The Indian Parliament enacted the landmark Insolvency and Bankruptcy Code, 2016 (Code) on May 28, 2016. One of the primary objectives of the Insolvency and Bankruptcy Code, 2016 (the “Code”) is to facilitate the adoption of a resolution plan for the corporate debtor.
The Code was introduced amid an alarming rise in nonperforming loans (NPLs) in the Indian banking industry and to address a highly fragmented and delay-prone legal regime relating to insolvency and stressed debt resolution. Since its introduction, the Code has undergone two rounds of amendments with the Government of India introducing ordinances followed by legislative amendments in November 2017 and June 2018, in light of the judicial pronouncements and industry experience.
Significantly, Section 29A was incorporated in the Code in November 2017, to curb the attempts by the recalcitrant promoters of insolvent companies to regain control of the company leaving creditors with a massive haircut.
Today, the majority of litigation initiated under the IBC relates to Section 29A. The Section provides extensive disqualifications criteria for resolution applicants enlisting those who shall not be eligible to submit a resolution plan under the IBC. The resolution plan is to serve as a benefit to not only the creditors but also to the already stressed corporate debtor. The intention behind inserting Section 29A is to restrict those persons from submitting a resolution plan who could have an adverse effect on the entire corporate insolvency resolution process. This would also aid in adhering to the timelines outlined under IBC which were otherwise being hampered due to the exploitation of the loopholes in the bidding process.
It has been seen in recent times that the Adjudicating Authority in its few decisions has permitted the promoters to submit their resolution plan after the company has been declared insolvent. Although, such decisions were highly praised by many scholars as it safeguarded the revival of the defaulting entity, however, authors verily believe that this will subsequently dilute the intent and purpose of section 29A and will ultimately defeat the objective of this code.
Need for Section 29A
Section 29A was introduced in order to curtail a bar on the eligibility of the resolution applicant. Section 29A is a restrictive provision, specifically lists down the persons who are not eligible to be resolution applicants. Section 29A in its entirety not only restricts promoters but also the people related/connected with the promoters. However, the first version of sec. 29A was a little too rigid, and hence washed-out way too many categories from being resolution applicants. Thus, to solve the problem a streamlined version of section 29A was introduced vide Notification dated 6th January 2020. Section 29A is now also relevant to the sale during liquidation, as well as sale outside the liquidation process, and participation in a scheme of arrangement during liquidation processes.
Nevertheless, Section 29A has excessively enlarged the scope of disqualification to the extent of drastically reducing the prospective resolution applicants based on what could be labeled as generalized criteria for disqualification wherein it does not differentiate between a genuine applicant and one with antecedents. A similar view was expressed by the National Company Law Tribunal (“NCLT”) in the matter of RBL Bank Ltd v. MBL Infrastructure Ltd wherein it was expressed that it cannot be the intention of the legislature to disqualify the promoters as a class but to rather exclude those class of persons who may affect the credibility of the resolution process given their antecedents.
Upon commencement of the resolution process under the Code, the Board of Directors of the company stands immediately suspended and its powers and rights are vested in and exercised by the Insolvency Professional. Also, while the directors are entitled to attend the meetings of the Creditors Committee, such directors have no voting rights and neither are their recommendations binding on either the resolution professional or any member of the Creditors Committee.
However, recently the NCLT, Mumbai Bench, in a matter of Wig Associates Private Limited gave a ruling that completely disregarded the wordings of Section 29A by allowing the resolution plan offered by an applicant who was related to the director(s) the company of Wig Associates which had applied to Section 10 of IBC, triggering CIR Process against itself in August 2017. It appeared, at that time that Bank of Baroda, being the sole financial creditor and Wig Associates reached a one-time settlement with Mr. Mahindra Wig for settlement of outstanding amounts.
To comply with the provisions of IBC, Mahindra Wig offered a resolution plan which was approved by Bank of Baroda, which was later submitted following an Expression of Interest (EOI) floated in April 2018, after the IBC Amendment Act, 2018/Ordinance was passed.
Need to encourage restructuring rather than liquidation
The Insolvency and Bankruptcy Board of India (IBBI) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Under the amendments introduced to the liquidation process regulations, ineligible persons are now barred from being part of any compromise or arrangement at the stage of liquidation.
Furthermore, a secured creditor who chooses to sell secured assets independently also cannot sell the same to a person who is ineligible under the IBC. This has been introduced to specifically overrule the decisions passed by some NCLTs, whereby it was held that no bar operated on the sale of secured assets to the ex-promoters of the Corporate Debtor if such sale is carried out by a secured creditor under Section 52 of the IBC.
Since many believe that genuine promoters will become ineligible and there will be no competition between acquirers/ bidders and promoters and due to which creditors will not receive adequate consideration. Owing to the uproar created by the Ordinance, the government is considering to revisit blanket restrictions provided under the ordinance and is expected to announce certain relaxations to the ‘harsh’ eligibility requirements for the bidders (i.e. the resolution applicants).
After the moratorium period commences, the RPs take charge of the debtor company with the sole objective of protecting its assets and the fundamental operations. It is a one-man show that runs the affairs of the debtor company. The amendment has been introduced to fill in the gaps in the insolvency law in India. It clarifies the position of the promoters and management of the corporate debtor in the process of insolvency and liquidation. It removes the contradiction between IBC and the Act.
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