Disqualification Under Section 29A – A restrictive provision made quandary?

The Insolvency and Bankruptcy Code, 2016 (“Code”) as originally enacted did not contain any disqualification criteria for a resolution applicant (“RA”) from submitting a resolution plan. Ineligibility criteria were brought into the Code through the insertion of Section 29A vide the Insolvency and Bankruptcy (Amendment) Ordinance dated November 23, 2017. Subsequently, on January 18, 2018, the aforementioned ordinance took the shape of the Insolvency and Bankruptcy Amendment Act, 2017 (“Amendment Act”)[1]. Section 29A disqualifies the RA if inter alia either the RA or persons acting jointly or in concert with the RA or any connected person either qua the RA or the person acting jointly or in concert with the RA suffers from any of the infirmities stipulated in the section. The Statement of Reasons and Objects of the aforesaid Amendment Act, mentions that the objective of these ineligibility criteria is to preclude persons who by their misconduct have contributed to the defaults of the corporate debtor, so that such persons do not regain control on the corporate debtor at the cost of the creditors during the resolution and the liquidation stage[2].

The nature of disqualifications under Section 29A of the Code imposes four layers of ineligibility. First layer of ineligibility is where the RA itself is ineligible; second layer of ineligibility is where a “connected person” is ineligible; third layer of ineligibility is being a “related party” of connected persons; and fourth layer of ineligibility is where the RA is acting jointly/in concert with a person suffering from first layer/second layer/third layer ineligibility, becomes ineligible. The opening lines of Section 29A refer to a de facto control as opposed to a de jure control, this is a typical instance of a “see through provision” so that one is able to arrive at persons who are actually in “control”, whether jointly, or in concert, with other persons. The nature of ineligibilities in clauses (a), (e) and (f) is reflected in the speech of Late Mr. Arun Jaitley, wherein he stated while moving the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 that, “For instance there is a clause with regard to an undischarged insolvent who is not eligible to apply; a person who has been disqualifies under the Companies Act as a director cannot apply and a person who is prohibited under the SEBI Act cannot apply. So these are statutory disqualifications.”

The Supreme Court in Arcelor Mittal India[3] had clarified that eligibility of the RA must be determined at the time of submission of the resolution plan and if there is a RA who can run the corporate debtor as a going concern, then every effort must be made to ensure that this is made possible.

In the same spirit, the Insolvency Law Committee vide its report dated March 26, 2018 (“ILC Report”) suggested that the ambit of Section 29A must be narrowed down by limiting the disqualifications. For instance, the ILC Report recommends that the term PAC under Section 29A results in exclusion of a wide gamut of persons because in practice, it is unclear whether the term ‘connected person’ in Section 29A(j) applies only to the RA or even to the PAC with such person as well. In terms of the ILC Report, if the latter interpretation is taken, then Section 29A would, (i) exclude a plethora of persons who are related to the RA even remotely; and (ii) ARCs, banks and AIFs which are specifically excluded from the definition of “connected person” under proviso to Section 29A(j), could get caught within the scope of PAC along with such person. Such interpretation of this provision may shrink the pool of potential RAs. Accordingly, the ILC Report recommended deleting the reference of PAC in the lead-in statement of Section 29A.

In the same spirit of limiting the scope of such wide disqualification, the Supreme Court[4] in Swiss Ribbons[5] curtailed the scope of Section 29A by clarifying that relatives mentioned in will be termed “connected” only if they are related with the business activity of the RA.

Recently, in the matter of MBL Infrastructure Limited (“MBL”)[6], the non-defaulting promoters of MBL submitted a resolution plan. Their resolution plan was approved on the basis that Section 29A is not intended to disqualify bona fide persons. This issue is now pending before the Supreme Court[7] which will finally rule on whether MBL’s promoters are eligible to be a successful RA which could enable them to regain control and management of MBL.

In conclusion, it can be said that, though the expansive language of the aforesaid section has potentially shrunk the pool of potential RAs, the objective behind introducing such disqualification criteria cannot be faulted. The uncertainties in respect of Section 29A will gradually evolve over time through judicial pronouncements which would finally lead to a more workable and robust set of rules concerning ineligibility criteria for RAs.

Authors:
Dhirajkumar Totala, Partner
Harshita S Chaudhary, Associate

Footnotes:

[1] Section 1(2) of the amendment act stated that it would be implemented with retrospective effect from November 23, 2017.
[2] Recently, on January 6, 2020 the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 were amended to insert a proviso to Regulation 2B(1) which states that persons who were ineligible under Section 29A of the Code to submit a resolution plan will now be barred at the stage of liquidation from being part of any compromise or arrangement under section 230 of the Companies Act, 2013.
[3] ArcelorMittal India Private Limited v Satish Kumar Gupta and Ors, in (C.A Nos.9402-9405 of 2017), order dated October 4, 2018.
[4] Swiss Ribbons v. Union of India (AIR 2019 SC 739), order dated January 25, 2019.
[5] The introduction of Section 29A to disqualify persons connected to the corporate debtor came up for constitutional scrutiny before Supreme Court in the matter of Swiss Ribbons. The constitutionality of Section 29A was upheld by Supreme Court and it was held that Section 29A is based on a justifiable legislative policy choice that if a person is unable to service its own debt then the person is unfit to resolve other stressed asset
[6] RBL Bank Ltd v. MBL Infrastructure Ltd in CA [IB] No.543/KB/2017, NCLT (Kolkata bench) order dated December 18, 2017. The corporate insolvency resolution process of MBL started from March 30, 2017 vides NCLT (Kolkata bench) order. In this matter the CoC unanimously believed that the non-defaulting promoters were barred under Section 29A(c) and Section 29A(h) of the Code. On the other hand, the resolution professional opined that they did not fall under Section 29A as they were bona-fide promoters. This led to an inordinate delay and the insolvency process only resumed after the National Company Law Tribunal clarified that the promoters of the corporate debtor were allowed to submit a resolution plan.
[7] MBL was admitted insolvent on March 30, 2017 and is currently pending adjudication before Supreme Court.

Date: August 31, 2020