- Important Judgment under Section 29A
Abstract: In Bank of Baroda & Anr. v MBL Infrastructures & Ors., the Apex Court ruled that the bar u/S. 29A(h) of the IBC very much applies to the personal guarantor (who wishes to submit a Resolution Plan) whose guarantee has been invoked by any of the creditors of the corporate debtor, notwithstanding the fact whether the same creditor put into motion the machinery of CIRP.
Do you know what makes the Insolvency and Bankruptcy Code, 2016 (IBC), different from its predecessors? It is a fact that IBC recognised the time value of the money. It accommodated the idea that when a business defaults, it needs to be admitted into the corporate insolvency resolution process (CIRP) as early as possible and with every passing day, the money that creditors can recover plummets and capital & labour remains locked in.
IBC addressed these concerns by two methods. Firstly, it places strict timelines on the CIRP and secondly, it reduces the scope of judicial discretion (so that courts don’t get involved in commercial decision-making). But judicial discretion has, in most cases, been proven a tool for furthering the legislature’s will. Also, justice can’t be sacrificed on the altar of expeditiousness and expediency. Thus, there is a need to balance the legislature’s will, judicial discretion & the parties’ interest, and the Supreme Court’s judgment in the matter of Bank of Baroda & Anr. v MBL Infrastructures & Ors. is an epitome of that.
In this judgment, the Apex Court answered 2 critical questions as follows:
- If the creditors invoke the guarantee of a guarantor, is such guarantor eligible under Section 29A(h) of the IBC to submit a Resolution Plan?
- Whether the words “such creditors” in Section 29A(h) is confined to those who initiate the CIRP or all the creditors?
Facts of the case
- Mr Anjanee Kumar Lakhotiya’s (Lakhotiya) company MBL Infrastructures Ltd (MBL) secured loans from a syndicate of banks and thereafter failed to pay them back.
- A few banks in the consortium invoked the personal guarantees Mr. Lakhotiya provided in exchange for credit facilities to MBL and issued notice u/S. 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act).
- Then, RBL Bank made an application u/S. 7 of the IBC before the National Company Law Tribunal (NCLT), Kolkata to initiate CIRP against MBL and it was ordered to be admitted. The Resolution Profesional (RP) received two Resolution Plans one of which was of Mr. Lakhotiya’s. It got sanctioned by CoC.
- Then in 2017, the “Insolvency and Bankruptcy IBC (Amendment) Ordinance, 2017” was rolled out adding S. 29A to the IBC.
- The Committee of Creditors (“CoC”) held extensive meetings to ascertain the effects of this amendment vis-a-vis Mr. Lakhotiya’s position to submit a Resolution Plan.
- Due to the ambiguity of the situation, Mr. Lakhotiya filed an application before NCLT praying for a declaration that he is eligible for submitting the u/S. 29A(c) & (h). The NCLT ruled in the favour of Mr Lakhotiya. (By now, the 180+90 days of CIRP had expired).
- This NCLT order was challenged before NCLAT but the appeal was later withdrawn due to a change in the situation (the Resolution Plan got 78.5% votes, crossing the mandate of S. 30(4)). NCLAT allowed withdrawal without liberty to challenge the same order.
- Thereafter, the NCLT sanctioned the Lakhotiya’s Resolution Plan holding that there is a marked difference between extension and exclusion and therefore, the requirements u/S. 12(1) of the IBC would not be applicable in the present case as there are pending proceedings with interim orders (of NCLAT which directed the NCLT to not act on the Resolution Plan until its final order).
- An appeal was made to NCLAT. The same was rejected because the Resolution Plan was approved with 78.50% votes and had roots in the techno-economic report for its viability and feasibility. Thus, the NCLT decision pertaining to Lakhotiya’s eligibility u/S. 29A to submit a Resolution Plan as finalised and that NCLAT “cannot sit in appeal over the decision of the adjudicating authority or the CoC in the absence of any apparent discrimination”.
- The aforementioned Order of NCLT confirmed by the NCLAT stands assailed before the Apex Court.
Grounds of Appeal before the Apex Court
- Mr. Lakhotiya (a promoter of the MBL/corporate debtor), was ineligible to submit a Resolution Plan u/S. 29A(h) of the Code, as multiple personal guarantees executed by him in favour of several creditors of MBL, were invoked before the CIRP commenced.
- The prevailing law on the CIRP application’s date has to be seen and thus, the disqualification u/S. 29A gets attracted. Similarly, not only S. 29A(h) but also S. 30(4) needs to be interpreted accordingly.
- The Resolution Plan was approved after the expiry of the CIRP period (270 days). And since there is a clear infraction of S. 12, the aforementioned Orders are liable to be set aside.
Ratio of the Verdict:
1. Section 29A(h): Ineligibility from the Point of View of the Resolution Process
Reinforcing the core purpose of the IBC, that is, to facilitate the process of rehabilitation and revival of the entities who failed to repay the debt with the involvement of the creditors in the entire process, the Court held that there are two prime actors in the CIRP, the CoC and the corporate debtor and thus, there can’t be a third-interest than beside theirs.
The objective of S. 29A of the IBC is to filter out unprincipled and unwarranted elements from the resolution process and to block persons of particular categories who can bring down the credibility of the resolution exercise due to their disqualification u/S. 29A.Reliance was placed on Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd., to hold that the CoC in approving the Resolution Plan shall take into account the “feasibility and viability of the Plan” and the order of distribution u/S. 53(1) of the IBC and that the CoC can’t sanction a Resolution Plan barred u/S. 29A.
2. Equal Rights for all Creditors of the Same Category
Defenestrating respondents’ contention that S. 29A(h) needs to be interpreted literally to the extent that a personal guarantor(in this case, Lakhotiya) is not allowed to submit a Resolution Plan only when the creditor (RBL Bank) initiating the CIRP has invoked a personal guarantee executed in favour of that creditor by the resolution applicant (personal guarantor, that is Lakhotiya) and as RBL Bank didn’t invoke any personal guarantee against Lakhotiya at the time of making application to the NCLT u/S. 7 of the IBC that Lakhotiya is somewhat exempted from the application of S. 29A(h). The Court emphasised that ineligibility needs to be construed from the perspective of the resolution process.
It can’t be held that there can be ineligibility will flow from one creditor but not from the others and the manner of invocation can’t be a consideration for the same. Appropriate consideration needs to be paid to the part of the provision that bars a person liable vis-a-vis “the personal guarantee executed in favour of a creditor, remains unpaid in full or in part for the amount due from him, upon invocation”.
3. Exclusion, not Extension
Deciding upon the limitation, the Bench agreed with the Order of NCLT confirmed by NCLAT. Taking note of the earlier rounds of litigation with the interim orders, the Supreme Court ruled that NCLT was right in condoning and excluding the 106 days delay by exercising its jurisdiction u/S. 12(3) of the IBC. Hence, the Supreme Court put the seal of approval on the NCLT’s distinction between extension (it is applicable when NCLT’s order is appealed before NCLAT) and exclusion (it is exercised by the NCLT).
4. Peculiarity of Facts
It was the admitted case that Mr. Lakhotiya had executed personal guarantees which were invoked by financial creditors even before the CIRP application was filed. Therefore, the Supreme Court opined that the bar of S. 29A(h) of the IBC will certainly be attracted and the Resolution Plan Lakhotiya submitted shouldn’t have been entertained. Thus, the Bench held that NCLT and NCLAT were incorrect in declining the appellant’s contentions on the basis that “the earlier appeals was withdrawn without liberty, the issue qua eligibility cannot be raised for the second time”, especially when the appellant herein was not even a party to the NCLT’s decision in the first instance.
5. Ramification of Possibly Commercially Unsound Interference
Even though Mr. Lakhotiya was marked ineligible and thus his Resolution Plan as not maintainable, the Apex Court held that a lot of time has gone by, and the required percentage of votes has been secured by Lakhotiya’s Resolution Plan. The same is in implementation since 2018. The interest of 23,000 shareholders, the future of thousands of employees, and many under-progress projects of public importance that are undertaken by MBL had to be borne in mind by the Apex Court.
Being considerate of the above factors unique to the case at hand, reiterating the core purpose of the IBC to make the defaulter be again financially buoyant, and being cognizant of the fact that dissenting creditors’ interest won’t suffer under the Lakhotiya’s Resolution Plan as it allows them to get back the liquidation value of the credit limits, the Supreme Court abstained from interfering the CIRP process.
The Apex Court admitted that the NCLT and NCLAT were incorrect in their decisions, having regard to the “commercial wisdom” of the CoC and the ramifications of setting aside these decisions, the Supreme Court disposed of the appeal and all the applications. No costs are imposed. However, the unequivocal precedent that is set from this case is that a personal guarantor, whose guarantee has been invoked by any creditor (regardless of the fact whether the same creditor initiated CIRP or not), will be barred u/S. 29A(h) from submitting Resolution Plans.