This article has been written by Hardik Nanda Sawant pursuing the Certificate Course in Insolvency and Bankruptcy Code from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Ruchika Mohapatra (Associate, Lawsikho).
Section 29A of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code) has emerged as one of the key aspects in determining the Eligibility of the Potential Resolution Applicants in a tedious attempt to save the company in question under the Corporate Insolvency Resolution Process (CIRP). This brought in considerable delays right at the stage of admission of the resolution plans that would come in. The Code, in its originality, at the time of enactment did not have any provision to keep defaulting promoters or their associates out of the process, which would otherwise mean Repeating the mistakes of the Past regimes to save ‘Sick’ companies. This provision was brought forth by subsequent amendments to the law following the recommendations of the Insolvency Law Committee, formed by the Central Government, and various observations in the Landmark Judgements by the Hon’ble Supreme Court of India.
Before Section 29A came to the light, without any specified criteria about the eligibility or disqualification for that matter, any person having an interest in the corporate debtor(CD), any corporate body could participate in the bidding process irrespective of whether he is a promoter, a director, a key management personnel, or any other person associated with the promoter, either directly or indirectly. This would mean the CD or the control of it falling back to the hands of the very people it was supposed to be saved from the process, which would, in turn, the financial institutions take the burden of deep haircuts when it comes to recovery.
Therefore, after numerous consultations with the lawmakers, the Courts, the professionals, this provision was brought about in the Code vide Amendments dated 23/11/2017 and the other one on 6/6/2018, to disqualify those due to whom the corporate debtor stood on the verge of downfall at the cost of various stakeholders’ time, money, efforts.
The Insolvency and Bankruptcy Code was the brainchild of the then Union Finance Minister, Senior Advocate of the Supreme Court, Late Mr. Arun Jaitley, which was introduced in the Parliament on 21st December 2015. It was passed by Lok Sabha (Lower House of the Parliament) on 5th May 2016 and later by the Rajya Sabha (Upper House of the Parliament) on 11th May 2016. The Code received the assent of the President of India on the 28th of May 2016.
This is the Bankruptcy Law of India which consolidated the existing (weak) framework by creating a single law for the purpose. This law/code is the ‘One Stop Solution’ for resolving the insolvency cases in a strict court monitored, time-bound process to bring the defaulting corporate debtor back to its Going Concern Status in a transparent way. This Code gives power to the lenders- the financial institutions who provided loans to the Corporate Debtor, which was declared as the Non-Performing Assets (NPAs) over some time. Therefore, the onus lies with these lenders, depending on the factors such as their exposure to the CD, their expertise and experience with similar cases, the results of the due-diligence conducted on the viability and the pay-back capacity of the entity over the tenure of the loan.
The IBC, 2016 has been instrumental in inculcating the discipline with which the promoters and the boards run the day-to-day affairs of the corporate debtor, emphasizing good corporate governance practices, making them answerable to the authorities for the financial decisions they take in the best interest of the stakeholders. The Code gives the power of the cases under IBC to the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) thereby reducing the burden of the civil courts across the country. The prime objective of the Code is to ensure resolution of the corporate debtor with liquidation only as a matter of last resort and that under no circumstances the law is to be referred to as a recovery mechanism.
- What does it emphasize?
Section 29A of the IBC, 2016 contains the list of Conditions that would disqualify a potential bidder from being a resolution applicant. Section 29A goes a step further in its capacity to effectively prevent the incumbent management to participate in the future of the distressed company all together. Here, we go through the motivations of enacting Section 29A and how it influenced India’s new era of corporate restructuring.
- Criteria of Disqualifications u/s 29A:
There are three layers of Ineligibility and they are as follows:
- Persons acting in Concert: Persons having a common objective of acquisition of the shares or voting rights to gain control over a distressed co. following an agreement, formal/informal, directly/indirectly, to co-operate to gain back the control of the company in question.
- Connected Persons: A promoter, a member of the Board or in control of the resolution applicant; any person who shall be so in the process during the implementation of the resolution plan; or holding/subsidiary/associate company or a related party of a person mentioned above.
- Related Party: Anyone about the defaulting promoter or their spouse; partner in a partnership firm or a trustee in a trust in which the defaulter individual is associated with; a private company in which that individual is a director and holds over the prescribed limit of share capital including family and relatives.
- Importance of this Provision in Indian Context:
This section asserts protection to the creditors of the company by safeguarding them against unscrupulous persons who irrespective of the earlier defaults are trying to reward themselves by taking the system for a ride resulting in the very objective of the resolution process going for a toss. The Resolution Professional has the responsibility to conduct due-diligence u/s 29A of the Code. Adequate due diligence on the prospective Resolution Applicants and their connected persons needs to be conducted efficiently and independently subject to the timeline prescribed by the NCLT. The CoC has been empowered to review the Due diligence report submitted by the Resolution Professional and to decide on approval or rejection of the Resolution Plan.
In the Indian context, this process is necessary to maintain the very objective of the code and to do away with the drawbacks of the previous Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), Lok Adalat & DRT frameworks regimes. There have been cases before IBC where the powerful promoters of defaulting companies used their political connections to derail the process of recovery and notoriously threaten or terrorize the Professional in charge of the Process.
Examples of attacks on the provision of Section 29A of the Code
Following are the case studies in which this provision was challenged over some time since the enactment of the code:
The Supreme Court while dealing with the proposal of JAL to submit a resolution plan for CIRP of Jaypee Infratech Limited (JIL), observed the following:
- JAL is disqualified under Section 29A of the IBC under sub-clauses (c) and (g), as it has an account that has been classified as a non-performing asset for over one year from the date of commencement of the CIRP of JIL and is also a person who has been a promoter or in the management or control of the corporate debtor, who has engaged in a fraudulent transaction;
- JAL (Jaiprakash Associates Limited) also lacks the financial capacity to complete the unfinished projects, as the Reserve Bank of India is seeking to initiate insolvency proceedings against JAL.
- The “de facto” position of person has to be checked as opposed to “de jure” It is important to discover who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for submission of a resolution plan.
- “Acting jointly” does not mean a Joint Venture (JV) necessarily, it is in the sense acting together
- Stage of ineligibility attaches at the time of when the resolution plan is submitted by a resolution applicant.
- “Management” ordinarily vests in the board of directors and includes MD, manager, and officer as per Companies Act, 2013.
- The expression “control”, in Section 29A(c), denotes only positive control, which means that the mere power to block special resolutions of a company cannot amount to control. “Control” here, as contrasted with “management”, means de facto control of actual management or policy decisions that can be or are taken.
- 29A (f) – if a person is prohibited by a regulator of the securities market in a foreign country from trading in securities or accessing the securities market, the disability under sub-clause (i) would attach.
The Key implications of the judgment of the Supreme Court are as follows:
- The distinction between promoters/Management and the Corporate Debtor has been judicially recognized. Displacement of the promoter or the management of the Company in default can now be done relatively quickly to protect the company and its assets.
- The SC has concluded that the IBC is a beneficial legislation and is for the benefit of the Corporate Debtor and therefore the admission of the Company in the Corporate Insolvency Resolution Process cannot be seen from the lens of Traditional proceedings in the matter.
- The SC has acquired a fair and reasonable treatment for Operational Creditors as a requirement for the approval of the Resolution Plans. The SC has provided for the much-needed clarity on what is expected out of the Operational Creditors.
- The SC has also upheld Section 29A in its entirety while going through the list of the related parties specified thereunder who are subject to be tested for the Disqualification under Sec. 29A, to those who have a business connection with the Resolution Applicant and sighted that this will help in increasing the number of the participants in the process. It would also help in streamlining the process of Due-Diligence required by the Resolution Applicant, the Committee of Creditors, and the Resolution Professional u/s 29A compliance as regards the ‘Connected Person’ thereby reducing the costs and timelines of the CIRP Process.
The above judgments do not provide any rational basis for the solutions on such extraordinary circumstances and therefore the stop-gate to the promoters by sec. 29A is getting withered away. After going through the above cases and the time taken by them, it is evident that the IBC has failed to comply with the timeline of 330days as envisaged under the Code read with the rules relating to the same, and this has impacted the confidence of the Investors intending to participate in the Bidding process of such defaulting companies.
- United Nations Commission on International Trade Laws (UNCITRAL)- Legislative Guide on Insolvency Law:
- The Legislative Guide provides a comprehensive statement of the key objectives and principles that should be reflected in a Member Country’s insolvency laws.
- It is intended to inform and assist insolvency law reform around the world, providing a reference tool for national authorities and legislative bodies when preparing new laws and regulations or reviewing the adequacy of existing laws and regulations.
- The advice provided aims at achieving a balance between the need to address a debtor’s financial difficulty as quickly and efficiently as possible; the interests of the various parties directly concerned with that financial difficulty, principally creditors and other stakeholders in the debtor’s business; and public policy concerns, such as employment and taxation.
- Strong and Effective Insolvency Regimes are important for all the States as a means of preventing or limiting financial crises and facilitating rapid and orderly workouts from excessive indebtedness.
- These Legislations can facilitate the orderly reallocation of economic resources from the businesses that are not viable to more efficient and profitable activities, Provide incentives that not only encourage the investors to take up the investments but also encourage the managers of the failing companies to take early steps to address that failure and preserve employment, reduce the costs of businesses and increase the availability of credit across the globe.
- The Legislative guide is divided into four parts:
- Key Objectives of an Insolvency Law, Structural Issues, and the mechanisms available for resolving a debtor’s financial difficulties and the institutional framework required to Support an effective insolvency regime.
- Core Features of an Effective Insolvency Law- Right from commencement of Insolvency Proceedings to Discharge of Debtors and closure of the process. This includes the Standardized Process, In-Process Finance, participation of creditors, and Simplified Requirements for Submission and Verification of Claims, a suggested path to Convert to Liquidation if in case Restructuring Fails and finally the Closure of the Procedure.
- Treatment of Enterprise Groups under the Insolvency Laws – both Nationally and Internationally. This part supplements the above two parts. This part focuses on Co-operation and Coordination, extending provisions based on the Model Law on Cross-Border Insolvency to Group Context.
- Focus on the obligations that might be imposed on those responsible for making decisions w.r.t. the management of the enterprise when I face imminent insolvency or in the case where the Insolvency becomes unavoidable. This is to protect the legitimate Interests of Creditors and other stakeholders and to provide incentives for timely action to minimize the effects of the Financial Distress being experienced by the concerned enterprise.
As far as India’s Position is concerned, India is yet to align its Insolvency and Bankruptcy Code to the provisions of this Model Laws on Insolvency and Cross Border Insolvency. As I write this piece, India is set to adopt the “UNCITRAL Model Law on Cross-Border Insolvency”
International Insolvency Institute Guidelines for Coordination for Multinational Enterprise Groups (2013):
- The International Insolvency Institute (III) aims to promote and advance international insolvency laws, and in particular to support better cooperation in cross-border insolvency cases.
- The Committee chaired by Hon’ble Ralph Maybe has drafted ‘Guidelines for Coordination of Multinational Enterprise Groups’ concluded in 2013 and with an emphasis on ‘Cooperation’ at the very Heart of the Guidelines.
- These guidelines add on to Multinational Enterprise Groups with ‘Operations, Assets and Employees located in more than one country, which has a unified Corporate Governance, either through common or interlocking shareholding or by Contract.’
- The Guidelines consider seven topics and twenty-two points which if applied to by Member Jurisdictions are subject to changes to suit their Domestic Aspects.
- Refer Page 355-356 of the EU Document by the European Law Institute titled “Rescue of Business in Insolvency Law.”
- Insolvency, Restructuring and Dissolution Act, 2018 – Singapore:
- This is a vast and an integrated Act for the City-State of Singapore which inculcates every aspect of the Insolvency Proceedings about the Resolution or Insolvency proceedings against an Individual Debtor, a Partnership Firm, and a Body Corporate and the Prescribed Manner in which these should be carried on with the time constraints.
- This Act read with the relevant provisions of the Companies Act, 2018 of Singapore (Part VII to Part X of the Companies Act, 2018, SG) provides for a wide range of solutions to the instances about the winding-up, Reorganization of a Partnership Firm or Restructuring of a Company registered under the law of the Land.
- Specifically, Part 16 of this Insolvency Law corresponds to the Provisions of the Section 29A of the Insolvency and Bankruptcy Code, 2016 of India as it describes the eligibility of the persons submitting applications for Bankruptcy and the one who is eligible to submit a plan of Resolution to the Court subject to the scrutiny by the Official entitled by the Court to make the decisions to the Best of his/her Knowledge and Public Interest at large.
- This Act of Singapore also takes into consideration the UNCITRAL Model Law for Cross-Border Insolvency right since its Enactment as the law of the land making it a one-stop-shop for all the relevant aspects related to Insolvency and Bankruptcy as a whole.
- Rescue of Business in Insolvency Law – European Law Institute, European Union:
- Since the global financial crisis, insolvency law has been at the forefront of law reform
initiatives in Europe and beyond. The specific topic of business rescue appears to rank top on the insolvency law-related agenda of the EU institutions.
- The economic recession in Europe has faced a rapid growth of insolvencies, clearly highlighting the importance of effective business rescue. More recently the downfall of oil prices and for instance, the problems retail markets face, are other causes for ongoing harm for businesses.
- Procedural Design of a Restructuring and Insolvency Framework:
Distinguishing between three types of Business Rescue Oriented procedures that need to be defined:
- Workout: The Debtor concludes a contract with all the relevant creditors and other stakeholders that contains a solution to the Debtor’s Financial Problems. The Workout is purely a contractual solution, that is no Courts are involved. That is why, these are often referred to as informal, private, or out-of-court workouts.
- Pre-Insolvency Proceedings: Any one of the jurisdictions offers a judicial procedure with the sole purpose of rescuing a business from its difficulties independent of its Formal Insolvency Proceedings. The degree of the involvement of the courts can be either substantial or minimal.
- Formal (Restructuring and Insolvency) Proceedings: Every Jurisdiction provides for the court proceedings that are designated for Insolvent Debtors only. Such proceedings require insolvency tests and involvement of the courts from Day one. These may not be Rescue-oriented but provide for legal instruments to conduct a business restructuring or a going-concern sale of the viable Business parts. Otherwise, interim proceedings are also common, if in case any of the jurisdictions do not open such proceedings.
- Chapter 8.3 of the law puts forth the Criteria for proposing and negotiating a Plan to Rescue the Business which is again in line with that of India’s Eligibility Criteria for the same u/s 29A of the insolvency and Bankruptcy Code, 2016 (as amended from time to time).
This part of the text deviates from ours as it commonly provides the right to the Corporate Debtor itself to present a Resolution plan. Where a Restructuring Plan is the sole purpose of either specific Reorganization proceedings or a plan option in consolidated insolvency proceedings, the debtor here usually owns this right exclusively. Whereas, the only distinguishing law, in this case, is that of France’s which allows for a competing plan from a member of the Creditor’s Committee and empowers the court to decide which plan to Accept. While, in Sweden, the Insolvency Professional has the right to decide between the viable Plans it has received to save the failing Corporate Debtor.
Chapter 8.3.2 in the Document presses for Transparent Negotiations of a plan proposed. Here, The Plan Proponent is responsible for organizing sufficient Creditor support for the Proposal. Negotiations with the Key Stakeholder will normally begin before a plan is formally filed, essentially an out-of-court element of plan negotiations that involve only critical stakeholders, usually major lenders, key suppliers, or employee representatives. These are often confidential, but if successful in establishing required support for the plan, it is filed formally before the adjudicating authority in respective jurisdictions.
Chapter 8.5 puts down the Conditions which would lead to the Confirmation of the Plan so discussed. A Restructuring Plan commonly requires the confirmation or the sanctioning of the Court before putting it into action. While Confirming a Plan, the Court in that Jurisdiction verifies the Following:
- The plan has been accepted according to the underlying applicable rules,
- The Content of the plan meets all the legal requirements, and,
- The Plan is Fair and Equitable against the dissenting Creditors.
Point 8.7 provides for the Recommendations regarding the Right to present plans, the Content of the Plan, The Scope of the Plan and the Protection of the Parties involved, the Secured Creditors, Preferential Creditors, Other operational or unsecured creditors, the stakeholders. This part emphasizes the “No Creditor Worse off” Principle. This is followed by the recommendations on Confirmation standards and the legal requirements to be adhered to. And, finally the particulars on the Implementation, Supervision, Termination of the Plans in question and the Tax implications of the same.
- The Inclusion of the provision of Section 29A which declared the persons responsible for the Sorry State of Affairs of the Corporate Debtor Ineligible and restrained them from submitting Resolution Plans and gaining back the control of the very Corporate Debtor in question. The particulars of this section assert protection to the Creditors of the company by safeguarding them against unscrupulous persons trying to take undue advantage of the procedure which is meant to be carried out in Good Faith and undermine the process with no intention to contribute to the revival of the business.
- It is obvious that the intention behind inserting Section 29A is to restrict those persons from submitting a Resolution Plan who could hurt the entire Corporate Insolvency Resolution Process. This provision would indirectly ensure adhering to timelines for the resolution put forth by the Code which was otherwise being hampered by the loopholes in absence of such a stringent criteria-driven approach.
- It provides for a Diligence Framework enabling the Committee of Creditors to make a proper assessment of the solvency, integrity, and credibility of the resolution applicant before approving a Resolution plan keeping in view the scale, complexity, viability, and feasibility of the resolution plan to avoid entry of unsolicited applicants. The prescription of heavy penalties for the violation of the Code in this regard shall ensure keeping fraudsters at Bay.
- As per the instructions of the Apex Court, this section also allows for the Applicant to file Resolution Plans once it clears its dues to the lenders and shreds the tag of ‘Non-Performing Asset’.
- This provision also helped in filling the gaps in the Law, as the Insolvency Resolution Procedure had become cumbersome adding to the already heavy workload of the Resolution or the Insolvency Professional to verify the background of the Resolution Applicants which may also result in a delay in the process and missing the deadline so fixed by the Adjudicating Authority.
- Due to its stringent qualification criteria, the Code ends up disqualifying the majority of the domestic and international players from participating in the process of reviving the Corporate Debtor which would, in turn, result in the Loss of the already depressed financial value of the Company.
- The Scope of the terms ‘Related parties’ and the ‘Connected Persons’ haven’t been clarified in this provision of the Code.
- One of the plus points of this section is also that the ‘Financial Entity’ have been excluded from the ambit of the ‘Related Party’ in the Code and it also allows limited exemptions to the MSMEs from the application of the same by allowing its promoters to submit a resolution plan provided a proven fact that he is not a Wilful Defaulter in any case.
So, when the Creditors are getting what they want and where the Resolution Plan, made adhering to the Law (the Code), is satisfying the very purpose of revival of the Corporate Debtor, then why to reconsider it and challenge its validity?
- Extending a disqualification to a resolution application owing to inconsistencies in the relationships of the persons may prove to be adverse in that shrinking of the pool of Resolution Applicants. Anyone acting with a common objective of the applicant shall be subject to pass the test laid down in 29A.
- Under Section 29A, the law should clarify that if an NPA account is held only because of the acquisition of the Corporate Debtor under the CIRP, then the disqualifications should be either relaxed for them or exempt them completely sighting the fact that the law was relatively New and that as per the Supreme Court, there is a need to encourage the Industry experience as regards the progress of the Law.
- As far as Clause (h) of 29A is concerned, the intent of the clause could not have been to disqualify every guarantor for the reason of ensuring an enforceable guarantee as it may prove discriminatory.
- Given the wide array of disqualification criteria laid down under section 29A and its applicability to the resolution applicant and the connected persons, in the interest of timely and transparent resolution, the resolution applicant may still be required to submit an affidavit stating that it is eligible to submit a Plan under this provision.
- Note that Section 30(2)(e), which states that the resolution plan must not contravene any provisions of the law for the time being in force will adequately ensure compliance with section 29A of the Code.
The Section 29A of the Insolvency and Bankruptcy Code, 2016 of India laid down a multi-layered and comprehensive standard of disqualification that will ensure exclusion of Bona-Fide Resolution Applicants. The Application of this section may also bar crucial or potential stakeholders to bid for the Revival of the Company. Therefore, a certain amount of leniency by the courts in deciding the issue of qualification is the need of the hour to maximize the Benefits and Objectives of the Code to the Creditors and the Economy as a whole.
As an alternative to the current restrictions, a middle ground could be adopted which would permit the promoters to be able to submit the Resolution Plans like that of the common European practices, but with relevant safeguards in place to ensure that the Lenders make the most out of the Process. This shall also help in protecting the interest of various other stakeholders making the IBC and the CIRP much more economically viable for the promoters and the lenders holding the Code True to its Letter and Spirit.
There must be certain relaxations as suggested by the Insolvency Law Committee and its Report on the same dated 26th March 2018, which are yet to be implemented in the day-to-day proceedings about the CIRPs which are live as I conclude this piece on a highly contentious topic of debate for quite some time. The Ultimate aim of the Legislation is to Revive the Company and avoid Liquidation, maintain Transparency and Ethical requirements and not repeat the mistakes of the previous Regimes for the purpose.
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