Read time: 12 minutes
Inhouse credit: Editor: Shantanu Rawat
Last updated: 21/10/2021
Synopsis: The resolution process has been substantially altered due to the introduction of Section 29A in the Insolvency and Bankruptcy Code. This article discusses the long debated topic of eligibility criteria of a resolution applicant.
The Insolvency and Bankruptcy Code, 2016 (“the Code”) was drafted with an objective of providing a time-bound resolution mechanism while maximizing the value of assets held by entities undergoing resolution process. The purpose of the Code was resolution rather than recovery unlike other prevailing debt recovery legislations at the time. Such resolution mechanism envisages seeking of resolution plans from prospective resolution applicants.
As per the original text of the Code as appearing under Section 5(25), before the Amendment Act 8 of 2018 (w.e.f. 23/11/2017), a ‘resolution applicant’ meant any person who submits a resolution plan to the resolution professional. The Code never stipulated any qualification criteria for such resolution applicant which becomes a major loophole utilised by the erstwhile promoters of entities undergoing resolution process to bid as resolution applicants and suggest a way forward for revival of such entities. This was widely criticised on the ground that the Code allows successful bids being made by such persons who were once responsible for the downfall of these entities.
To curb such misutilisation, an amendment vide the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 was carried out through which Section 29-A was introduced to specify such categories/classes of persons who are ineligible to be a resolution applicant. Simultaneously, the definition of resolution applicant was amended vide Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“2018 Ordinance”) to include a “person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25”.
Section 29-A of the Code, being in the nature of a restrictive provision, does not guarantee that any person not falling under such negative list shall be qualified to submit a resolution plan. As per Section 25(h) of the Code, such prospective resolution applicant should also fulfill the criteria laid down by the resolution professional with the approval of the Committee of Creditors (“the CoC”) to be able to bid for and submit its own resolution plan. The said Section has been further amended by the 2018 Ordinance which was based on the recommendations set out in the Report of the Insolvency Law Committee issued in March, 2018 (“ILC Report”), narrowing the scope of disqualification criteria so as to allow genuine and credible resolution applicants from bidding, thereby negating the previous impact.
List of disqualifications prescribed under Section 29-A: Way too broad?
Persons, whether acting individually or jointly or in concert with any other person, are not eligible to submit a resolution plan if -
The below mentioned persons have been excluded from the purview of the aforementioned disqualification -
However, Explanation I explicitly excludes those financial entities who by virtue of being a financial creditor would have been a related party to such corporate debtor but would not be considered so if such financial entity has acquired shares solely on account of conversion or substitution of debt equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.
The 2018 Ordinance under Explanation II also seeks to squarely define the term ‘financial entity’ to broadly cover a scheduled bank, an asset reconstruction company, an alternate investment fund, an investment vehicle, registered portfolio investor, any entity regulated by a foreign central bank or securities market regulator in a jurisdiction outside India and is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding.
Additionally, this disqualification is exempted to be applicable for such persons post the expiry of two years from the date of release from the imprisonment and to categories of persons referred to under (iii) of the Explanation to Section 29-A of the Code (dealing with the scope and ambit of connected person) which includes a holding company, subsidiary company, associate company or related party of a person referred to clauses (i) and (ii) of the Explanation.
Before the amendment, such disqualification was a blanket ban on those persons who have been convicted for any offence punishable with imprisonment for two or more years without classifying or specifying the nature or type of offences. The interpretation of Section 29A(ii) of the Code was put to test in the matter of State Bank of India v. Electrosteel Steels Ltd., CA (IB) No. 277/KB/2018/CA (IB) No. 271/KB/2018/CA (IB) No. 281/KB/2018 in CP (IB) No. 361/2017 which would be discussed in detail in the next chapter. Even after incorporating the ILC Report’s recommendations vide the amendment, there still remains a grey area as to the issue of applicability of Section 29-A(d) of the Code to only corporate persons or whether it will apply to individuals as well.
However, this shall not be applicable for the aforementioned classes of transactions that took place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under the IBC, or a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to such categories of transactions. The exception so stated herein was inserted by means of an amendment through the 2018 Ordinance.
Further, as per the newly introduced Section 240(A) of the Code, the disqualification concerning NPA and guarantee, the same shall not be applicable to such resolution applicants who submit resolution plans in respect of a corporate debtor which may be treated as MSME enterprise under the Micro, Small, and Medium Enterprises Development Act, 2006.
Interpreting Section 29A through the experience of NCLT, Kolkata: the case of SBI v. Electrosteel Steels
In the case of Electrosteel Steels, eligibility of Vedanta Limited (subsidiary of Vedanta Resources Plc) being the highest H1 bidder to submit resolution plans was challenged by Renaissance Steel India (P) Ltd., (RSIPL), under Section 29-A(d), (i) and (j) of the Code. RSIPL being the fourth highest unsuccessful bidder, contended that Konkola Copper Mines (KCM) which was also a subsidiary entity of Vedanta Resources Plc, based out of Zambia had been convicted under various provisions of Environmental Protection and Pollution Control Act in Zambia. NCLT Kolkata Bench adjudged that since Vedanta Limited was also a subsidiary of Vedanta Resources Plc (like KCM being a subsidiary as well), hence, it was indeed a ‘connected person’ to KCM under Section 29-A(j) of the Code.
The larger question before the Bench was whether or not KCM is convicted for any offence punishable for imprisonment for 2 years or more and hence ineligible as per Section 29-A(d) of the Code.
While interpreting the concerned Section of 29-A(d), the NCLT took reference to the definition of ‘person’ as appearing under Section 3(23) of the Code to observe that since the definition of ‘person’ included both ‘corporate person’ and a ‘natural person’, the provisions of Section 29-A(d) of the Code squarely cover a company and its directors or officers who, if were convicted, for an offence punishable under the purview of the said Section, shall render Vedanta ineligible. Moreover, an offence punishable with imprisonment and an offence punishable with imprisonment or fine was differentiated basis the rationale provided by the Supreme Court in its judgment in Standard Chartered Bank & Ors. v. Director of Enforcement and Ors., (2005) 4 SCC 530. It was reasoned that since only statutory fines had been imposed on KCM for the violation of the concerned laws, it was found guilty of an offence punishable with imprisonment or fine and not of an offence punishable with imprisonment as contemplated under the Code. Additionally, none of the officers or Key Managerial Personnel (KMPs) had been punished nor KCM had been found as a habitual offender. In light of the aforementioned grounds and findings, it was held that Vedanta was not affected by the disqualification so stated under Section 29-A(d) of the Code.
Though, this judgment is of little relevance post the amendment carried out through the 2018 Ordinance, by virtue of which the provision now entails a list of offences (as detailed in the Schedule XII of the Companies Act, 2013) which can, in turn, make any resolution applicant ineligible duly incorporating the changes as suggested under the ILC Report. However, this judgment is crucial when we seek to find an interpretation of Section 30(3) of the Code which mandates that the resolution professional to present to the CoC such resolution plans which confirm to the statutory conditions specified under Section 30(2)of the Code. As regards who can consider the objections raised by prospective resolution applicants, the NCLT was of the opinion that while a resolution professional is duty bound to do so, such objections shall also required to be independently considered and evaluated by CoC basis perusal of all requisite documents. With time, it shall be seen whether the same approach will be taken by other NCLTs as well or not.
While as we see in the Electrosteels Steels case, the ambit of Section 29-A of the Code as originally introduced was quite exhaustive and fairly unclear which gave way to unprecedented amount of litigations by prospective resolution applicants challenging the eligibility of the successful bidders on one of the grounds specified in Section 29-A of the Code.
As pointed out earlier, the 2018 Ordinance more or less has replicated the recommendations enlisted out in the ILC Report, the incorporation of specific schedule to capture all the nature/class of offences under Section 29-A(d) of the Code brings clarity as to which offences are covered under the scope of the sub-Section and thereby removes the ambiguity therein. Such enormous challenges may only decrease with time when there remains an established jurisprudence consciously evolved through various measures.
Though with the amendments, it can be very well deduced that the tone of the Section has been changed from being suggestive to prescriptive, however there are a lot of other issues which still remain unresolved and unaddressed at the moment. That being said, considering that the insolvency and bankruptcy regime under the Code is fairly new, the developments that have happened in the recent past have been very positive and encouraging.
DISCLAIMER: The information provided in this article is for educational purposes only. The same cannot be construed as legal advice.
Associate, Khaitan & Co.
Ananda Chakraverty is currently working as an Associate (Banking and Finance) with Khaitan & Co., Mumbai. Previously he has worked as a Senior Legal Manager with ICICI Bank, Kolkata.
Mr. Chakraverty completed his B.A. LL.B (Honours) from Hidayatullah National Law University, Raipur.
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