Section 29A in practice: SC, NCLAT & NCLT’s approach to ineligibility in CIRP

Section 29A of the Insolvency and Bankruptcy Code, introduced in 2017, bars defaulting promoters, wilful defaulters and other tainted persons from bidding for stressed companies to prevent misuse of the insolvency process. Shubhangi Shukla, a legal professional, charts the course of evolution of Section 29A through various court and tribunal rulings.

Section 29Adisqualifies certain persons — especially promoters connected with the defaulting company — from participating in resolution plans, intending to prevent moral hazard and protect creditor value.

A statutory provision introduced in 2017 curbing ineligibility of certain persons (notably promoters or related parties with tainted financial records) from submitting resolution plans.

The objective behind Section 29A of the Code is to avoid unwarranted and unscrupulous elements to get into the resolution process while preventing their personal interests to step in. Secondly, it consciously seeks to prevent certain categories of persons who may not be in a position to lend credence to the resolution process by virtue of their disqualification. Section 29A has a laudable object of protecting and balancing the interest of the committee of creditors and the corporate debtor, while shutting the doors to canvas the interests of others.

At the heart of the debate is the question: Should the insolvency process prioritize commercial certainty and revival or should it strictly exclude those responsible for insolvency irrespective of the need for viable bidders?

SECTION 29A OF THE IBC: DISQUALIFICATIONS AND SAFEGUARDS

Section 29A was inserted into the IBC in 2017 to address moral hazard — the concern that promoters or related parties responsible for a company’s distress might exploit CIRP to regain control under a cleaned-slate plan without facing consequences.

The provision lists categories of persons who are ineligible to submit resolution plans. These include — but are not limited to:

• Undischarged insolvents.
• Willful defaulters.
• Persons convicted for certain offences.
• Promoters or management of companies with outstanding non-performing assets.
• Connected persons of the above.
• Persons disqualified by regulatory authorities.

Section 29A is assessed as of the date of submission of the resolution plan, and an affidavit confirming compliance must accompany the plan.

INTERPRETATION OF SECTION 29A(H) OF IBC – BANK OF BARODA AND ANR. VS. MBL INFRASTRUCTURES LTD. AND ORS. – SUPREME COURT.

Section 29A(h) –

“Persons not eligible to be resolution applicant- if he 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 word “person” is of a wider import to include a promoter or a director, as the case may be. The definition of “person” as mentioned under Section 3(23) of the Code includes certain categories of persons and thus, there is no such exclusion. It is merely illustrative/inclusive in nature and therefore, the persons mentioned in Section 29A alone are ineligible to be resolution applicants. Once a person executes a guarantee in favour of a creditor with respect to the credit facilities availed by a corporate debtor, and in a case where an application for insolvency resolution has been admitted, with the further fact of the said guarantee having been invoked, the bar qua eligibility would certainly come into play. What the provision requires is a guarantee in favour of ‘a creditor’. Once an application for insolvency resolution is admitted on behalf of ‘a creditor’ then the process would be one of rem, and therefore, all creditors of the same class would have their respective rights at par with each other.

The word “such creditor” in Section 29A(h) has to be interpreted to mean similarly placed creditors after the application for insolvency application is admitted by the adjudicating authority. As a result, what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process.

Adequate importance will have to be given to the latter part of the provision which also disqualifies a person whose liability under the personal guarantee executed in favour of a creditor, remains unpaid in full or in part for the amount due from him, upon invocation.

FINDINGS

Hon’ble Supreme Court held that once an application for insolvency resolution is admitted on behalf of ‘a creditor’ then the process would be one of rem, and therefore, all creditors of the same class would have their respective rights at par with each other.

The Respondent No.3 has executed personal guarantees which were invoked by three of the financial creditors even prior to the application filed. The rigor of Section 29A(h) of the Code obviously gets attracted. The eligibility can never be restricted to the aforesaid three creditors, but also to other financial creditors in view of the import of Section 7 of the Code. In the case at hand, in pursuance to the invocation, an application invoking Section 7 indeed was filed by one such creditor. It was invoked even at the time of submitting a resolution plan by the Respondent No.3. Thus, in the touchstone of our interpretation of Section 29A(h), Apex court held that the plan submitted by the Respondent No.3 ought not to have been entertained.

The Court clarified that once a person has:

• executed a personal guarantee in favour of a creditor,
• and the CIRP application has been admitted,
• and such guarantee has been invoked and remains unpaid,

then the bar under Section 29A(h) is automatically attracted

THE HON’BLE NCLAT’S APPROACH TO SECTION 29A DISQUALIFICATIONS

1. In the matter of Navayuga Engineering Company Ltd. Vs. Mr. Umesh Garg RP of Athena Demwe Power Ltd. and Ors.”, Company Appeal (AT) (Ins) No. of 2023, it was held that 29A(c) of IBC does, not only disqualify, those who were in management and control of Corporate Debtor at the time when its account was declared NPA, but also disqualifies those, who were in management and control of Corporate Debtor and in close proximity of time, before submission of Resolution Plan, who failed to clear the debts of Corporate Debtor.

Hon’ble NCLAT noticed that the Appellant was very much in control of the Corporate Debtor as per the MoU dated 23/28.03.2016. The Appellant may be right in his submission that he was not Promoter of the Corporate Debtor since beginning and by MoU dated 15.03.2013. However, even if the Appellant was not the Promoter of the Corporate Debtor since inception, after the execution of the MoU dated 23/28.03.2016, the Appellant was given control and management of the Corporate Debtor. The reason for handing over the management and control to the Appellant was proposed investment of 51% equity share and to implement the Project. Rs.236 Crores having already been invested by the Appellant, the control and management was given, so that the Corporate Debtor may run the Project.

It was hereby cleared by the Hon’ble NCLAT that the Adjudicating Authority did not commit any error in holding the Appellant disqualified under Section 29A, sub-section (c) of the IBC.

• In Avantha Holdings Ltd. and Anr. v. Abhilash Lall RP of Jhabua Power Ltd., Company Appeal (AT) (Insolvency) No. 304 of 2022, Facts of the case were that that classification was declared on 21.05.2018. The purpose of date of “such classification” is that from the date of such classification, within grace period, that is, one year, if one year period has expired and NPA still continues, the Resolution Applicant is ineligible. From reverting to the facts of the present case, the NPA classification was declared on 21.05.2018 with effect from 01.04.2009. So, 01.04.2009 is the backdate which has been given by Canara Bank, but actual date of classification is 21.05.2018. If the backdate is taken as the date of classification, the purpose and object for giving the grace period will not be fulfilled. The purpose for statutory requirement that at least one year has elapsed from the date of such classification is to see that within a period of one year from classification, if the Resolution Applicant did not get away from NPA, it should be declared as NPA.

Hon’ble NCLAT was of the view that date of NPA classification shall be treated as 21.05.2018 and it cannot be taken as on 01.04.2009, which is the backdate with effect from which date NPA is declared.

• Whether ex-Promoter/Director who resigned from Corporate Debtor before initiation of CIRP u/s 10 of IBC is eligible to submit a Resolution Plan under Sec. 29A of IBC? Vishram Narayan Panchpor RP of Blue Frog Media Pvt. Ltd. Vs. Committee of Creditors (Blue Frog Media Pvt. Ltd.) and Anr.

Hon’ble NCLAT holds that Section 29A(c) is attracted when at the time of submission of the plan. Ineligibility is being held only on the ground that Successful Resolution Applicant was promoter of the Corporate Debtor till 2018 when he resigned. Section 29A does not make per se promoters and directors ineligible to submit a plan unless they are ineligible under clauses (a) to (g). Since in the present case, it is not the case that any of the clauses (a) to (g) are attracted on Successful Resolution Applicant, the mere fact that Successful Resolution Applicant was promoter and director shall not make him ineligible to submit a Resolution Plan.

• CoC has the power to consider the eligibility/ineligibility of the Resolution Applicant whether they are eligible/ineligible under Section 29A(e) of the Code – Everest Organics Ltd. Vs. Leesa Lifesciences Pvt. Ltd., Represented by its RP Mr. Jagadees Kumar Morri , Company Appeal (AT) (CH) (INS) No. 228 of 2021. NCLAT held that the Code and the Regulations empowers the CoC approving the Resolution Plan and also empowers that it shall not approve a Resolution Plan where the Resolution Applicant is ineligible under Section 29A. In this case, the Adjudicating Authority directed the COC to consider whether the 3rd Respondent is really ineligible under Section 29A(e) of the IBC and therefore directed the COC, which has the power to approve the Resolution Plan and also consider the Resolution Applicant’s ineligibility under Section 29A. In accordance with the above Provisions of Law and the Regulations made thereunder, the COC has the power to consider the eligibility/ineligibility of the Resolution Applicant whether they are eligible/ineligible under Section 29A(e) of the Code. The stand of the 3rd Respondent is that the Resolution Professional did not afford any opportunity to cure the defect and Suo moto rejected on the ground of ineligibility which is mere technicality. The COC has power to take a decision with regard to approval of the Resolution Plan. Further in accordance with the Regulations, the Committee has power to evaluate the Resolution Plans received by the Resolution Professional. As per CIRP Regulation 39(4), the COC has power to approve the plan and after approving the Plan by the Committee the Resolution Professional shall submit to the Adjudicating Authority. Therefore, this Tribunal is of the view that the COC has power to decide and approve the Resolution Plan of the Resolution Applicants. Further, the COC also can consider the eligibility/ineligibility of the Resolution Applicants under Section 29(A)(e) of the Code.
• Common directors’ disqualification under Section 29A(e) of the IBC – Fortune Chemicals Ltd. Vs. Ashok Kumar Jaiswal, RP of Aarya Industrial Products Pvt. Ltd. and Anr, Company Appeal (AT) (Insolvency) No. 1263 of 2022.

One of the directors of the Appellant, who was the Prospective Resolution Applicant, was also director of GADPPL which had failed to file its accounts since inception (i.e. 28.02.2014). The said Director was ineligible to be a director as per provisions of Section 164(2) of the Companies Act, 2013 and the Appellant company also accordingly was not eligible to be a resolution applicant in terms of provisions of clause (e) of Section 29A of IBC, 2016.

• The Exemption under Section 240A of IBC is not applicable to Section 29A(b) of IBC. MSME Promoters are exempted only from clauses (c) and (h) of Section 29A of IBC and other eligibility criteria as stipulated under section 29A will be applicable. Comp. App. (AT) (Ins) No. 858 of 2023.

Hon’ble NCLAT interpreted Section 29A read with Section 240A that in a way, Section 29A intends to give protection to the genuine creditors of the Corporate Debtor by preventing unscrupulous persons from rewarding themselves at the expenses of the creditors and undermine the process and object of the Code. The Promoters of MSME are exempted only from clauses (c) and (h) of the Section 29A of the Code and other eligibility criteria as stipulated under section 29A of the Code will be applicable i.e., Section 29A(b) is not carved out. The CoC has full powers to decide regarding approval or non-approval of the Resolution Plan. The CoC is also duty bound to consider the eligibility or ineligibility of the Resolution Applicant under section 29A of the Code. The ineligibility for submission of the Resolution Plan, would be determinate w.r.t date on which the Resolution Applicant submits his Plan.

THE NCLT’S APPROACH TO SECTION 29 DISQUALIFICATIONS

1. A bar under Section 29A of IBC cannot be attracted only by virtue of a blood relationship or marital alliance. Familial relationship between the promoters and successful resolution applicant (SRA) is not sufficient to attract bar under Section 29A- Tech Nirman Ispat Pvt. Ltd. Vs. Aditya Kumar Tibrewal (RP) of Jagdamba Industries Ltd. and Ors, C.P.(IB) No. 203/KB/2021.
2.  Neither Promoters/Ex-Directors nor the Resolution Professional/CoC are empowered under the IBC 2016 to obtain an MSME Certificate post-commencement of CIRP with the sole purpose of opening or enabling a back door entry to the defaulting promoters, who are otherwise barred under Section 29A of IBC, 2016 to submit Resolution Plan – Deutsche Bank A.G Vs. Mr. Devendra Umrao RP of Overnite Express Ltd. – NCLT New Delhi Bench Court-II, Company Petition No. (IB)-2240(ND)/2019.
3. Date of eligibility under Section 29A of IBC should be the date on which all plans are finally considered by the CoC before it is put to vote in terms of regulation 39 of the CIRP Regulations – Avantha Holdings Ltd. and another Vs. Abhilash Lall, RP of Jhabua Power Ltd. & others – NCLT Kolkata Bench.

The words, “at the time of submission of the resolution plan,” occurring in section 29A(c) of the Code, should really be read as, “at the time of submission of the relevant resolution plan.” the crucial date of eligibility should be the date on which all plans are finally considered by the CoC before it is put to vote in terms of regulation 39 of the CIRP Regulations. Therefore, the gate-pass theory advanced during the course of oral arguments, which adopts a mechanical check-box approach, is rejected. It also held that it does not really matter if a single resolution applicant submits plans any number of times, and also whether it is really a revision or a fresh plan. It does not make any material difference at all.

• Mere familial relationship with a person alleged to be a willful defaulter does not ipso facto attract disqualification under Section 29A of IBC unless a demonstrable nexus with the business activities of the resolution applicant is established- Abhay Narhar Kadam Vs. Vakati Balasubramanyam Reddy, RP of Megi Agro Chem Ltd. and Ors. – NCLT Mumbai Bench, CP (IB) No. 144/MB/2021.

CONCLUSION

Section 29A is important because it stops dishonest or defaulting promoters from misusing the insolvency process to regain control of the company. It acts as a safeguard against unfair practices and moral hazard. If eligibility rules under Section 29A become too strict, fewer bidders may come forward, which can reduce the value creditors receive. But if the rules are too relaxed, it may allow wrongdoers to take advantage of the process.

Also Read: How will the role of insolvency professionals evolve in future