The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced with the objective to ensure that ease of doing business greatly improves in India. The code has simplified the winding up process in respect of companies, which was earlier fragmented due to multiplicity of statutes as well as forums. One of the main purpose of this code is to empower the creditors to get back their dues through the Corporate Insolvency Resolution Process (CIRP) or through liquidation of defaulting debtor entity.
Section 29A is a negatively prescribed list of who cannot be a resolution applicant.
A resolution applicant, as defined under section 5(25) of the Code, earlier referred to mean any person who submits a resolution plan to the resolution professional. Hence, a resolution applicant might have been any person- a creditor, a promoter, a prospective investor, an employee, or any other person. The Code had not gone into the basis and criteria for selection of the resolution applicant. This became a fatal loophole in the law which allowed back-door entry to defaulting promoters at substantially discounted rates for the assets of the corporate debtor.”
ROLE OF PROMOTERS U/S 29A
A promoter stands in a fiduciary relationship with the company. When a company makes default in payment of dues, CIRP is initiated against such defaulting company by the creditors or by the debtor itself for the restructuring and revival of the company, failing which it goes for liquidation. The purpose of CIRP is to revive the ailing company and focus on maximization of value of its assets so that the company is not liquidated and the entrepreneurial spirit is not killed. The whole debate which arose was whether a promoter should be given any control when a company goes under CIRP as it was reasonable to allege that the insiders were majorly responsible for the collapsing of the company and hence they should not be allowed to put up a resolution plan. Here ‘resolution plan’ is designated as a way out for insolvent entities under IBC. However, since Section 5(25) of the code earlier defined ‘resolution applicant’ as any person who submits ‘resolution plan’ to ‘resolution professional’, it allowed entry to defaulting promoter to submit resolution plan at substantially discounted rates. In order to curb such practices 29A was introduced.
PURPOSE OF SECTION 29A
The underlying purpose or rather, the objective behind the introduction of this section was to prevent a Company going under the CIRP to land up once again in the hands of the promoter or any other defaulter mentioned in the section, who, in the first place played a major role in the downfall of the Company. In other words, these are the people who will be assumed to have approached to revive the Company with unclean hands and cannot be trusted to bring the Company back to normal.
Until this section was enacted, concerns were constantly raised that “persons who, with their misconduct contributed to defaults of companies or are otherwise undesirable, may misuse this situation due to lack of prohibition or restrictions to participate in the resolution or liquidation process, and gain or regain control of the corporate debtor.
The Supreme Court in Chitra Sharma v Union of India, while dealing with the question of eligibility of a resolution applicant, held inter alia that the primary purpose behind Section 29A was to ensure that the persons responsible for insolvency of the corporate debtor do not participate in the corporate insolvency resolution process by means of a backdoor entry, effectuate public interest and ensure effective corporate governance. Therefore, the Section must be applied in a manner that effectuates and furthers this purpose.
However, the reach of this section extends to three layers beyond the person ineligible in the first place which will have more far reaching consequences on strategic investors/ private equity investors and entities associated with such investors.The intent of the Code was not to restrict genuine applicants, but only to exclude participation from habitual miscreants or applicants who might themselves be sick, however, Section 29A may result in elimination of persons who might be interested in buying stakes and improving the financial picture of the Company. Hence, what we need is a balanced interpretation and implementation of section 29A, failing which, the IBC will not be able to achieve its ultimate goal.
RECOMMENDATIONS:
As an alternate to the current restriction, a middle ground could be adopted, which permits promoters to bid for the corporate debtor, while ensuring sufficient safeguards in place to ensure that lenders are not defrauded.
- Firstly, the promoters may be permitted to bid for the corporate debtor only as long as such a promoter has defaulted only in respect of the corporate debtor, and not any other company, due to which such promoter is barred from being a resolution applicant under Section 29A. This ensures that the promoters do not benefit from being a resolution applicant while lenders of the other company, where they are defaulters are not paid out.
- Secondly, the bid of the promoters should be considered only in situations when there are other credible resolution plans only. This would ensure that the CIRP is not misused by the promoter to start off with a clean slate. The existence of other potential resolution applicants also ensures that the corporate debtor is appropriately valued by the bidders (including the promoters) to ensure that the creditors are not short-charged.
- Thirdly, the promoters should not be provided any waivers, such as past non-compliances, non-payment of stamp duties and levies, etc., which are sought in a resolution plan by the resolution applicants. This comes from the fact that the non-compliances occurred while the promoters were in control of the corporate debtor itself.”
- Lastly, the CIRP should not be used by the promoters to the detriment of other minority shareholders. Accordingly, appropriate safeguards should be included to ensure that appropriate payments are made to the minority shareholders. Fair value norms may be prescribed to protect the minority shareholders.”
This will make the IBC and CIRP process much more economically viable for the promoters and the lenders without compromising the sanctity of the process. The excess of the payments that the promoters are willing to make to the lenders cannot be foregone for the cost of morality.”
For the list of persons not eligible to be resolution applicants u/s 29A click here
To read our article on Section 29A through the Judicary’s lenses, click here
To read on Effects of 29A on IBC, click here
