INELIGIBILITY OF RESOLUTION APPLICANTS UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016
Resolution Applicant, individually or jointly with other persons, submits Resolution Plan to the Resolution Professional for revival and resolution of the Corporate Debtor. In the original code there was no provision regarding ineligibly of the Resolution Applicant to submit Resolution Plan. Experience with the implementation of the act showed that the very promotors who were responsible for the decline and downfall of the Corporate Debtor were submitting Resolution Plan and trying to reclaim the Corporate Debtor with huge hair cut to the creditors. This was against the spirit of the Code.
In Synergy Dooray1, Resolution Plan was submitted by Synergies Casting Ltd, which was a Related Party to the Corporate Debtor. The Resolution Plan has proposed repayment of 5% of the Financial Debt to the Financial Creditors. This Resolution Plan was approved by the NCLT. An appeal was filed by one of the aggrieved Financial Creditor Edelweiss Asset Reconstruction, which was dismissed by the NCLAT.
Because of such cases, need was being felt for amendment in the Code and restrain such Resolution Applicant from submitting Resolution Plan who has contributed in decline and downfall of the Corporate Debtor.
Section 29A was introduced vide Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017. Subsequently, 29A was inserted in the Code vide the Insolvency and Bankruptcy Code (Amendment) Act, 2017 with retrospective effect from 23rd November, 2017.
In light of Section 240A, Section 29 (c) and (h) are not applicable to Resolution Applicant in respect of Corporate Insolvency Resolution Process or Pre-Packaged Insolvency Resolution Process of any, micro, small and medium enterprises.
The Supreme Court held Section 29A constitutionally valid in Swiss Ribbons2.
Section 29A of the Code is reproduced as under;
29A. Persons not eligible to be resolution applicant. – A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person—
(a) is an undischarged insolvent;
(b) is a willful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949);
(c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:
Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non performing asset accounts before submission of resolution plan:
Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.
Explanation I.- For the purposes of this proviso, the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date.
Explanation II.— For the purposes of this clause, where a resolution applicant has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from the date of approval of such resolution plan by the Adjudicating Authority under this Code;
(d) has been convicted for any offence punishable with imprisonment –
(i) for two years or more under any Act specified under the Twelfth Schedule; or
(ii) for seven years or more under any law for the time being in force:
Provided that this clause shall not apply to a person after the expiry of a period of two years from the date of his release from imprisonment: Provided further that this clause shall not apply in relation to a connected person referred to in clause(iii) of Explanation I;
(e) is disqualified to act as a director under the Companies Act, 2013 (18 of 2013):
Provided that this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I;
(f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;
(g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code:
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 a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction;
(h) has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part;
(i) is subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or (j) has a connected person not eligible under clauses (a) to (i).
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.
Provided further that the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date;
Explanation II—For the purposes of this section, “financial entity” shall mean the following entities which meet such criteria or conditions as the Central Government may, in consultation with the financial sector regulator, notify in this behalf, namely: —
(a) a scheduled bank;
(b) any entity regulated by a foreign central bank or a securities market regulator or other financial sector regulator of a jurisdiction outside India which jurisdiction is compliant with the Financial Action Task Force Standards and is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding;
(c) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor, where the terms shall have the meaning assigned to them in regulation of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999 (42 of 1999);
(d) an asset reconstruction company register with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(e) an Alternate Investment Fund registered with Securities and Exchange Board of India;
(f) such categories of persons as may be notified by the Central Government.
ANALYSIS OF SECTION 29A
A person is not be eligible to submit a Resolution Plan, if such person, or any person acting jointly or in concert with such person falls under Section 29 (a) to (j) of the Code. It is pertinent to mention that according to Section 3 (23) the term ‘person’ includes an Individual, a Hindu Undivided Family, a Company, a Trust, a Partnership, a Limited Liability Partnership, any other entity established under a statute and a person resident outside India.
Before proceeding further, it will be profitable to understand definition of “Financial Entity” for the purpose of Section 29A. Financial entities have certain relaxation from rigours of ineligibility of Resolution Applicant under Section 29A. Ineligibility under Section 29 A (c) is not applicable to financial entities. Ineligibility under Section 29 (A) (j) (iii) is also not applicable to financial entities. Financial entity has been defined under Section 29A as
(a) a scheduled bank;
(b) any entity regulated by a foreign central bank or a Securities Market Regulator or other Financial Sector Regulator of a jurisdiction outside India which jurisdiction is compliant with the Financial Action Task Force Standards and is signatory to the International Orgnisation of Securities Commissions Multilateral Memorandum of Understanding;
(c) Any investment vehicle, registered foreign institutional investor or a foreign venture capital investor, where the terms shall have the meaning assigned to them in regulation 2 of Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999;
(d) an asset reconstruction company registered with the Reserve Bank of India under Section 3 of the SARFAESI Act, 2002,
(e) an alternate investment fund registered with SEBI; and
(f) such categories of persons as may be notified by the Central Government.
For easy comprehension of the Section 29A, persons, who are ineligible to become Resolution Applicant, can be divided in four categories.
First category of persons are those persons who have failed to maintain financial discipline and have defaulted in repayment of loan amount. Such persons are categorised under Section 29A (a), (c) and (h).
Section 29A (a) covers such persons who have defaulted in repayment of their debt and as yet has not been discharged by competent court.
Section 29A (c) covers such persons, who at the time of submission of the Resolution Plan has an account which has been classified as Non-Performing Asset (NPA), or who at the time of submission of Resolution Plan is managing or controlling the Corporate Debtor having an account which has been classified as Non-Performing Asset (NPA) or who at the time of submission of Resolution Plan is promotor of Corporate Debtor having an account classified as Non-Performing Asset (NPA). At least one year should have elapsed since classification of Non-Performing Asset (NPA) as per guidelines of RBI under Banking Regulation Act, 1949 or guidelines of a Financial Sector Regulator issued under any other law for the time being in force till insolvency commencement date.
Ineligibility under 29A (c) is not applicable to such Resolution Applicant, which is financial entity and is not Related Party to the Corporate Debtor.
According to Explanation I to Section 29A (c) disability of a Related Party is not applicable to Financial Creditors, which is covered under definitions of financial entity regulated by Financial Sector Regulator, if such Financial Creditor of the Corporate Debtor is a Related Party only on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares prior to the insolvency commencement date.
According to Explanation II to Section 29A (c), ineligibility will not attach to such account if the same has been acquired pursuant to a prior Resolution Plan approved under this code for a period of three years from the date of approval of such Resolution Plan by the Adjudicating Authority.
Such person will become eligible if payment of all overdue amount with interest and charges relating to Non-Performing Asset (NPA) is paid before submission of Resolution Plan.
The Supreme Court in Arcellor Mittal3 has interpreted Section 29 A (c) as under:
54. The interpretation of Section 29A(c) now becomes clear. Any person who wishes to submit a Resolution Plan, if he or it does so act jointly, or in concert with other persons, which person or other persons happen to either manage or control or be promoters of a Corporate Debtor, who is classified as a non-performing asset and whose debts have not been paid off for a period of at least one year before commencement of the Corporate Insolvency Resolution Process, becomes ineligible to submit a Resolution Plan. This provision therefore ensures that if a person wishes to submit a Resolution Plan, and if such person or any person acting jointly or any person in concert with such person, happens to either manage, control, or be promoter of a Corporate Debtor declared as a non-performing asset one year before the Corporate Insolvency Resolution Process begins, is ineligible to submit a Resolution Plan. The first proviso to sub-clause (c) makes it clear that the ineligibility can only be removed if the person submitting a Resolution Plan makes payment of all overdue amounts with interest thereon and charges relating to the non-performing asset in question before submission of a Resolution Plan. The position in law is thus clear. Any person who wishes to submit a Resolution Plan acting jointly or in concert with other persons, any of whom may either manage, control or be a promoter of a Corporate Debtor 82 classified as a non-performing asset in the period abovementioned, must first pay off the debt of the said Corporate Debtor classified as a non-performing asset in order to become eligible under Section 29A(c).
Section 29A (h) covers such persons who have executed a guarantee on behalf of the Corporate Debtor in favour of creditor and insolvency proceeding has been initiated against such Corporate Debtor by such creditor. Further, guarantee has been invoked by such creditor and despite the invocation such guarantee, outstanding amount has not been paid. The Supreme Court has an occasion to consider cause (h) in the matter of MBL Infrastructures Ltd4. The Supreme Court observed as under:
The word “such creditor” in Section 29A(h) has to be interpreted to mean similarly placed creditors after the application for insolvency application is admitted by the Adjudicating Authority. As a result, what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process. This is subject to further compliance of invocation of the said personal guarantee by any other creditor. We have already said that the concern of the Court is only from the point of view of two entities viz., corporate creditors and the Corporate Debtors. Any other interpretation would lead to an absurdity striking at the very objective of Section 29A, and hence, the Code. Ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the Corporate Debtor. Exclusion is meant to facilitate a fair and transparent process.
Second category of persons are those persons, who have been disqualified under any other law due to misconduct. Such persons have been categorised under Section 29A (b), (d), (e), (f) and (g).
Section 29A (b) covers such persons who are willful defaulters in accordance with the guidelines of Reserve Bank of India issued under the Banking Regulation Act, 1949.
Section 29A (d) covers such persons, who have been convicted for any offence punishable with imprisonment for two years or more under any act specified under twelfth schedule under the Code or for seven years or more under any other law for the time being in force. Section 29A does not apply to a person after expiry of a period of two years form the date of his release from imprisonment.
Section 29A (e) covers such persons who are disqualified to act as a director under the Companies Act, 2013.
Section 29 (f) covers such persons who have been prohibited by the Securities and Exchange Board of India from trading in securities or accessing to security markets.
Section 29A (g) covers such persons who have been a promotor or in the management or control of a Corporate Debtor in which a Preferential Transaction, Undervalued Transaction, Extortionate Credit Transaction or Fraudulent Transaction have taken place and in respect of which an order has been made by Adjudicating Authority. Section 29A(g) does not apply if a Preferential Transaction, Undervalued Transaction, Extortionate Credit Transaction or Fraudulent Transaction have 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 a court, and such Resolution Applicant has not otherwise contributed to such transactions.
Third category of ineligible person are those who are covered under corresponding sections to Sections 29A (a) to (h) under any law in a jurisdiction outside India. Such category of persons have been covered under Section 29A (i).
Fourth category of ineligible persons to submit Resolution Plan are those who are connected persons to ineligible persons mentioned under Section 29A (a) to (i). Such persons have been covered under Section 29A (j). Under Section 29A (j), if a person is ineligible to become a Resolution Applicant, a connected person to such person will also become ineligible to become a Resolution Applicant.
Connected person has been defined under Explanation I to Section 29A (j).
Sub-clause (i) to Explanation covers such person under definition of connected person, who is promotor, or in management and control of the Resolution Applicant. Thus, if a person is ineligible to become Resolution Applicant under clause (a) to (i), its promotor or manager will also become ineligible to become Resolution Applicant.
Sub-clause (ii) to Explanation covers such persons under definition of connected person, who will be promotor or in management or control of the business of the Corporate Debtor during the implementation of the Resolution Plan.
Sub-clause (iii) to Explanation covers such persons under definition of connected person, who is holding company, subsidiary company, associate company or Related Party to persons covered under clause (i) and (ii).
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- Edelweiss Assets Reconstruction Company Ltd. Vs. Synergies Dooray Automative Ltd. & Ors; CA(AT) No. 169-173/2018)
- Swiss Ribbons Pvt. Ltd. Vs. Union of India; W.P. (Civil) 99/2018
- Arcellor Mittal India Pvt Ltd Vs. Satish Kumar Gupta & Ors; Civil Appeal No. 9402-9405/2018)
- Bank of Baroda & anr Vs. MBL Infrastructure Ltd.; Civil Appeal No. 8411/2019
Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.