Open Access Research Article
ANALYSING SECTION 29A OF IBC READ WITH COMPANIES ACT, 2013: READING BETWEEN INELIGIBILITIES AND COMPROMISES
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ANALYSING
SECTION 29A OF IBC READ WITH COMPANIES ACT, 2013: READING BETWEEN
INELIGIBILITIES AND COMPROMISES
AUTHORED BY - NANDHAA KISHORE S
& INIYAVAN ABDULLAH SA
I.
Abstract
Amongst a rigmarole of undecided
questions of law and critical opinions of eminent corporate law enthusiasts,
the Insolvency and Bankruptcy Code, 2016 (“IBC” for brevity) is nothing like
the insolvency laws of other democracies the world over. For instance, the
Insolvency Act of 1986, the United Kingdom counterpart of the IBC, is “an Act
to consolidate the enactments relating to company insolvency and winding up
including the winding up of companies that are not insolvent.”[1]
The fundamental difference between the two statutes is in their respective
natures of operation and scope; the younger one being a Code and the older, an
Act. Comparing it to the Long Title of the IBC, it is evident that the main
purpose behind both statutes is significantly different. The English Act
intends to ensure the operation of the law “and redress malpractice and
wrongdoing”[2] whereas
the Code seeks to maximise the value of assets of such insolvent persons and
balance the mechanism of repayment of debts. The bare perusal of the Long Title
of the Code leaves us with the notion that winding up of corporate concerns is
not the goal intended to be achieved herein. In fact, the end goal is quite the
opposite.
The following paper analyses major
questions of law by analysing several judicial pronouncements of the Supreme
Court of India in light of the revised creditor-centric regime of the IBC. By
throwing light on the operation of bankruptcy law in other countries, the
exceptional spotlight of the IBC is analysed and the framework of Insolvency
laws and the interpretation thereof with certain provisions of the Companies
Act, 2013 will be analysed, thereby carving out the common ground wherein both
these comprehensive statutes operate.
Keywords: Corporate
Insolvency Resolution Process, Committee of Creditors, Insolvency Resolution
Professional, moratorium, substantive consolidation, purposive interpretation.
II.
Background
study:
The Bankruptcy Law Reform Committee
released a report dated 04.11.2015[3]
which discussed in detail the major reasons behind the enactment of the IBC
along with the legislative intent behind its draft.
The antecedent structure of the
bankruptcy process for companies was highly fragmented, with the powers of
creditors and debtors governed by different legislation. Different statutes
like the Sick Industrial Companies (Special Provisions) Act, 1985[4]
(SICA hereinafter) and the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002[5]
(“SARFAESI” hereinafter) contain separate definitions of rights of creditors or
debtors as the case maybe. This raises challenges in achieving consistency and
efficiency in the insolvency resolution process as well as interpretation of
terminology and determination of capacities of parties to a dispute. An
additional complication arises from the implementation of these diverse laws
before various judicial fora. Matters decided by the Tribunal or Board of
Industrial and Financial Reconstruction often undergo review in High Courts,
creating two key issues in implementing the resolution framework.
Firstly, there is a lack of jurisdictional
clarity. When one forum handles creditor rights, and another deals with debtor
rights, decisions are frequently appealed, leading to stays or reversals before
higher judicial or quasi-judicial authorities. Ideally, for the preservation of
economic value, a single forum should hear both sides of the case and deliver a
comprehensive judgment. Another pertinent problem often ignored by analysts at
this stage is overlapping of judicial or technical expertise or clash between
decisions of different fora.
Secondly, these fora might lack the necessary
business or financial expertise, information, or capacity to effectively decide
on insolvency and bankruptcy matters. This results in delays, extensions in
reaching outcomes, and heightened susceptibility to appeals. Because of the
absence of concrete law, major decisions are taken by the Courts without
relying on any statutes. According to
that Report, “Judicial precedent is set by “case law” which helps flesh out the
statutory laws. These may also, in some cases, pronounce new substantive law
where the statute and precedent are silent.”[6]
The Committee went on to observe that “The judgments reviewed are those after
June 2002 when the SARFAESI Act came into effect. It is illustrative of both
debtor and creditor led process of corporate insolvency, and reveals a matrix
of fragmented and contrary outcomes, rather than coherent and consistent, being
set as precedents.” These judgments exemplify both debtor-driven and
creditor-driven approaches to corporate insolvency. Instead of establishing
consistent and coherent precedents, the outcomes depict a complex matrix of
fragmented and conflicting decisions. According to the World Bank (2014)[7],
the average duration for insolvency resolution in India is four years due to
the intricate corporate structure which requires more time in examination and
decision making. Whereas the time taken for insolvency resolution is 0.8 years
in Singapore and 1 year in London. According
to World Bank’s Ease of Doing Business Index in 2017, India remains at the
130th position out of 190 countries globally.[8]
The Eradi Committee Report on the insolvency and winding up of companies, dated
July 31, 2000 highlighted that out of 3068 cases referred to BIFR from 1987 to
2000, all except 1062 cases were disposed of. Among the disposed cases, 264
were revived, 375 were in negotiation for the revival process, 741 were
recommended for winding up, and 626 were dismissed as not maintainable[9].
These statistics raise significant concerns about the efficacy of the SICA. The
Committee emphasized that the effectiveness of the statute had been greatly
compromised due to substantial delays in case disposal by BIFR. As a result,
the Committee recommended the repeal of the SICA and suggested integrating its
revival and rehabilitation provisions into the structure of the Companies Act,
1956. Fast-forward half a decade, the Companies Act 2013 was enacted followed
by the Insolvency and Bankruptcy Code, 2016.
III.
Research
Method
The research design for this study is
primarily exploratory and analytical in nature. It aims to understand the
practical implications and challenges in the IBC in the context of roles and
capacities of members of corporate debtors. The study will utilize both
qualitative and quantitative research methods to achieve comprehensive
insights. This qualitative method of research limits the scope to a relatively
small group of subjects by carefully observing the stages of Corporate
Insolvency Resolution Process (CIRP), liquidation, sale of assets, and winding
up of a corporate debtor. The authors intend to apply analytical methods of
research to find and compile the most relevant information on insolvent
companies, and the capacity of certain related personnel of such companies in
initiating CIRP and liquidation proceedings. Reliance will be placed on
secondary sources, including legislative documents related to the IBC,
including the Code itself, and subsidiary regulations, case law and judgments
from the National Company Law Tribunal (NCLT), National Company Law Appellate
Tribunal (NCLAT), and the Supreme Court, academic articles, books, research
papers, and reports analysing the IBC’s impact on corporate insolvency. The
qualitative and quantitative findings will be interpreted collectively to draw
meaningful conclusions. The authors will address the research objectives by
comparing the research findings with the existing literature on corporate
insolvency and the IBC.
IV.
Introduction
It is a well-known fact that the IBC acts
as a life-saviour in the backdrop of failure of erstwhile insolvency laws like
the Provincial Insolvency Act, 1920, the Sick Industrial Companies (Special
Provisions) Act, 1985, The Presidency Towns Insolvency Act, 1909, etc. It was
found to be “problematic that these different laws are implemented in different
judicial fora. Cases that are decided at the tribunal/BIFR often come for
review to the High Courts.”[10]
This led to two serious problems – lack of certainty of jurisdiction, and the
presence of multiple judicial fora attempting to resolve the same category of
cases. This was the backdrop in which the IBC found its inception.[11]
However, there are certain areas of
the insolvency regime not accounted for by the original enactment of 2016,
which were subsequently inserted vide amendments in 2017[12],
2018[13],
and 2019[14]. The
questions of law before NCLATs and also the Supreme Court have led to the
passage of such amendments, one of which has opened up several debates and
cross-opinions. Section 29A of the IBC inserted vide an amendment in 2018[15]
has disentitled certain members of a corporate debtor from proposing resolution
plans for CIRP to take place. The Committee of Creditors (“CoC”) is not
permitted to pursue the resolution ideas suggested by such members listed under
Section 29A or any other persons acting jointly or in concert with such person.[16]
The pragmatic approach taken by the Apex Court was to read this ineligibility
under Section 29A into the capacity of such a member to propose a compromise or
arrangement as under Sections 230 to 232 of the Companies Act, 2013[17].
The issue dealt with hereunder would be whether such an ineligibility not
provided for by Parliament may be arrived at by judicial determination.
Moreover, the present position of law regarding such schemes for compromise and
arrangement is that they are permitted to be proposed at the time of
liquidation. The same position is put under scrutiny in light of the statutory
purpose behind the enactment of the IBC and such other legislation, like the Companies
Act. The authors first examine the nature of insolvency laws in other countries
and then conduct an analysis of the legislative intent of the same in India.
V.
Insolvency
Laws in Other Jurisdictions – persuasive value
A.
Insolvency
Laws in the United Kingdom:
In the United Kingdom, the recent
enactment of the Corporate Insolvency and Governance Act, 2020[18]
(CIGA) has witnessed insertion of provisions for ‘free-standing moratorium’[19]
and a refurnished ‘restructuring plan’ regime, with ‘cross-class cram down’[20].
It has been the view of jurists and corporate law experts that such a
free-standing moratorium applied to the IBC would postpone the threat of
litigation and will provide the members of the Corporate Debtor a significant
breathing space to plan the revival thereof.[21]
Although the scope of the CIGA offers a target of adaptation for the IBC,
specifically in the post-COVID era, the Code contains a creditor-centric regime[22]
wherein the CoC is given precedence in the repayment of debts owed by the
corporate concern. The CIGA however focusses more on debtors’ rights and
measures to abate the harshness of COVID-19. The CIGA contains six Parts and
eight Schedules governing the process of moratorium in the interest of the
corporate debtor[23],
whereas the aspects of moratorium in the IBC are inclined towards placing a bar
on the continuance of business of the corporate debtor, and instead focusses on
repayment of debts to the creditor[24]. The
Supreme Court has observed[25]
that once a moratorium either under Section 14 or Section 33 of the IBC has
been upheld against a corporate debtor, recovery proceedings as under the
Customs Act, 1961 will not apply. Such an observation is based on the precedence
afforded to the stake of the creditor, in the creditor-centric regime
established under the Code. Moreover, in the UK, according to the Insolvency
Act of 1956, the daily operation of the company retains with the directors even
though the management is controlled by the insolvency practitioner. However, in
India pursuant to section 17(1)(b) of the IBC, the powers of the Board of Directors
are suspended and their rights and responsibilities are provided to the IRP,
thus restricting the role played by the directors.[26]
This is one of the main considerations for the instant analysis in purview of
Section 29A and the purpose behind it.
B.
Insolvency
Laws in the United States:
In the United
States, the renown “debtor-possession” approach has been established. A debtor possession approach is based
upon the possession and control of the company’s management administered by the
corporate debtor[27] rather
than giving the administration of management to Insolvency resolution
Professionals like in India or, handing over the administration of management
to creditors which is followed in the UK. The US law lays down the process of
Reorganisation[28] which
is a method by which a company that is financially distressed in its operation
restructures its assets and capital in order to take up a better position.[29]
Further elucidation was done by the District Court in the case of Re:
Lionel Corporation[30]
wherein the principle that a debtor in possession has a fiduciary duty
to unsecured creditors was established. In this case, the Court ordered to sell
a particular asset which was in the possession of debtor, prior to approval of
a reorganization plan which in turn deprives the rights of the equity holders.
Yet another practice gaining
prominence is equitable subordination[31]. Equitable
subordination involves treating certain claims or interests as lower in
priority than others due to factors such as inequitable conduct, fraud, or
abuse of fiduciary duty.[32]
This doctrine is more commonly associated with bankruptcy laws in the United
States and some other jurisdictions. This remedy can be achieved under Section
510(c) of US Bankruptcy Reforms Act[33]. The
best example was given by the US court in Re: Owens Corning case,[34]
“…if a corporate parent is both a creditor of a subsidiary and also
dominates the affairs of that entity as to prejudice its other creditors, a
court may place payment priority to the parent below that of the other
creditors. The equitable subordination places bad acting creditors behind other
creditors when the distributions are made”.[35]
C.
Contrasting
Indian scenario:
In light of the Doctrine of
Substantive Consolidation,[36]
the IBC does not include mechanism for grouping the corporate debtor’s
bankruptcy as together. The doctrine essentially enables the Adjudicating Authority
to merge the assets and liabilities of all such individual entities under a
common umbrella while involving them in common CIRP also known as group
insolvency[37]. This
doctrine recognizes that in certain situations, multiple affiliated entities (such
as holding and subsidiary companies) may be so interconnected. By treating them
as separate legal entities during the insolvency process could be impractical
or detrimental to the overall resolution process. This would allow pooling of
the assets and liabilities for resolution plan for revival of such companies.[38]
The Court has opined that the substantive consolidation has a significant
impact on the assets of the consolidated entities and in certain cases, the
impact of substantive consolidation on the assets is considered self-evident,
without the need for further investigation.[39]
This can be particularly relevant in cases where there are complex intercompany
transactions or where entities within a group are closely interconnected
financially. The NCLT Bench at Mumbai applied this doctrine in one instance[40]
where a group of 18 insolvent companies was considered as one legal entity vide
a petition of the bank (creditor). Two companies were left out because they
were not insolvent and they operated in a different line of business.
Moreover, Indian Parliament foresaw
the inconvenience in introducing a new member who would require their own
learning curve, for instance. The American method takes the perspective that
the management personnel of the corporate debtor is best suited to reorganise
the company and prevent it from liquidation.
However, the IBC was enacted to bring in a consolidated CIRP
methodology by replacing the previous “debtor-in-possession” model under the
Sick Industrial Companies (Special Provisions) Act, 1985 with a “creditor-in-control”
model.[41]
There were no notable changes made to the country’s credit discipline under the
creditor-in-control system. The creditors who have a stake in keeping the
debtor operating as a going concern currently hold the advantage in the balance
of convenience.[42] According to the IBC,
decisions about the CIRP are made by the CoC[43],
whose business judgment has consistently been accepted by the courts. It is
also an accepted practice in the Indian scenario to consider a particular
transaction of a holding company and subsidiary company separately in a
particular time frame to evaluate the debt obligations of the corporate debtor.
This is starkly in contrast to the practice of joint consideration of holding
and subsidiary companies as a single legal entity as per the doctrine of
substantive consolidation. Corporate debtors are often found in situations
where debt obligations are divided between creditors of poorer estates and
those of richer estates. Although the practice of substantive consolidation
results in several advantages[44]
like resolution of cross debts and increment of value of assets, courts often
hesitate to consider substantive consolidation because such a practice results
in debts being shared between two economically distinct classes of creditors.
Also, the basic principles of separate legal entity and limited liability are
infringed by such application.[45]
Therefore, the consolidation of bankruptcy procedure in India vide the IBC
shares a certain element of precision and exactment with foreign legislation
but also starkly differs in certain areas of operation.
VI.
Legislative
intent behind enactment of the Code
A.
Argumentative
outlook:
The position of the Apex Court in
interpreting its law-making counterpart’s aim and design has been remarkably
clear. Without crossing the boundaries of judicial review, but perhaps closing
in on the border of this constitutional duty of the Judiciary, the Apex Court
considered the contentions of unconstitutionality of specific clauses of the
IBC wherein the contentions were based on several precedents[46] passed by
the NCLT, NCLAT, and the Supreme Court itself on previous such occasions. The
Court pronounced finality on these questions of law inter alia by
upholding the constitutional validity of the provisions thereunder, and in the
process, made such other significant observations relevant to that matter. The
landmark case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India
& Ors.[47] pronounced
the legislative intent behind the enactment of the IBC by perusing the Preamble
and Long Title of the Code:
“What is interesting to note is that
the Preamble does not, in any manner, refer to liquidation, which is only
availed of as a last resort if there is either no resolution plan or the
resolution plans submitted are not up to the mark. Even in liquidation, the
liquidator can sell the business of the corporate debtor as a going concern.”
The simple formula applied therein
was the one established categorically by the Supreme Court itself in several previous
cases.[48] The
Preamble and the Long Title were observed to be the “key to open the minds of
the law-makers”. A careful perusal of the Preamble and Long Title were held
necessary to determine “the policy and purpose of every legislation.”[49] However,
a simple counter-intuition would be that such perusal would be required only in
circumstances of ambiguity and silence of the legislation. But the Supreme
Court removed such doubts regardless of the Preamble and held:
“It could thus be seen that one of
the principal objectives of the IBC is providing for the revival of the
Corporate Debtor and to make it a going concern. Every attempt has to be first
made to revive the concern and make it a going concern; liquidation is the last
resort…”[50]
All such observations of the Supreme
Court could be possible only because of perusing several Reports of Law
Committees, the Insolvency Bankruptcy Board of India, the Ministry of Company
Affairs, etc. The Ministry on one occasion observed that “the law should strike
a balance between rehabilitation and liquidation process. It should provide an
opportunity for genuine efforts towards revival. Only where
revival/rehabilitation is not feasible, winding up should be resorted to.”[51] As a
matter of prudence, the structure of the IBC in India is aimed at reviving the
Corporate Debtor rather than permitting its liquidation. The structures of
other insolvency laws around the world are unmistakably dissimilar.
B.
Consequences
of delayed CIRP – contravening the legislative intent:
As of 31st
December 2022, there were about 2000 corporate insolvency resolution processes
pending in India.[52]
In light of this, the strict compliance of the statutory time period laid out
in Section 12[53] for the conclusion of
CIRP has formed the foreground of several judgements of the Apex court. One of
the important remarks stated by the Apex court is that “Section 12 of IBC
mandates that all CIRP including legal proceedings, should be completed within
a time period of 330 days.” Holding further, the Court mentioned that
“if the Adjudicating Authority is allowed to extend the timelines while
exercising its power under Section 60(5)(c)[54], it would be
antithetical to the objectives of the IBC.” [55]
But a plethora of conflicting stances taken by the Tribunals as well as
the Supreme Court on this point reveal an intricate fact-based application of
Section 12. One instance is where the NCLT's Delhi Bench sanctioned the
resolution proposal of the corporate debtor, which was submitted approximately
seven years after the initiation of the Corporate Insolvency Resolution Process
(CIRP).[56]
The reason for such delay was litigation before several fora.
The extension
beyond 270 days to a maximum of 330 days for the completion of CIRP is
inclusive of “time taken for all legal proceedings in relation to such
resolution process.”[57]
The Supreme Court had ordered liquidation of the corporate debtor on many
occasions where valid resolution plans were not submitted within the statutory
extended period, “… the general rule being that 330 days is the outer limit
within which resolution of the stressed assets of the Corporate Debtor must
take place, beyond which it is to be driven into liquidation.”[58]
Where no valid resolution plan was submitted or the submitted plan was not
approved by the requisite per cent of the CoC before the end of the statutory
period, the Supreme Court observed that “the inevitable sequel is initiation
of liquidation process against the Corporate Debtor concerned in the manner
specified in Chapter III of the I&B Code.”[59]
Where the statutory period is extended beyond 330 days, the Courts
generally tend to identify exceptional circumstances to permit the CIRP. Yet
another restriction on CIRP procedures is laid out in Section 29A of the Code
in the form of ineligibilities to propose resolution plans.
VII.
Reading
Section 29A of IBC into Sections 230-232 of the Companies Act
A.
Ineligibility
to propose Resolution Plans – Section 29A:
Turning the
pages to Section 29A of the Code[60],
The intent behind this ineligibility is to establish safeguards and prevent
these individuals from pursuing their personal interests during the resolution
process. If they seek to satisfy their personal debts, it would be prejudicial
to the corporate debtor’s interests and the purpose of CIRP would be defeated[61].
The landmark judgement of the Supreme Court in the case of Chitra Sharma
v. Union of India[62]
threw light on this point:
“Parliament
was evidently concerned over the fact that persons whose misconduct has
contributed to the defaults on the part of the debtor companies misuse the
absence of a bar on their participation in the resolution process to gain an
entry. Parliament was of the view that to allow such persons to participate in
the resolution process would undermine the salutary object and purpose of the Act.
It was in this background that Section 29A has now specified a list of persons
who are not eligible to be resolution applicants.”
Laying emphasis
on the time frame under Section 12, the Supreme Court observed inter alia:
“The
Code is first and foremost, a Code for reorganization and insolvency resolution
of corporate debtors. Unless such reorganization is effected in a time-bound
manner, the value of assets of such persons will be depleted. Therefore,
maximization of value of assets of such persons so that they are efficiently
run as going concerns is another very important objective of the Code This, in
turn, will promote entrepreneurship as the persons in management of the
corporate debtor are removed and replaced by entrepreneurs.”[63]
Moreover, the
NCLAT also observed with respect to the purpose of inserting such
ineligibilities that a certain “death by liquidation” can be avoided and
the corporate debtor would be protected from its own faulty management.[64]
A matter that sparked debate while witnessing an in-depth and argumentative
articulation at the Supreme Court was whether any such ineligibility under
Section 29A of the IBC can be read into such other provisions under a
neighboring, but not too distinct a legislation, namely the Companies Act,
2013. There are several layers of this aspect that needs breaking down.
In a general
consideration of statutes which are consolidations of rules in that law, like
the IBC,[66] the Indian Penal Code,
etc., the scope of the provisions thereunder would be applicable only to the
subject matters considered under or governed by that statute. Applying that
logic, it could be argued that the ineligibilities as mentioned in the IBC
would bind only the procedures thereunder and not those under any other
statute. The restrains placed on judicial review are bulky and the judicial
interpretation cannot introduce meanings or provisions that the legislature has
not explicitly included in the law. The boundaries of judicial review with
respect to constitutional disqualifications per se were established in
the case of Manoj Narula v. Union of India[67]
wherein it was verbatim observed,
“… where
a disqualification was not provided under the Constitution or by Parliament by
law, the same could not be read in by recourse to principles of implied
limitation, silence of the Constitution, constitutional morality, good
governance, or constitutional trust.”
Where such
principles were applied to arrive at a creative interpretation, “it would
tantamount to crossing the boundaries of judicial review”.[68]
In another
instance, the observation of the Supreme Court was on the line that
extrapolating the intention of the legislature is not the role of the Court,
but merely clarifying the lines marked by the legislature is. The Supreme Court
held:
“There
is no doubt a marginal area in which the courts mould or creatively interpret
legislation which comes to them in a state requiring varying degrees of further
processing. But by no stretch of imagination a Judge is entitled to add
something more than what is there in the statute by way of a supposed intention
of the legislature.”[69]
However, on the
other end of the spectrum lies the aspects of purposive interpretation and
harmonious construction. The underlying object of Section 29A is to disallow
indirect entry of the management that resulted in the mounting debts of the
corporate debtor, mainly because the probability of revival of the company to
make it a going concern is significantly lessened by such entry.[70]
If such a backdoor for ineligible entities is allowed, such members may pursue
self-interests and the purpose of the Code would be vitiated.[71]
The Supreme Court put into perspective the intent of Parliament in this regard:
“Parliament was evidently concerned
over the fact that persons whose misconduct has contributed to the defaults on
the part of debtor companies misuse the absence of a bar on their participation
in the resolution process to gain an entry. Parliament was of the view that to
allow such persons to participate in the resolution process would undermine the
salutary object and purpose of the Act. It was in this background that Section
29A has now specified a list of persons who are not eligible to be resolution
applicants.”[72]
A purposive interpretation requires
comprehensive theories put through statutory provisions and/or precedents which
relate to the proposed conjoint interpretation. The several pointers are dealt
with in the section below.
C.
Purposive
Construction:
An observable
pattern characteristic of the purposive construction theory is the method of reading
a provision into the constituents of another. In the present scenario, the need
for purposive interpretation falls under the guidance of Section 35 of the IBC
listing out the powers and duties of the liquidator is pertinent. A bare
perusal of clause (f) of sub-section (1) and the proviso appended thereto[73]
reveals the following:
“Section 35.
Powers and duties of liquidator. –-
(1)
Subject to the directions of the
Adjudicating Authority, the liquidator shall have the following powers and
duties namely: --
(f)
subject to section 52, to sell the immovable and movable property and
actionable claims of the corporate debtor in liquidation by public auction or
private contract, with power to transfer such property to any person or body
corporate, or to sell the same in parcels in such manner as may be specified;
Provided
that the liquidator shall not sell the immovable and movable property or
actionable claims of the corporate debtor in liquidation to any person who is
not eligible to be a resolution applicant.”
The purpose of
the appended proviso is with reference to a continuum “when the Court
observes that the erstwhile promoters of the corporate debtor in liquidation.
The values which animate Section 29A, continue to provide sustenance to the
rationale underlying the exclusion of the same category of persons from the
process of liquidation involving the sale of assets, by virtue of the
provisions of Section 35(1)(f).”[74]
Yet another incorporation of a similar ineligibility is in Regulation 32 of the
Liquidation Process Regulations[75],
Sale of Assets, etc. Moreover, a bare perusal of Regulation 32A[76]
reveals an emphasis laid on the transfer of corporate debtor or its business on
a going concern basis. This signifies
the characteristics and objectives of the different procedures designed to
occur either during the liquidation stage or when the accumulating debts of a
corporate debtor reaches a critical level. Based on this, the purpose of the
ineligibilities under Section 29A was deduced to be in consonance with the
legislative intent of the Code in order to promote sustainable revival. The
ingredient of non-performing asset[77]
as a characteristic of a promoter, for instance, leads to such an ineligibility
as stated thereunder.
Following up on
this, the Apex Court reiterated the need for a purposive interpretation in
several instances.[78]
It was highlighted in ArcelorMittal India (P) Ltd.[79]:
“A
purposive interpretation of Section 29A, depending both on the text and the
context in which the provision was enacted, must, therefore, inform our
interpretation of the same… the opening lines of Section 29A of the Amendment
Act refer to a de facto as opposed to a de jure position of the persons
mentioned therein. This is a typical instance of a “see-through provision”, so
that one is able to arrive at persons who are actually in “control”, whether
jointly, or in concert, with other persons. A wooden, literal interpretation
would obviously not permit a tearing of the corporate veil when it comes to the
“person” whose eligibility is to be gone into. However, a purposeful and
contextual interpretation, such as is the felt necessity of interpretation of
such a provision as Section 29A, alone governs.”[80]
The observable
pattern previously stated hereinabove is justified by relating the purpose of
the said provisions to the purpose of the statute. Two independent provisions
belonging to different Chapters of the Code and governing two different
procedures thereunder are linked through a proviso (to Section 35(1)(f))
inserted vide an amendment. The establishment of such a link poses the question
as to the regulatory framework connecting this with compromises and
arrangements as under Companies Act 2013.
D. Regulatory framework connecting the dots – Regulation
2B:
No eligibility
or ineligibility which is not intended so to be, by the legislature can be
established by judicial determination.[81]
But where the legislature has established a link specifically between two
seemingly unconnected provisions vide a rule or regulation, then the concern of
a far-fetched judicial review vanishes. Taking the limelight is Regulation 2B[82]
of the Liquidation Process Regulations[83]
which links liquidation process under the Code with compromises and
arrangements under the Companies Act. A bare perusal of Regulation 2B (1) and
the appended proviso thereto reveals that there is a time period for the
completion of compromise or arrangement proposed under Section 230 of the Act. A
bare perusal of the proviso reveals:
“Provided
that a person, who is not eligible under the Code to submit a resolution plan
for insolvency resolution of the corporate debtor, shall not be a party in any
manner to such compromise or arrangement.” [84]
The above proviso
entails a retrospective effect dealing with proposals of compromise and
arrangement before 06th January 2020. The ratio behind this is that
there is a possibility that the entities held ineligible under Section 29A are
responsible for the corporate death of the company. In such an event, the
purpose of the established law would be defeated. Given that “it is fundamental
that a rule-making body cannot frame rules in conflict with or derogating from
the substantive provisions of the law or statute under which the rules are
framed”[85],
it is important to note the emphasis laid by legislature in furtherance of the
conjoint interpretation of the above-said provisions. However, the extent and
scope of importing such ineligibilities across two statutes that operate on
considerably different grounds must be tested. This question of interpretation
fell before the consideration of the Apex Court on a few occasions.
Moreover, such a
provision may suffer from a vice of arbitrariness in some contexts, in
violation of Articles 14, 19, and 21 of the Constitution. The primary
contentions in this regard[86]
were, firstly that Regulation 2B was ultra vires Section 230 of the Act,
and secondly that the provision suffered from a vice of arbitrariness. The Apex
Court has categorically upheld in a recent case:
“The
doctrine of ultra vires envisages that the rule making body must function within the purview
of the rule making authority conferred on it by the parent Act. As the body
making rules or regulations has no inherent power of its own to make rules, but
derives such power only from the statute, it has to necessarily function within
the purview of the statute.”[87]
On the line of
arbitrariness, it was contended that Regulation 2B successfully imports an
ineligibility provided under the IBC to a provision that operates in a
different area under the Companies Act. The opposite set of contentions
thereunder was that Regulation 2B is merely clarificatory in nature. The
purpose of the Regulation was connected to that of Sections 29A and 35(1)(f) of
the Code.
The Court
pronounced its judgement upon the conjoint perusal of Sections 196(1)(t) and 240(1)
of the Code. Under Section 196(1)(t), the Insolvency and Bankruptcy Board of
India (IBBI) is empowered to “make regulations and guidelines on matters
relating to insolvency and bankruptcy”, and under Section 240(1), the IBBI is
empowered to “make regulations consistent with this Code and rules made
thereunder, to carry out the provisions of this Code.” The Court observed that
“Regulation 2B met both the requirements, of being consistent with the
provisions of IBC and of being made in order to carry out the provisions of the
IBC…”[88],
and thereby rejected all contentions of unconstitutionality.
E.
Curing
defects and covering loopholes – the Mischief Rule:
The method of
interpretation which specifically imposes “the duty of every Judge to make such
construction of a statute as to suppress the mischief and advance the remedy”[89]
is known as the mischief rule of interpretation. Any defect in law for which a
cure can be found by judicial interpretation is referred to as a ‘mischief’.[90]
Where the ineligibilities under the Code are read into the Companies Act, 2013,
a counter-intuitive theory because the capacity and qualifications required for
proposing a resolution plan under insolvency law might not align with the
purposes and objectives of compromises or arrangements under corporate law. It
would be that the mischief sought to be remedied is not achieved because the
capacity of a person proposing a resolution plan under the Code compared to
that of a person proposing a compromise or an arrangement under the Act are on
different footings. That the mischief which was sought to be remedied by the
insertion and interpretation of Section 29A is demarcated to the resolution
process under Chapter II of the Code, and the object of this provision is that
those accountable for leading the company to liquidation should not benefit
from their own misconduct. Disallowing a defaulting member from participating
in the resolution process might be considered justifiable, as it prevents an
advantage that could compromise the interests of creditors.[91]
The provision regarding compromises and arrangements on the other hand, must be
sanctioned by the Adjudicating Authority and operates in a different area.
However, the Apex
Court considered in preponderance, the set of contentions that “to make an
exception in a plan for revival under Section 230 of the Act in the context of
a scheme of compromise or arrangement will defeat the object and intent of the
amendment to the IBC and lead to an absurdity. This indeed would perpetrate the
mischief which was sought to be obviated.”[92]
The new IBC framework replaces the debtor’s paradise with a creditor-centric
regime which ensures corporate justice.[93]
In lieu of acts which led to the company’s death by liquidation, it would be
justified to ensure that those persons whose poor decision-making schemes led
to such a situation hinging on the corporate debtor, should not be a part of
the process of finding a solution.[94]
Moreover, the disallowed entities under Section 29A are susceptible to
favouring the CoC, thus not exercising their best judgement in what is best for
the corporate debtor. On these lines, the Supreme Court observed thus:
“A
harmonious construction between the two statutes would ensure that while on the
one hand a scheme of compromise or arrangement under Section 230 is being
pursued, this takes place in a manner which is consistent with the underlying
principles of the IBC because the scheme is proposed in respect of an entity
which is undergoing liquidation under Chapter III of the IBC. As such, the
company has to be protected from its management and a corporate death. It would
lead to a manifest absurdity if the very persons who are ineligible for
submitting a resolution plan, participating in the sale of assets of the
company in liquidation or participating in the sale of the corporate debtor as
a ‘going concern’, are somehow permitted to propose a compromise or arrangement
under Section 230 of the Act of 2013.”[95]
VIII.
Concluding
remarks
Having compared
the modus operandi in lieu of insolvency matters in other countries, the
Indian scenario has laid, not a clean road, but one with quite a few puddles.
The matters dealt with by the IBC are of such nature that careful drafting of
provisions with exceptions and appended rules is necessary. Tracing the
backdrop of the IBC, as already mentioned above, the Code came into existence
as a saviour of the creditor where the previously existing statutes were being
exploited by the debtor’s regiment. Matters concerning corporate law were being
subject to out-of-court settlements due to the inability to constrain factual
matters within the ‘four walls’ of codified law. Yet somehow, the legislators
have managed to close the “front door opportunity” to the debtor regiment to
take the benefit of the new framework vide amendments, rules, and regulations
assisting its interpretation, clarifying procedures, and covering loopholes in
the vast subject of corporate law. Even the recent order of the Apex Court
upholding the constitutional validity of Sections 95 to 100 of the Code[96],
regarding insolvency of personal guarantors is an example of a constant
surveillance by the Top Court of happenings around such legislation. Fulfilling
its constitutional duty and upholding the principles of natural justice, the
Court has delivered several verdicts on questions of law above and beyond the
‘four walls of statute’ of the IBC. The best and most suitable instance of an
exceptional interplay between the two pillars, Judiciary and Legislature, is
the present one: comprehensively limiting a colored act prohibited by law,
preventing the assets of a legal entity from being usurped by a poor
management, and ensuring revival of the corporate debtor in line with the
legislative intent.
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[4] Sick Industrial Companies (Special
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[5] Securitization and Reconstruction
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[6] Ibid, para. 3.3.1. at pp.
26.
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[10] Supra, note 5.
[11] Ibid.
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[13] Ministry of Law and Justice, The
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[15] Insolvency and Bankruptcy Code
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[81] Manoj Narula, supra, note
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[84] Inserted vide the Insolvency and
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Article Information
ANALYSING SECTION 29A OF IBC READ WITH COMPANIES ACT, 2013: READING BETWEEN INELIGIBILITIES AND COMPROMISES
Authors: NANDHAA KISHORE S, INIYAVAN ABDULLAH SA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/03/24
- Issue 7
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International Journal for Legal Research and Analysis
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- ISSN 2582-6433
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