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Disqualification From Submitting Resolution Plan Vis-A-Vis Defaulting Personal Guarantors
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Disqualification From Submitting Resolution Plan Vis-A-Vis Defaulting Personal Guarantors
Authored By
- Abhinav Gaur, Advocate
With the advent of the last decade,
India has seen a paradigm shift in the regulatory regime of its domestic
corporate laws for betterment in terms of ease of doing business besides
gaining the trust of investors in India. Corporate laws in India were often
referred to as outdated and inflexible laws which left little room for change
with the ever evolving global corporate structures and laws being enacted
worldwide to address the issues governing the corporate space. One of such
issues which is the point of discussion in this article is the issue of
insolvency and bankruptcy vis-a-vis ineligibility or disqualification of
certain class of persons from participating in the corporate insolvency
resolution process. In this article the author discusses the disqualification
criteria introduced by amending Insolvency and Bankruptcy Code, 2016
(hereinafter referred to as “IBC”)
and inserting Section 29A(h) which restrains defaulting personal guarantors
from submitting resolution plan with an intention to preserve the sanctity of
the corporate insolvency process and also safeguarding the interest of the
genuine creditors in the corporate debtor. The Hon’ble Supreme Court of India
in the case of Bank of Baroda vs. MBL Infrastructures Private Limited in its
verdict dated 18 January 2022 has clarified the ambiguity surrounding the
aspect of applicability of the said disqualification on such resolution plans
which have already been acted upon or are under consideration by the committee
of creditors.
The said change in corporate law
regime in India began with repealing of the Companies Act, 1956 and its
replacement with an entirely new enactment of law be in Companies Act, 2013 and
soon thereafter, the enactment of IBC. IBC was brought into effect in phase by
phase manner from 1 December 2016 and it is a one of its kind statute enacted
to consolidate and amend the laws regarding insolvency resolution of inter-alia corporate persons in a time
bound manner to maximise asset value and balance the interest of all the
stakeholders. With the introduction of Section 29A of IBC certain ambiguity had
arisen in respect of its application to the pending resolution plans submitted
by defaulting personal guarantors which has now been settled by the Apex Court
which has been discussed in detail in this article.
Introduction & Synopsis of IBC
The IBC comprises of four parts where
the first part deals with preliminary provisions regarding application of the
Code and general definitions; the second parts deals with insolvency resolution
and liquidation process of corporate persons; the third part deals with
insolvency resolution and bankruptcy of individuals and partnership firms and
lastly the fourth part deals with regulation of insolvency professionals,
agencies, information utility and incorporation of Insolvency and Bankruptcy
Board of India (IBBI).
For the purposes of this article, we
will be discussing the second part of IBC and more particularly Section 29A
which deals with the provisions relating to ineligibility of certain persons from
submitting resolution plans and otherwise participating in Corporate Insolvency
Resolution Process (CIRP) of the
corporate debtor. Before discussing the said provision of Section 29A of IBC,
it may be pertinent to understand the scheme of the second part of the IBC
which is spread into seven chapters from Section 4 to Section 77.
Chapter 1 comprises Section 4 and 5
dealing with application of the second part of IBC and definitions applicable
to the terms referred in the said part respectively. Section 4 prescribes for
minimum amount of default to make a person eligible to file an application
under the second part against a corporate debtor at Rs. 1 lac which has now
been increased to Rs. 1 crore by the Central Government vide a notification
dated 24.03.2020. The said increase in threshold was introduced in order to
prevent invocation of CIRP at such a low threshold of default of Rs. 1 lac,
since the Ministry of Home Affairs had issued a nation-wide lockdown owing to
onset of Covid-19 pandemic and the companies were beginning to experience
financial distress due to the same. Section 5 on the other hand prescribes for
definition of various terms used in the second part of IBC, few of which being
relevant for this article are also being discussed here for ease of
understanding. Section 5(5) of IBC defines “Corporate Applicant” as a corporate debtor, or a member thereof who
has been authorized to make an application for CIRP, or an individual who is in
charge of managing the operations thereof, or otherwise having control and
supervision over its financial affairs. The term “Corporate Debtor” has been
defined under Section 3(8) of IBC to mean a corporate person who owes a debt.
Chapter 2 comprises Sections 6 to 32
in which Section 6 provides that in case of a default by a corporate debtor, a
financial creditor, operation creditor or the corporate applicant may initiate
CIRP. Section 7 provides for procedure for initiation of CIRP by a financial
creditor, Section 9 provides for procedure for initiation of CIRP by an
operational creditor and Section 10 provides for procedure for initiation of
CIRP by corporate applicant. Once the said applications are admitted by the
Adjudicating Authority they culminate into passing of an order by the
Adjudicating Authority under Section 13 of IBC which requires for declaration
of a moratorium, making of public announcement about the initiation of CIRP,
calling of claims from public at large and appointment of interim resolution
professional (IRP) to carry out the
functions prescribed under IBC. Section 12 prescribes for mandatory time limit
of 330 days within which the CIRP should be completed leading to either
approval of resolution plan by the Adjudicating Authority under Section 31 of
IBC or passing of an order for liquidation of corporate debtor under Section 33
of IBC, as the case may be.
During the aforesaid period of
operation of moratorium, the committee of creditors (COC) is formulated by the IRP or resolution professionals (RP) as the case may be which is
governed by Section 21 of IBC. IRP is required to collate all the claims
received from the public against the corporate debtor and on the basis of
determination of financial situation of the corporate debtor, he is acquired to
constitute COC. The COC comprises financial creditors of the corporate debtor,
except such financial creditor which is a related party of a corporate debtor.
All decisions of the COC are taken by a vote of at least 51% unless otherwise
specifically provided under the Code. Section 25(2)(h) of IBC provides that the
RP should call for prospective resolution applicants to submit a resolution
plan from eligible resolution applicants who meet the criteria fixed by RP with
approval of COC. Such criteria may be fixed with the wisdom of the COC after
duly considering the complexity and scale of business operations and structure
of the corporate debtor. In so far as eligibility criteria fixed by the RP and
COC is concerned, the same is subject to the eligibility criteria as may be
fixed by IBBI. IBBI has prescribed disqualification criteria of a person from
being “Resolution Applicant” and submitting a resolution plan and also from
participating in CIRP. The said disqualification has been prescribed under
Section 29A of IBC which is a subject matter of discussion in this article.
Before proceeding with discussion on the said provision it may be worthwhile to
note that the RP is required to present all resolutions plans before COC for
heir approval[1] which is
required to be approved by COC by a vote of at least 66% of voting share of
financial creditors[2].
Thereafter, the approved resolution plan is required to be submitted by RP
before the Adjudicating Authority[3].
Now, having briefly discussed the
general provisions regarding invocation of CIRP and business during CIRP
including constitution of COC and approval of resolution plan, this article
will discuss the need of introducing Section 29A of IBC by way of amendment,
extent of applicability of the said amendment and purpose achieved by the same.
This article will also discuss pre and post amendment regime of IBC with
supporting judicial pronouncements on the subject.
Object of Section 29A of IBC
Late Sri Arun Jately, the then
Hon’ble Minister of Finance as well as Minister of Corporate Affairs presented
the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 on 29 December 2017
and emphasized on the importance of the ordinance by stating that the statutory
disqualifications being introduced would lay out the ineligibility criteria for
resolution applicants as the same was missing from the IBC and with the
amendment a specific carved out will be made for persons meeting the said
disqualification to protect the interest of stakeholders. The said ordinance
dated 29 December 2017 was further amended to include certain provisions and
later became an Act on 06.06.2018.
Section 29A imposed restrictions on
certain class of individuals from being resolution applicants with an intention
from respecting certain class of persons from submitting resolution plans in
order to ensure preservation and maintenance of faith and credibility of CIRP
and further to ensure that such persons are not rewarded from CIRP at the cost
of the genuine creditors. The amendment was introduced to ensure that no
fraudulent promoters or directors sitting behind a coloured corporate veil take
undue advantage of CIRP by gaining ultimate control of a corporate debtor which
is already undergoing a financial distress. It can also be said that the said
amendment was introduced to make sure that certain persons which may be said to
be responsible for insolvency of corporate debtors do not reap undue benefit
from the CIRP which justifies the disqualification introduced by the amendment.[4]
Before the amendment was introduced
it was a major concerned being highlighted by the corporate and insolvency law
practitioner that persons whose misconduct and failure to act in the interest
of the corporate debtor had driven the corporate debtor to insolvency were
taking undue advantage of CIRP and without them being disqualified from
participating in CIRP, the intention of the legislature was being frustrated
and rendered nugatory. It appeared as if IBC was toothless without provisions
like Section 29A being introduced in IBC. It was in this background that the
said amendment was introduced providing for a specific list of persons who were
disqualified to be resolution applicants. The amendment fixed a major loophole
in the IBC taking advantage of which backdoor entry was being taken by the
management of the corporate debtor which was ousted with the initiation of
CIRP.
Understanding Section 29A
Section 29A of IBC was made effective
from 23 November 2017 and was made applicable on pending proceedings
prospectively. Though there was much hue and cry as regards its applicability
being also on such resolution plans which were pending consideration before the
COC or which were already approved by the COC but pending sanction of the
Adjudicating Authority, it was settled by judicial pronouncement in the matter
of In Re Wig Associates (P) Ltd.[5]
by National Company Law Tribunal, Mumbai that its application was strictly
prospective in nature. It was observed by the Hon’ble Tribunal that the
insolvency proceedings were time sensitive and continuous in nature which
cannot be halted or disturbed by the change of law unless so specifically
provided for in the amended provision. As such all the pending insolvency
proceedings were directed to continue taking into consideration the status quo ante. Thus, its applicability
was only on such CIRPs which got initiated after the date of bringing into
effect of the Section 29A i.e. 23 November 2017.[6]
Section 29A from the very wordings of
it is a disqualification clause providing that a person will be disqualified
from submitting a resolution plan if such person(s) either independently or
jointly or acts in concert with other person falling within the category of
persons described from sub clause (a) to (f) of Section 29A. Section 29A(a)
disqualifies an undischarged insolvent from being a resolution applicant. The
said term “undischarged insolvent” has not been defined in IBC, however, the
term “undischarged bankrupt” has been defined under Section 79(22) of IBC to
mean a bankrupt who has not received a discharged order under Section 138. Thus
drawing a corollary from the same it can be said that term “undischarged
insolvent” refers to individuals adjudged as insolvent under the Presidency
Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920 and continue
to be undischarged under the said enactments.
Section 29A(b) disqualifies a wilful
defaulter from submitting a resolution plan who has been declared by the
Reserve Bank of India to be a wilful defaulter as per the extant guidelines and
Banking Regulations Act, 1949. Section 29A(c) at the outset disqualifies such
person(s) from submitting a resolution plan who himself or in concert with
other person manages or controls or be a promoter of a corporate debtor
classified as a non-performing asset if its debts are not paid at least one
year prior to the commencement of CIRP. However, there are certain qualifying
proviso to the said disqualification such as the first proviso provides that the
said ineligibility may be cured if such person clears the entire dues including
the interest and charges before submitting the resolution plan. Therefore, if a
such resolution applicant is able to repay the entire outstanding before
submitting a resolution plan then in that case despite such resolution
applicant by itself or in concert with another person being in control of
corporate debtor classified as non-performing asset in last one year period,
may become eligible to submit a resolution plan[7].
What is interesting to note is that while sub-clause (a) as aforesaid refers to
a de jure position, sub-clause (b)
and (c) are de facto in nature
insofar as this position needs to be proved factually.
Further, Section 29A(d) provides for
disqualification of individuals who have been convicted with an imprisonment of
two or more years under certain laws enlisted under the twelfth schedule of IBC
or for seven years or more under any other law. This provision does not apply
to juristic entities but only to individual resolution applicants. Sub-clause
(e) disqualifies an individual who has been disqualified to act as a director
under the Companies Act, 2013 and sub-clause (f) disqualifies such persons to
submit a resolution plan who have been prohibited by the Securities and
Exchange Board of India from trading in securities or accessing the market. The
aforesaid provisions carves out ineligibility on such individuals based on
their antecedent activities and have been provided to ensure that a sincere
resolution applicant is given a go-ahead while those with colored history are
discouraged from participating in CIRP. This also aims at promoting fair
businesses and individuals who have been law abiding persons and are less
likely to take undue advantage of the CIRP.
Sub-clause (g) ousts such persons who
have been a promoter or in control or management of a corporate debtor in
respect of which the Adjudicating Authority has passed an order of a
preferential transaction, undervalued transaction, extortionate credit transaction
or fraudulent transaction. The only exception to this is if such transactions
were carried out prior to the acquisition of such corporate debtor and such
person has not contributed to the said transactions.
Sub-clause (h) is one provision controversy
in relation to which has recently been settled by the Hon’ble Supreme Court of
India. This provision provides that in case a person has executed a guarantee
in favor of a creditor relating to a corporate debtor undergoing CIRP at the
instance of such creditor and the said guarantees has been invoked and remains
unsatisfied, then such person will also be disqualified from submitting a
resolution plan.[8] Before discussing this provision in detail,
it may be worthwhile to also take note of sub-clause (i) which makes a person
being subject to any disability under any other law applicable outside India
ineligible to submit a resolution plan and sub-clause (j) is a blanket clause
which disqualifies a resolution applicant from submitting a resolution plan who
has a connected person being ineligible under sub-clause (a) to (i). Connected
person has been defined to mean any person who is the promoter or in the
management or control of resolution applicant, or be in the aforesaid capacity
when resolution plan is implemented. Holding company, subsidiary or associate
company or a related party is also taken within the ambit of the definition of
connected person.
Interpretation of Section 29A(h) of
IBC
The Hon’ble Supreme Court of India in
the case of Bank of Baroda v. MBL Infrastructures (supra) on 18 January 2022 gave a verdict on the interpretation of
Section 29A(h) of IBC which has finally settled the position of law in this
regard. This article discusses the same and analyses the position clarified by
the Apex Court.
Relevant facts of the case
M/s MBL Infrastructure Limited (MBL) was set up by Mr. Anjanee
Lakhotiya (Lakhotiya) in early 1990s
and the said company obtained various credit facilities and loans from a
consortium of banks. However, MBL defaulted in repaying the loans and some of
the banks invoked personal guarantees extended by Lakhotiya for the credit
facilities availed by MBL. RBL Bank invoked proceedings under Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 followed by other banks against MBL in the year 2013. On the footing
of the aforesaid, RBL moved an application under Section 7 of the IBC before
the NCLT, Kolkata against MBL which was admitted vide an order dated 30.03.2017
and an IRP was appointed.
In the aforesaid proceedings, two
resolution plans were received by the RP of MBL, one of which was submitted by
Lakhotiya on 29.06.2017. This resolution plan was submitted prior to the
introduction of Section 29A of IBC. On 18.11.2017, the COC of MBL required
Lakhotiya to submit an amended resolution plan which was accordingly submitted
on 22.11.2017. Thereafter, Section 29A was introduced by way of Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2017 and the COC in its meeting dated
1.12.2017 decided to deliberate on the impact of the said amendment as regards
the eligibility of Lakotiya to submit a resolution plan. However, due to lack
of consensus in the COC it was decided by MBL to move an application before the
NCLT to seek clarification in this regard.
Vide an order dated 18.12.2017, the
NCLT held that Lakhotiya was eligible to submit the resolution plan despite the
fact his personal guarantees were invoked by some creditors of MBL. However,
this fact was never placed on record before the NCLT and as such no findings
were returned in this regard while considering Section 29A(c). It was observed
that since the said personal guarantees were not invoked, mere extension of
personal guarantee by itself would not disqualify Lakhotiya from submitting its
resolution plan for MBL under Section 29A(h). It was further observed that debt
payable by Lakhotiya had not crystallised as such he could not be considered as
a defaulter and with these observations, application of Lakhotiya was allowed
and he was permitted to submit his resolution plan.
Assailing the said order, Punjab
National Bank preferred an appeal before the National Company Law Appellate
Tribunal in Company Appeal (AT) (Insolvency) No. 330 of 2017 on which vide an
order dated 21.12.2017 the COC and RP were allowed to consider the resolution
plan of Lakhotiya, however, the same was made subject to final outcome of the
appeal and NCLT was also directed to not accept or reject the same without
prior approval of the NCLAT. On the same day, the resolution plan of Lakhotiya
was put to vote before COC and it received 68.50% votes. Similarly, the order
dated 18.12.2017 was challenged before NCLAT by RBL and a similar order was
passed by NCLAT on 11.01.2018. Later, few other creditors also voted in favor
of the said resolution plan and as such the voting share stood at 78.50%.
In the meanwhile, Section 21A(h) also
came into effect from 18.01.2018 and on 23.03.2018 the NCLAT permitted Punjab
National Bank to withdraw its appeal and also discharged the interim order
passed by it. Later, the pending appeal was also withdrawn on 27.02.2018. With
the said order, the interlocutory application filed by the Bank of Baroda to be
impleaded as a party to the said appeal was also not considered and the same
stood rejected with the passing of the dismissal order dated 23.03.2018.
Eventually, vide an order dated 18.04.2018 NCLT Kolkata approved the resolution
plan submitted by Lakhotiya.
Aggrieved by the passing of order
dated 18.04.2018, the Bank of Baroda preferred an appeal before NCLAT and the
same was upheld with some amendments to the resolution plan of Lakhotiya. In
the meanwhile Section 29A(h) underwent further change as it stands today and
the same is being reproduced below:
“Section 29 A- Persons not eligible to be resolution
applicant – 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 – xxx
xxx xxx (h) has executed a guarantee in favour 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 and such guarantee has been
invoked by the credit and remains unpaid if full or part.”
The reasoning supplied by the NCLAT
while upholding the approval of the said resolution plan was that the same was
approved with 78.50% votes by COC and that it was backed by the techno-economic
report. Challenging the same, an appeal was filed before the Hon’ble Supreme
Court of India.
Observations of the Hon’ble Supreme
Court of India
vis-a-vis Section 29A
The Hon’ble Apex Court appreciated
that the purpose of Section 29A is to keep a check on unwarranted and
unscrupulous elements to use the CIRP with ulterior motives for their personal
interest. Much importance has been ascribed to the credence of the corporate
applicants while justifying the legislative intent of disqualifying certain
class of persons. The Apex Court referred to the legislative history and intent
of the said provision to support its findings and also referred to other
judicial pronouncements of the Court while dealing with challenges to the other
provisions of the IBC. It was observed that the intended disqualification under
the provision was to attain sustainable revival and to make sure that the
persons who are cause of the problem either by design or default are not made
part of CIRP which is the solution to such problem.
It was held that the term “such
creditor” in Section 29A(h) of IBC should be interpreted to mean all similarly
placed creditors after admission of the application for CIRP. Resultantly, in
order to be disqualified under the said provision, just a presence of personal
guarantee being invoked by any creditor, whether the application has been filed
by such creditor or not, would suffice. This remains subject to further
compliance of the said guarantee by any other creditor. It was clarified that
the ineligibility is only with respect to the participation in CIRP and that
the exclusion is only meant to facilitate a fair and transparent process of
CIRP.
Another issue decided by the Hon’ble
Apex Court was regarding the date to be considered for applying the said
provision on pending resolution plans - whether the date of submission of
resolution plan or date of adjudication by the authority. It was held that considering the object
intended to be achieved by the legislature, mere filing of a resolution plan
would not make a resolution applicant eligible if such resolution applicant is
rendered disqualified during the pendency of decision on his resolution plan.
With the aforesaid observations, the
Hon’ble Apex Court held that the resolution plan submitted by Lakhotoya should
have been rejected at the very outset in view of the amendment carried out in
Section 29A of the IBC. However, despite noting the said illegality in
entertaining the said resolution plan, the Hon’ble Court took note of the fact that much water had flown
under the bridge as an amount of Rs. 63 crores was infused in MBL to make it
functional and also statutory compliance with respect to voting of COC was
achieved, as such in such peculiar facts the resolution plan of Lakhotiya was
allowed to be implemented.
Conclusion
The Hon’ble Supreme Court has for now
settled the position that if a guarantee has been extended in favor of a
corporate debtor against whom CIRP has been initiated and if such guarantee has
been invoked by a creditor, then in such event the guarantor is ineligible to
submit a resolution plan under section 29A(h) of IBC. The trigger event for
application of disqualification under the said provision is ‘invocation of
personal guarantee’ by any single creditor even if the application for CIRP has
been filed by any other creditor. The manner of invocation of the personal
guarantee is of no relevance for the purpose of determining eligibility.
What is to be seen is the implication
of the exception carved out by the Hon’ble Apex Court that despite the
resolution plan being illegal and de hors
the provision of Section 29A(h) of IBC, yet the said plan was permitted to be
implemented considering that by the time the matter could be finally decided,
much water had flown under the bridge.
[1]
Section 25 (2)(i) of IBC.
[2]
Section 30(4) of IBC.
[3]
Section 30(6) of IBC.
[4]
Chitra Sharma v. Union of India, [2018] (9) SCALE 490 (SC).
[5] [2018] 145 CLA 255.
[6] Numetal v. Satish Kumar Gupta, [2018] 209 Comp Cas
181.
[7] Arcelormittal India Pvt. Ltd. v. Satish Kumar Gupta,
2018 SCC Online SC 1733.
[8] Bank of Baroda
v. MBL Infrastructures Limited & Others, CA No. 8411 of 2019 decided by
Supreme Court of India on 18 January 2022.
Article Information
Disqualification From Submitting Resolution Plan Vis-A-Vis Defaulting Personal Guarantors
Authors: Abhinav Gaur
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/01/30
- Volume 2
- Issue 7
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International Journal for Legal Research and Analysis
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