The IBC, 2016 was introduced to fasten up the long insolvency process. The main objective of the code is resolution over liquidation. Section 29A focuses on preventing a Company undergoing 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.
Section 29A is a negatively prescribed list of who cannot be a resolution applicant.
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.
LET US LOOK AT THE EFFECTS OF THIS SECTION ON IBC BY WEIGHING THE PROS AND CONS :
NO BACK DOOR ENTRY FOR REPEATED DEFAULTERS
Section 29A prohibits promoter or related parties from bidding for assets under bankruptcy resolution. Keeping the promoter out of the process will have short-term negatives but long-term benefits will far outweigh them.
This section is a one stop solution for promoters who are repeated defaulters and who try seek a back-door entry in the form of putting a resolution application to revive the Company when they themselves have been a major contributor in the downfall of the Company.
Hence, this section is necessary to maintain discipline in the resolution process. It has changed the game for lenders and has changed the balance in favour of the lender. There is a sea change in the attitude of promoters who are now looking to help resolve the cases.
UMBRELLA OF DISQUALIFICATIONS STRETCHED TOO FAR
The language of Section 29A stretched the umbrella of disqualifications a bit too far, extending from promoters and those in the management of the company on one hand, to the persons included in the definition of connected persons, making the definition too wide, thereby defeating the sole purpose of IBC of reviving the Company and preventing it from entering the liquidation phase.
NO RESOLUTION APPLICANT/PLAN
Under IBC, companies undergoing insolvency proceedings at the National Company Law Tribunal (NCLT) have a total of 270 days to settle on a resolution plan. The companies may opt for liquidation proceedings if no solution is reached within the time frame.The purpose of this Section itself gets defeated in case there is no resolution plan brought forward or no resolution applicant submits an application. In such a case, the Company goes straight into Liquidation without any chance of revival. Hence, the blanket ban renders it impossible for promoters and the connected persons to submit a resolution plan and hence the Company loses its last chance.
Although the Apex Court has already upheld the validity of the provision, irrespective of whether the default was an act of malfeasance not; the lawmakers as well as the judiciary might need to relook the entire scenario from a different perspective. Even the Bankruptcy Law Review Committee took note of the fact that “some business plans will always go wrong”. Above all, “the bankruptcy law must give honest debtors a second chance, and penalize those who act with mala fide intentions in default”.
ONUS ON SECURED CREDITORS TO RUN A 29A CHECK WHILE SELLING OFF THEIR ASSETS.
There is a requirement for any bidder to certify his eligibility under Section 29A of the code. But what is the reliability of such an affidavit? What if the bidder lied and won? Could it result in the scrapping of the resolution plan, even years after its implemented? Earlier, the onus was on the resolution professional to ensure that each bidder is eligible. After the amendment, the onus is now on the secured creditors. As a result, this has put unnecessary burden on the secured creditors.
TO CONCLUDE,
The intent of the Code with respect to this section was not to restrict genuine applicants, but only to exclude participation from habitual miscreants or applicants who might themselves be sick. The reach of this section extends to three layers beyond the person ineligible in the first place which will have far reaching consequences on strategic investors/ private equity investors and entities associated with such investors. This may result in elimination of applicants who might be interested in buying stakes and improving the financial picture of the Company.
Click here to read our article on Critical Analysis of Section 29A
