.in 19 NCLT
8 (2021) ibclaw.in 46
observed that Sec 29A prevents individuals involved in the mismanagement of the Corporate Debtor from re-entering the resolution process. The restrictive provisions u/s 29A aim to ensure that those responsible for the corporate debtor’s distress should not be a part of the resolution process. Allowing such ineligible individuals to submit resolution plans would contradict the fundamental purpose of Sec 29A. LAYERS OF INELIGIBILITY Sec 29A was incorporated as a restrictive provision to govern the eligibility requirements for prospective resolution applicants to submit a resolution application. A thorough understanding of this provision makes it clear that there are four layers of ineligibility criteria.
1. The first layer pertains to instances where an individual person is ineligible
2. The second layer, wherein the ‘connected person’ is ineligible
3. The third layer, where the ‘related party’ of a connected person is ineligible
4. The fourth layer, where the person acting jointly or in concert with any other person in
the first, second, or third layers above The ineligibility criteria as divided into four layers was a general understanding of the law and no express stipulation was made in the IBC regarding the same. LIMITATIONS The number of persons applying to resolve a corporate debtor was already low and the incorporation of disqualifying provisions will further reduce the quantum of prospective resolution applicants which in turn deteriorates the qualitative aspect of such resolution plans, as there is low to no direct competition. The extension of these provisions to the scheme of compromise or arrangement under Section
230 of the Companies Act 2013, makes no sense. As it is expressly provided in the company
law, various resolutions and approvals from the creditors and members and approval from NCLT are mandatory, the corporate debtor gets the approval of both creditors and NCLT in the existing procedure under the Companies Act which is similar to the procedure prescribed under IBC. Further, there is no need to extend the provisions of section 29A to compromise or arrangement, as what is happening under Sec 230 of the Companies Act is just corporate restructuring and no claim is getting extinguished or reduced in value. The genuine promoters and related parties who wish to resolve the corporate debtor were barred from doing so with the incorporation of these restrictive provisions. The definitions of ‘related party’ and ‘connected persons’ are extensive and bring a large number of persons under ineligibility criteria.
The excessive workload on the Resolution Professional to evaluate all the prospective resolution applicants whether they comply with provisions of sec 29A or not, is a timeconsuming activity and will affect the objective of IBC i. e. to provide timely resolutions.
CONCLUSION
The main object of the IBC is to resolve the corporate debtor rather than to liquidate, but the restrictive provisions under sec 29A are to the contrary of such object, as they disqualify the prospective resolution applicants from making an application to resolve the CD. In another viewpoint it can be construed that the object of the IBC was not just merely to resolve the CD, but to make sure that such resolution was beneficial and not detrimental to the interest of creditors and other stakeholders, on such an interpretation, the provisions of sec 29A are not contrary to the objects of IBC. The strict adherence to these provisions might affect the achievability of the objectives of IBC.
In order to uphold the economic viability, the legislature shall consider providing some room for genuine applicants who are related parties or promoters and a certain amount of leniency by the courts in interpreting these restrictive provisions is the need of the hour.