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CRITICAL ANALYSIS OF SECTION 29A OF INSOLVENCY AND BANKRUPTCY CODE 2016

Author: Lakshay Mehta, V year of B.A.,LL.B. from Ideal School of Law, Ip university


What is Insolvency and Bankruptcy Code?

The Insolvency and Bankruptcy Code 2016, provides for the time bound process to resolve the insolvency. Whenever there is a default in the reimbursement, then the creditors gain control over the corporate debtor’s assets and needs to take the decision required to solve the insolvency. So, the resolution process may be initiated by either creditor or debtor. This code is such an effective mechanism for the lenders, suppliers and different creditors to ensure payment of the loan.


What was the objective behind Insolvency and Bankruptcy Code?

The sole objective behind implementing Insolvency and Bankruptcy Code 2016 was that to provide the balance between the stakeholders of company i.e. they can enjoy availability of credit and such loss which creditor needs to bear on the account of the default. The basic reason behind implementing the Insolvency and Bankruptcy Code was that to establish the Insolvency and Bankruptcy Board of India as the regulative body for the Insolvency and Bankruptcy Law.


What is Section 29 A?

The Section 29 A of the Insolvency and Bankruptcy Code 2016 was introduced through the Insolvency and Bankruptcy Amendment Act 2017. It essentially restricts certain person for submitting the resolution plan throughout the corporate insolvency process. It restricts the wilful defaulter, undischarged insolvent or the promoter of the company among others are then restricted from becoming resolution applicant and prohibits them from submitting the resolution plan.


Reason behind implementation of Section 29 A

The main reason behind the introduction of Section 29A in the Insolvency and Bankruptcy Amendment Act 2017 is that there was nothing being mandated by the law which might prohibit the ineligible person under to make an application under the Section 230 of the Act. So, before the Section 29 A, every individual or the body corporate will participate in the bidding process of the corporate debtor that is being subjected to the Corporate Insolvency Resolution Process irrespective of whether or not he’s the initial promotor, director or the person that is connected to them either directly or indirectly. This basic loophole within the Insolvency and Bankruptcy Code 2016 helps the person who by their misconduct or the deceitful motive that directly results in the default of the corporate debtor and the person can again regain the control of the Corporate Debtors by basically bidding in the significant discounts, while making the banks suffering so much losses/haircuts.


Applicability of Section 29 A

The application needs to be filed by the resolution applicant before the National Company Law Tribunal by seeking the permission to grant the approval of the resolution plan and to held that he’s not being disbarred or he is not being disqualified under the provisions of the Section 29 A of the Insolvency and Bankruptcy Code 2016. So, the Section 29 is basically applicable to all whether the person is a sole resolution applicant or jointly with the other persons and he is not violating any provisions in regard to the Section 29 A.


What is Resolution Plan?

Under the Section 5(26) of the Insolvency and Bankruptcy Code 2016 it is a plan which is being proposed by any person. For the Insolvency Resolution of the corporate debtor it must be going concern which is in accordance with the Part II.


What is resolution applicant?

The Resolution Applicant means a person who individually or being jointly with any person, submits the resolution plan to the resolution professional which is pursuant to the invitations made under the clause (h) of the sub section (2) of the Section 25.


Who is ineligible to be resolution applicant?

According to the Section 29 A of Insolvency and Bankruptcy Code,2016 the following persons are basically ineligible to be resolution applicant:

A. A person is found to be undischarged insolvent i.e. he is unable to repay his debts and as long as he is unable to repay debts, he is an undischarged insolvent.

B. A person is a wilful defaulter i.e. despite having sufficient means to make payment of his pending dues still he refuses to comply with demand made by guarantor.

C. He is basically convicted for the offence which is punishable and liable for imprisonment for 2 years or more.


Also, the person who has been disqualified to act as the director under the Company Act 2013 or is prohibited by the SEBI for accessing the security market, are ineligible to become resolution applicant.


Four Layers for the Ineligibility under Section 29 A of IBC

1. The person himself is found to be ineligible.

2. The person connected to the ineligible person is also ineligible.

3. The person related to the ineligible person is also ineligible.

4. The person acting jointly or in concern with the ineligible person.

(As per the Section 240 A of the Insolvency and Bankruptcy Code 2016, the provisions of the clauses (c) and (h) will not be applicable to the resolution applicant with respect to the corporate insolvency process of the micro, medium and any small enterprises.)


Case Laws

1. RBL Bank Limited vs MBL Infrastructures[i]: In this case while interpreting the clause (h) of the Section 29 A of the Insolvency and Bankruptcy Code 2016 saying that the object of the clause (h) of the Section 29 is not to disqualify the promoters as the class for submitting the resolution plan. The basic reasoning behind insertingthe clause (h) was to exclude such guarantors from offering of their resolution plan on the account of their antecedent which may adversely affect the resolution process. Thus, the National Company Law Tribunal held that one has to consider that whether guarantee has been invoked or the guarantor has made any default. If none of the elements which were discussed above then there will be no case for the disqualifications for the defaulter,


2. JaypeeInfratechv/s Axis Bank Limited[ii]: This case has clarified the questions regarding the application and the scope of the section 29 A of the Insolvency and Bankruptcy Code 2016. In this case while dealing with the eligibility of the Jai Prakash Associates Limited, the parent company of the Jaypee Infratech Limited as the resolution application under the Section 29A Insolvency and Bankruptcy Code. The Supreme Court held that the Jai Prakash Associates have been disqualified from submitting the resolution plan as they fall within scope of section 29 A thus, they are ineligible. Therefore, the strict adherence to the Section 29 A is mandatory so the wilful defaulters shall not be permitted to participate in the corporate insolvency resolution process.


3. Standard Chartered Bank DBS Bank Ltd Vs Ruchi Soya Industries Ltd[iii]-: In this committee of the creditors (COC) has declared the Adani Wilmar has the highest bidder therefore the resolution plan has been finalized. After being dissatisfied by the decision of the Committee of the Creditors, so the claim of the ineligibility under the Section 29 A of the Insolvency and Bankruptcy Code 2016 has been raised by the Patanjali Ayurveda (second bidder). Therefore, in this case the Adani Wilmer is claimed to be ineligible because spouse of the managing director of the Adani Wilmer is the daughter of the defaulting promotor. Thus, Patanjali Ayurveda has approached the National Company Law Tribunal challenging the decision of the committee of the creditors for appointing the Adani Wilmar.


Conclusion

The Section 29 A has laid down the multiple layers and comprehensive standard of the disqualification that will also exclude the bona fide resolution applicants. This section might also disbar the crucial shareholders trying to bid for revival of the company. Thus, there must be certain amount of the leniency to be provided by the courts in deciding the disqualification to maximise the objectives of the Insolvency and Bankruptcy Code.


As prior to the inclusion of the Section 29 A there was no bar on the eligibility of the resolution applicant so any person can become the resolution applicant. So, this led to the open-ended platform for the defaulters to bid for the assets undergoing the corporate insolvency process by taking undue advantage of this provision which would defeat the vary purpose of the Insolvency and Bankruptcy Code,2016. Thus, in order to curtail the same, the Section 29 A was introduced, so Section 29 A not only restricts the promoters but also the people who are related to the promoter. The basic reasoning behind the introduction of the Section 29 was to restrict those persons from submitting the resolution plan which could cause the adverse effect on the entire corporate insolvency process

[i](1) C.A.(I.B.) No.543/KB/2017 [ii] (2) Civil Appeal No 677-6797 of 2019 [iii](3) MA (Diary No.5747/2019) in CP(IB)1371 & 1372(MB)/2017