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Comprehensive Breakdown Analysis of Sec 29A of IBC code

Evaluation of Section 29A

Comprehensive Breakdown Critical Analysis of Sec 29A of the IBC code

The introduction of Sec 29A in the IBC, 2016, marked a critical step in preventing errant promoters and connected parties from misusing insolvency proceedings to regain control of their defaulting businesses. Sec 29A of the IBC outlines the ineligibility criteria for resolution applicants during the CIRP. It ensures that promoters or related parties responsible for the corporate debtor’s distress cannot exploit the process to regain control. Despite addressing significant loopholes, Sec 29A has sparked debates on its stringent qualifying criteria, impacts on creditors’ recoveries, and its overarching alignment with the Insolvency and Bankruptcy Code’s objectives. Here’s a detailed analysis:

Key Provisions and Their Interpretations of Section 29A of the IBC code

Section 29A under IBC law

  1. Acting Jointly or in Concert

The phrase “acting jointly or in concert” refers to individuals or entities working together as a cohesive group, potentially influencing the corporate debtor’s affairs.

Judicial Clarification: In ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, the Supreme Court clarified that this does not imply formal joint venture agreements. Instead, it encompasses scenarios where persons share objectives or act collaboratively to exert control.

  1. Ineligibility Criteria

(a) Undischarged Insolvents

  • Individuals or entities undergoing insolvency proceedings but yet to resolve their liabilities are disqualified.

(b) Wilful Defaulters

  • Defined under RBI guidelines, a wilful defaulter:
    • Deliberately avoids repayment despite ability.
    • Misuses borrowed funds.
    • Diverts funds from their intended purposes.
  • Example: Cases involving misrepresentation or fraudulent financial practices.

(c) Non-Performing Asset (NPA) Accounts

  • Entities managing or promoting a corporate debtor with accounts classified as NPAs for over a year are barred unless overdue amounts are cleared before submitting a resolution plan.
  • ArcelorMittal Judgment: Justice Nariman emphasized “positive control” as the defining factor for ineligibility under this clause.

(d) Convicted Individuals

  • A person convicted of offenses: Punishable by imprisonment of 2 years (under laws in the 12th Schedule) or 7 years under any law.
  • Exemptions: After two years of release from imprisonment or in cases with an appeal against conviction.

(e) Disqualification Under the Companies Act, 2013

  • Directors disqualified under Section 164(1) of the Companies Act, for reasons such as insolvency, unsoundness of mind, or fraudulent practices, are ineligible.

(f) Prohibited by Securities and Exchange Board of India

  • Individuals or entities banned by Securities and Exchange Board of India for engaging in fraudulent or unfair trade practices are disqualified.

(g) Preferential/Fraudulent Transactions

  • Promoters or managers of a corporate debtor involved in undervalued, preferential, or fraudulent transactions are disqualified unless:
    • These occurred before acquiring the corporate debtor.
    • They were beyond the control of the resolution applicant.

(h) Default on Guarantees

  • Guarantors for a corporate debtor undergoing CIRP are ineligible if the guarantee has been invoked and remains unpaid.
  • RBL Bank Ltd. v. MBL Infrastructure Ltd.: Clarified that guarantees must be invoked and unpaid for ineligibility to apply.

(i) Disabilities Outside India

  • Disabilities corresponding to clauses (a)–(h) under foreign jurisdictions also render a person ineligible.

(j) Connected Persons

  • Extends disqualification to:
    • Holding, subsidiary, associate companies.
    • Related parties of the resolution applicant or corporate debtor.
  • Exemption: Financial entities unrelated to the corporate debtor.

Key Strengths of Section 29A

What is ineligibility criteria under section 29A of IBC Code.

  1. Plugging Loopholes for Backdoor Entry: Sec 29A prevents defaulting promoters or connected persons from exploiting insolvency proceedings to reacquire assets at discounted rates. this aligns with the ethical foundations of the IBC and protects creditors’ interests. Section 29A ensures that defaulting promoters cannot exploit insolvency processes for personal gain. Essar Steel Case: Promoters were barred from submitting resolution plans despite offering higher bids.
  2. Promoting Creditor Confidence: By disqualifying unscrupulous resolution applicants, Sec 29A fosters transparency and instills trust among creditors in the CIRP.
  3. Accountability for Past Defaults: The provision ensures that individuals or entities responsible for a corporate debtor’s downfall are barred from further involvement, thereby incentivizing responsible business practices.
  4. Judicial Support: The judiciary has reinforced the necessity of Section 29A, as evident in cases like Jaypee Infratech and Essar Steel, emphasizing strict adherence to disqualification criteria to uphold the Insolvency and Bankruptcy Codes objectives.
  5. Balancing Fairness and Pragmatism: Courts often face challenges in balancing the morality of barring defaulting promoters and the economic benefits of accepting their higher bids.

Limitations and Criticisms of Section 29A

  • Over-Broad Disqualifications: The section’s broad scope includes a wide range of related and connected parties, which may inadvertently exclude capable resolution applicants. For instance, the inclusion of spouses and extended relatives in the “connected persons” definition can lead to unintended consequences.
  • Impact on Creditor Recoveries: Stringent disqualification criteria may disqualify higher bidders (often promoters) who are willing to offer better returns to creditors. This undermines the economic viability of resolutions, as seen in the Essar Steel and Monnet Ispat
  • Practical Challenges in Implementation: Resolution professionals bear the burden of conducting exhaustive due diligence to identify ineligible applicants. This adds procedural complexities and strains the already tight corporate insolvency resolution process timelines. The broad definitions of “connected persons” and “related parties” often lead to disputes and delays, as seen in the Ruchi Soya case. The extensive due diligence required places a heavy burden on resolution professionals.
  • Ambiguities in Interpretation: Terms like “person acting in concert” and the extensive definition of “related party” create interpretative challenges, leading to delays and legal disputes, as demonstrated in cases like Ruchi Soya.

Conclusion

Sec 29A addresses critical ethical concerns by disqualifying promoters and connected parties responsible for corporate defaults. However, its stringent criteria and wide ambit risk undermining the Insolvency and Bankruptcy Codes core objective—reviving distressed companies and maximizing creditor recoveries. By adopting pragmatic reforms, the IBC Code can continue to evolve as a robust framework for insolvency management in India.

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