Insolvency laws were at the nascent stage in India, when the Parliament enacted a legislation named as Insolvency and Bankruptcy Code, 2016. It aimed to protect the interest of a person/company on insolvency/bankruptcy and for improving ease of doing business in India.
Most of the matters on IBC are dealt with by the National Company Law Tribunal (NCLT) though SC is vested with an extraordinary constitutional jurisdiction under Article 142 of the Constitution of India to grant justice in any cause or matter pending before it. This jurisdiction is not available to other Tribunals or the High courts. However, the Supreme Court of India has been called multiple times to discuss the issues arising out of matters resolved under the IBC.
Section 29A is the most controversial section of IBC. It was amended multiple times to remove the errors. Section 29A talks about the conditions in which a person becomes ineligible to become a resolution applicant. This section has been discussed many times in the courts of law to interpret the section precisely and remove the irregularity and errors present in it.
Section 29A states that-
“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—
Here the expression ‘acting jointly or in concert’ signifies two or more persons acting together as a group. In the case of ARCELOR MITTAL INDIA (P.) LTD. V SATISH KUMAR GUPTA, the Supreme Court laid down that, The expression “acting jointly” in the opening sentence of Section 29A cannot be confused with “joint venture agreements”. It does not mean that certain persons have got together and are acting “jointly” in the sense of acting together.
(a) is an Undischarged Insolvent;
An Undischarged Insolvent is a person/company that hasn’t gone through the Insolvency resolution proceedings. In layman’s terms, it means, a person/ company who has filed the petition of bankruptcy at the court of law and is still going through the insolvency proceedings is known as an undischarged Insolvent.
(b) is a Wilful Defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949);
As per the Master Circular issued by RBI (under the Banking Regulation Act, 1949), A Willful Defaulter is a borrower – when he does not meet his obligations even when he can do so, not utilizes the funds for a specific purpose they have been availed for, siphons the funds neither for the purpose, they were availed for nor have it in another form of assets, dispose of the property or assets which were given for securing the loan without the knowledge of the lender, misrepresentation and falsification of reports, and fraudulent transactions.
(c) 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 a 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 elapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:
This simply means that when an insolvent entity is unable to settle overdue amounts including interest and charges relating to the account before the submission of the resolution plan for one or more years, whose accounts are classified as Non-Performing Assets is ineligible to be a resolution applicant. In the judgment of Arcelor Mittal India Private Limited vs. Satish Kumar Gupta & Ors. the apex court interpreted this clause and analyzed the definition of “control” and observed that the expression ‘control’ in Section 29A(c), denotes only positive control.
Justice Nariman further quoted that:
“Section 29A(c) is a see-through provision, great care must be taken to ensure that persons who are in charge of the corporate debtor do not come back in some other form to regain control of the company without first paying off its debts.”
Thus, it’s clear that if any person wishes to submit a resolution plan acting jointly or in concert with other persons, classified as NPA(person or other persons happens to either manage or control or be promoters of the corporate debtor) and whose debts have been not paid off for a period of at least one year before the commencement of CIRP, becomes ineligible to submit a resolution plan.”
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:
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.
(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];
Any person who has been convicted for an offence punishable with imprisonment for two years or more prescribed under the 12th Schedule to the IBC. A total of 25 laws are mentioned in the above-mentioned schedule consisting of Money laundering, Foreign Exchange, Pollution control norms, tax, Anti-corruption, and Securities market regulations.
Or for seven years or more under any law for the time being in force. This disqualification would be applicable to both Indian Laws and Foreign Laws. The disqualification will not apply to a person in a case where it has already been two years or more from his release from imprisonment.
Furthermore, the ineligibility is not applicable to “connected persons”, this definition has a broad spectrum including the holding company, subsidiary company, associate company or any related party of the proposed acquirer, its promoters, the acquirer’s board as well as the proposed management of the corporate debtor or its promoters. However, this condition would not be valid on a resolution applicant who is a financial entity and is not a related party of the corporate debtor.
(e) is disqualified to act as a director under the Companies Act, 2013 (18 of 2013):
Under section 164(1) of Companies Act, 2013, a director is disqualified if he turns out to be of unsound mind, Insolvent, His/her case is pending before the court on insolvency or unsoundness of mind, he/ she has been sentenced for 6 months of imprisonment for an offence involving moral turpitude, an order has been passed by the court/tribunal declaring him disqualified, he didn’t pay his calls on shares, he/she has been convicted of offences dealing with related party transactions(under section 188 of Companies Act, 2013), he/ she is prohibited from acquiring Director Identification Number.
(f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;
Under Section 3 and 4 of Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003, every person is prohibited to buy, sell or deal in securities in a fraudulent manner, to defraud on the issue of securities, listed or proposed to be listed on a recognized stock exchange, dealing in securities fraudulently or by an unfair trade practice, etc. ( Mentioned in Section 3 and 4 of the Act).
(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;
This ineligibility takes effect when promoter(or in the management or control) of a corporate debtor is involved in Preferential transactions/Undervalued transactions/ Extortionate credit transactions/ Fraudulent transactions.
This sub-clause talks about a person who has positive control over a corporate debtor, only he/she can make the dynamic decisions stated in sub-clause (g), such as entering into preferential, undervalued, or fraudulent transactions. Therefore it’s clear that the expression ‘management or control’, works on the principle of ‘Noscitur a sociis‘. In simple words, it’s a rule used by courts in interpreting legislation by interpreting the ambiguous words and understanding them with the words with which it is associated in the context.
(h) has executed a guarantee in favor 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 5 and such guarantee has been invoked by the creditor and remains unpaid in full or part;
This ineligibility occurs when a person takes a guarantee for a corporate debtor who is Insolvent. This clause was discussed in the case of RBL BANK LTD. VS. MBL INFRASTRUCTURES LTD and it was held that- in the cases where a creditor has not invoked the guarantee or made a demand, the guarantee should not be prohibited. It means that no default in payment of dues has been made and therefore cannot be covered under sub-clause (h) of the Code. Therefore this sub-clause has to be understood in the context of the objectives of the Code and Ordinance in general and not in their regular meaning or in the context of enforceability of the guarantee as a legal and binding contract.
(i) [is] subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or
In common parlance- any ineligibility arising from the above-mentioned clause in (i) will be effective under any law in India or outside the borders of India.
(j) has a connected person not eligible under clauses (a) to (i).
As mentioned above, the term “connected persons” has a very broad ambit including the holding company, subsidiary company, associate company or any related party of the proposed acquirer, its promoters, the acquirer’s board as well as the proposed management of the corporate debtor or its promoters. However, this condition would not be valid on a resolution applicant who is a financial entity and is not a related party of the corporate debtor. This explanation has been done by the apex court in the judgement made in Arcelor Mittal India Private Limited vs. Satish Kumar Gupta & Ors.
The affair has certainly not ceased and the question that is still in the heads is what’s going to be next? The Code is still at the initial stage and will need more interpretation before it gradually settles down. Lets just hope for better laws to be made and implemented for the development of the country.
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