The Insolvency and Bankruptcy Code 2016 (‘Code’) aims for resolution of insolvency as opposed to liquidation. The law was framed with the intention to expedite and simplify the process of insolvency and bankruptcy proceedings in India ensuring fair negotiations between opposite parties and encouraging revival of the company by formulation of a resolution plan.
A resolution applicant [See Endnote I ] as originally defined under the Code meant any person who submits a resolution plan [See Endnote II ] to the resolution professional [See Endnote III ]. Thus, a resolution applicant could be any person i.e. creditor, promoter, prospective investor etc. and there was no specific criteria or qualification assigned to who could submit a resolution plan. This lacuna in the law gave an opportunity of backdoor entry to defaulting promoters to submit a resolution plan and acquire assets of the corporate debtor at significantly discounted prices.
Insolvency and Bankruptcy Code (Amendment) Bill 2017
To reduce the chances of likely default brought forth by the abovementioned loophole, Section 29A was added to the Code by the ‘Ordinance of 2017’[See Endnote IV ]. The ‘Ordinance of 2017’ was replaced by The Insolvency and Bankruptcy Code (Amendment) Bill, 2017 (‘IBC 2017’) that gave effect to the amendments introduced in the ordinance with a few changes.
As a consequence of inclusion of section 29A in the Code, persons who have contributed to the defaults of the corporate debtor or are undesirable due to incapacities as specified in the section or are a ’related party' to another defaulting party, are prevented from gaining control of the corporate debtor by being declared ineligible to submit a resolution plan under the Code. This provision asserts protection to the creditors of the company by safeguarding them against unscrupulous persons who irrespective of their earlier defaults are trying to reward themselves by undermining the whole objective of the Code and do not aim to contribute to the revival of the corporate debtor.
While the insertion of Section 29A cured a few gaps in the law under the Code, the insolvency resolution procedure had become complicated as the resolution professional or liquidator had been accorded with an additional responsibility of inspecting the eligibility of resolution applicants putting a strain on the 180-day deadline for completion of the corporate insolvency resolution process.
For instance, during the discussions pertaining to the insolvency of MBL Infrastructure Limited, the committee of creditors unanimously believed that the non-defaulting promoters of the corporate debtor were barred under section 29A from submitting a resolution plan. On the other hand, the resolution professional was of the opinion that they did not fall under the criteria of ineligibility specified under section 29A as they were not defaulters. This led to a lot of confusion and delay and the insolvency process only resumed after the National Company Law Tribunal (‘NCLT’) clarified that the promoters were allowed to submit a resolution plan [See Endnote V ]. Further, the ambit of ineligibility was very wide declaring disqualification of many people due to lack of definition of the term ‘related to’ under the Code. The scope of the term ‘connected person’[See Endnote VI ] defined in the explanation of the section was also very extensive. As a result of the wide scope of ineligibility, many genuine resolution applicants were barred from submitting a resolution plan.
Another contention raised in a plethora of cases at the NCLT was whether section 29A will be applicable prospectively or retrospectively as the same was left unanswered in IBC 2017. This was settled by the NCLT in the insolvency matter of Wig Associates Private Limited [See Endnote VII] (‘Wig Associates’).
In this case, an application of insolvency was filed by Wig Associates as a corporate debtor [See Endnote VIII] under the Code. A resolution plan was submitted by the relative of the director of Wig Associates. NCLT adjudged that the resolution applicant i.e. the relative of the director should be allowed even though he falls under the criteria of ineligibility under Section 29A being a related party to a defaulter under clause (i) of section 29A. NCLT held that since section 29A alters existing substantive and legal rights, it should be applied prospectively. This meant that all resolution plans that were submitted before the ordinance of 2017 was introduced i.e. November 23,2017 will be considered by the committee of creditors to be undertaken for the revival of the company and the resolution applicants who had submitted the resolution plans would not fall under the purview of ineligibility prescribed under section 29A.
IBC 2017 had been highly criticized and required necessary changes and clarifications specifically pertaining to section 29A. In view of this, Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 was introduced which was replaced by the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018 (‘IBC 2018’).
Insolvency and Bankruptcy Code (Second Amendment) Bill 2018
IBC 2018 has modified the eligibility criteria and clarified the extent and applicability of the law under Section 29A. The exemptions that could be resorted to by resolution applicants to escape ineligibility are reduced and limited under IBC 2018 and the ambit of section 29A has become wider with the term ‘related party’[See Endnote IX] being defined under the Code. The definition of ‘related party’ in relation to an individual is extensive bringing a large number of people in the ineligibility criteria. Moreover, in determining the connected persons of an individual where he/she is married, the relatives of the spouse of the individual will also be included in the scope of the term ‘connected persons’ for the purpose of section 29A.
Additionally, IBC 2018 has excluded ‘financial entity’ [See Endnote X] from the purview of ‘related party’ in the Code. It also provides for limited exemptions to the micro, small and medium sector enterprises (‘MSMEs’) from the application of section 29A and allows its promoters to submit a resolution plan provided he is not a wilful defaulter [See Endnote XI] as concerns with respect to third party interest in submitting a resolution plan for the MSMEs was recognized.
The insolvency proceedings of Ruchi Soya Industries Ltd. is a noteworthy example showcasing the wide ambit of ineligibility that could be used by other bidders to challenge the eligibility of the resolution applicants. In this case, the committee of creditors declared Adani Wilmar as the highest bidder and a resolution plan was being finalised. Meanwhile, a claim of ineligibility was raised by Patanjali Ayurved, the second highest bidder against Adani Wilmar contesting its eligibility under Section 29A of the Code. The peculiarity of this case is that Adani Wilmar is claimed to be ineligible because the spouse of the managing director of Adani Wilmar is the daughter of a defaulting promoter. Patanjali Ayurved has approached NCLT challenging the decision of the committee of creditors approving the bid of Adani Wilmar. NCLT is yet to decide on the case[See Endnote XII]
Further, the Supreme Court in the case of Chitra Sharma and Ors. v. Union of India and Ors [See Endnote XIII] and other connected matters i.e. the Jaypee Infratech Case/Homebuyers case [See Endnote XIV] has clarified and put an end to the questions raised with respect to application and scope of section 29A. While dealing with the eligibility of Jaiprakash Associates Limited (‘JAL’), the parent company of Jaypee Infratech Limited as a resolution applicant under section 29A, the Supreme Court has observed that JAL and other promoters are disqualified from submitting a resolution plan as they fall within the scope of the section 29A and therefore are ineligible. It has described insertion of section 29A as a ‘plugging loophole’ and has ruled that strict adherence to Section 29A is mandatory and that wilful defaulters shall not be permitted to participate in the corporate insolvency resolution process.
It is important to note that section 29A laid down a multiple layered and comprehensive standard of disqualification that will exclude bona fide resolution applicants. The application of the section might also disbar crucial stakeholders to bid for the revival of the company. Therefore, certain amount of leniency by the courts in deciding the issue of disqualification is the need of the hour to maximise the objectives of the Code.