What is ineligibility criteria U/s 29A of IBC Code.
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What is ineligibility criteria U/s 29A of IBC Code.
- The Insolvency and Bankruptcy Code 2016 has been created to investigate prospects for a failing corporate entity to be revived. As a consequence, it invites others who might want come forward & Submit resolution plans for a resolution to do so.
- The initial strategy was open to everyone, & anyone may apply for a resolution. But this provision offered defaulting promoters a second chance & allowing them to buy back their companies at discounted prices either directly or Via related entities at hugely discounted prices.
- So, it became necessary to limit the capacity of such defaulting promoters to regain control & repeat the past. Therefore, a change was made to establish Section 29A, which is frequently enacted provision that has generated the most controversy in the Insolvency and Bankruptcy Code, 2016,
- This IBC Section 29A is specified a negatively list & A person who cannot apply for a resolution and become as a resolution applicant.
- According to the Section 5(25) of the IBC code define the meaning of resolution applicant i.e means any person who submits a resolution plan to the resolution or insolvency professional under IBC Law.
- Resolution plan designates plans as the “way-out” for insolvent companies that fall within provision of the Insolvency and Bankruptcy Code of 2016.
- A Committee of creditor is constituted by the Qualified Insolvency Professional appointed by the National Company Law Tribunal National Company Law Tribunal, who also invites prospective applicants for resolution and submits their resolution plans to the Committee of creditor.
- The CoC-approved resolution plan is presented to the National Company Law Tribunal for approval. Any person who submits a resolution plan to the resolution or insolvency professional is referred to as a resolution applicant which is prescribed as under section 5(5) of the Insolvency and Bankruptcy Code.
- So, a resolution applicant might have been any person- a promoter, an employee, a creditor or a prospective investor or any other person.
- The Insolvency and Bankruptcy Code had not gone into the basis & conditions for choosing of the person as resolution applicant.
- This turned into a fatal legal loophole that allowed defaulting promoters back-door access to the corporate debtor’s assets at substantially discounted rates.
- A lot of amendments were made to the IBC Code to prevent illegal practices & to curb the illicit ways, but IBC section 29A is the one that has everyone stumped.
- The IBC section 29A, which consisted of 10 clauses and lists the persons who are ineligible to apply for a resolution, is further separated into three sub-parts, the third of which has its own descendants.
- These layers of section 29A’s tiers are more akin to elimination procedures. The blog that follows delves more thoroughly into the subject.
What is Resolution Applicant criteria under IBC Code – Who and Who Not?
Through IBC amendment act the definition of “resolution applicant” was amended so as to mean a person, who jointly or individually files a resolution plan to the resolution or insolvency professional pursuant to the invitation made U/s 25(2)(h) of Insolvency And Bankruptcy Code.
Clause (h) of Section 25(2) of the Insolvency And Bankruptcy Code requires the resolution or insolvency professional to invite resolution plans from prospective resolution applicants who fulfill conditions as specified by the resolution or insolvency professional with the permission of CoC, having regard to the scale of operations & complexity of the of the corporate debtor business & such other criteria as may be prescribed by the IBBI Board.
IBC Section 29A is a restrictive provision which states that any person coming on the negative list is not eligible to submit a resolution plan.
So it can be say that, a person in order to be eligible to submit a resolution plan –
- shall not suffer from any disqualification specifically stated U/s 29A of IBC and
- shall fulfill the Conditions laid down by the the resolution or insolvency professional under IBC Law with the approval of the CoC;
IBC Section 29A – A Pandora’s Box
A person suffering from the disqualifications listed below is not qualified to submit a resolution plan, as per Section 29A of the Insolvency and Bankruptcy Code. moreover, any other person acting jointly or in concert with the prospective resolution applicant shall not be covered under the following disqualifications
- the person has been convicted for any offence punishable with imprisonment for Two years or more;
- Person has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with Reserve Bank of India Guidelines issued under the Banking Regulation Act, 1949 and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor: Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non- performing asset accounts before submission of resolution plan;
- The person is a willful defaulter in terms of the Reserve Bank of India Guidelines issued under the Banking Regulation Act, 1949;
- Person is an undischarged insolvent;
- the person is disqualified to act as a director under the Companies Act, 2013;
What are the Ineligibility Criteria u/s 29A of Insolvency and Bankruptcy Code 2016 ?
A Net too wide?
- the person is prohibited by Securities and Exchange Board Of India from trading in securities or accessing the securities markets;
- the person has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and an order has been made by the National Company Law Tribunal under the provisions of the Code;
- a person who has executed an enforceable 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 the Code;
- a person who has been subject to the above listed disabilities under any law in a jurisdiction outside India;
- connected persons, e. persons connected to the person disqualified under any of the aforementioned points, such as those who are promoters or in management of control of the resolution applicant, or will be promoters or in management of control of the business of the corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party of the above referred persons – exception has been carved out for scheduled banks, ARC companies registered with Reserve Bank of India U/s 3 of the SARFAESI Act., and alternative investment funds registered with Securities and Exchange Board of India.
What are the means of Layers of Ineligibility Under section 29A?
Main aspects of the section 29A provision have been analysed as mention here under –
The 4 layers of ineligibility u/s 29A
According to a thorough review of Section 29A, there are four levels of ineligibility which must be fulfilled:
- 1st layer ineligibility, where the person itself is ineligible;
- 2nd layer ineligibility, i.e. where a “connected person” is ineligible;
- 3rd layer ineligibility, e. being a “related party” of connected persons; and or
- 4th layer ineligibility, where a person acting jointly/in concert with a person suffering from 1st layer/ 2nd layer/ 3rd layer ineligibility, becomes
The Non-Performing Asset Criterion : Section 29A(c)
As per IBC Section 29A(c) debars a person or a person acting jointly or in concert with such person who-
- has an account classified as Non-Performing Asset.
- is a promoter of a corporate debtor the account of which has been classified as Non-Performing Asset.
- is in the management of a corporate debtor the account of which has been classified as Non-Performing Asset;
- is in control of a corporate debtor the account of which has been classified as Non-Performing Asset.
Between the date of classification of NPA and the insolvency commencement date under the IBC, at least 1 year shall have passed. Therefore, a company that has had its account designated as a non-performing asset for the past year (including the persons or promoters in control of or management of such a company) will not be eligible to present a resolution plan. But, the IBC Code makes an exception, stating that the person in question may only submit a resolution plan after paying all past-due sums, plus interest and other fees associated with non-performing asset accounts. may refer to Section 29A (j).
Vulnerable Transactions: Section 29A(g)
- According to Section 29A(g), a Person/Promoter in the control of a or management of corporate debtor in which
- extortionate credit transaction as per IBC Section 50, or
- fraudulent transaction as per IBC Section 49 or
- a preferential transaction as per IBC Section 43 or
- undervalued transaction as per IBC Section 45
have taken place and the National Company Law Tribunal has passed an order under the Code.
- The provision is qualified to the extent it uses the term “corporate debtor”, and that the National Company Law Tribunal should have passed an order under the Insolvency and Bankruptcy Code itself.
Guarantor executing guarantee in favour of the applicant creditor: Section 29A(h)
- The negative list includes persons who might have guaranteed the obligations of the corporate debtor which is currently in insolvency.
- As the provision goes, a person who has executed enforceable 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 the Insolvency and Bankruptcy Code.
- Going by the construction of the clause, it appears that the guarantee should be in favour of that creditor who has applied for insolvency resolution of the corporate debtor.
RBL Bank Ltd. v. MBL Infrastructures Ltd.:
- National Company Law Tribunal took a view that there was no intent of the Govt to debar all the promoters, only for the reason for issuing a guarantee which is enforceable, unless such guarantee has been invoked and not paid for, or the guarantor suffers from any other antecedent listed in section 29A Insolvency and Bankruptcy Code.
- which is enforceable, unless such guarantee has been invoked and not paid for, or the guarantor suffers from any other antecedent listed in section
- The provision came up for discussion in RBL Bank Ltd. v. MBL Infrastructures Ltd. where National Company Law Tribunal took a view that there was no intent of the Govt to debar all the promoters, only for the reason for issuing a guarantee
Ineligibility Criteria u/s 29A of Insolvency and Bankruptcy Code, 2016:
A Net too wide?
- Purporting to disqualify the entire class of guarantors under the said clause would be violative of the valuable rights of the applicant. If the guarantee is not invoked & demand is not made on the guarantor, the debt payable by him is not crystallized & the guarantor cannot be therefore said to be in default for breach of the guarantee & be penalized merely because a legal and binding contract of guarantee exists, which is otherwise impossible but is subject to its invocation in accordance with the terms of the
- The National Company Law Tribunal agreed to the view observing that the guarantors in respect of whom, a creditor has not invoked the guarantee or made a demand under guarantee should not be Therefore, no default in the payment of dues by the guarantor has occurred, cannot be covered U/s 29(A)(h).
- It cannot be the intent of clause (h) to penalize those guarantors who have not been offered an opportunity to pay by calling upon them to pay the dues, by invoking the guarantee. So, the words “enforceable guarantee” appearing in clause (h) are not to be understood by their ordinary meaning or in the context of enforceability of the guarantee as a legal and binding contract, but in the context of the objectives of the Insolvency And Bankruptcy Code and Ordinance in general and 29(A)(h) in particular.
Connected persons: Section 29A(j)
The word “connected persons” appear in section 29A(j). A person who is connected to the persons as defined under the Explanation, shall be disqualified if the other person suffers disability under section 29A(a) to (i).
“Connected persons” have been defined so as to include three categories – Explanation.— For the purposes of this clause, the expression “connected person” means-
- any person who is the promoter or in the management or control of the resolution applicant; or
- any-person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or
- the subsidiary company, holding company, associate company or related party of a person referred to in clauses (i) and (ii):
The definition can be analysed as follows-
Clause (i) includes:
- promoter;
- person in the management; and
- person-in control of an ineligible resolution applicant. Further, in accordance with clause (iii),\
- where (a) or (b) or (c) is a company, the holding, the subsidiary, and the associate companies or “related party” of (a), (b), (c) (as the case may be), shall also be
- where (a) or (b) or (c) is a natural person, any “related party” of such person shall also be
- Clause (ii) basically seeks to debar persons from submitting resolution plans in which persons suffering from disabilities mentioned U/s 29A are proposed as promoters or in the management of or in the control of the corporate debtor during implementation of the resolution It includes-
- would-be promoter;
- person, would-be in the management; and
- person would-be in control of the corporate debtor, who suffer from disqualification U/s
For example, XYZ wants to submit resolution plan for BCD Ltd. Ram Proposes that Rohan shall be in the management of BCD Ltd. during the implementation of the resolution plan. But, Rohan is a person suffering disability U/s 29A. Ram, therefore becomes ineligible to submit resolution plan.
Further, in accordance with clause (iii),
-
- where (a) or (b) or (c) is a company, the holding, the subsidiary, and the associate companies or “related party” of (a), (b), (c) (as the case may be), shall also be
- where(a) or (b) or (c) is a natural person, any “related party” of such person shall also be
For scope of the term “related party”, see below.
Note that from the scope of “holding company, subsidiary company, and associate company”, the following have been excluded, i.e. the following can proceed to submit the resolution plan-
- A Scheduled bank; or
- An Asset Reconstruction Companies registered with Reserve Bank of India U/s 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002; or
- Alternative Investment Fund (AIF) registered with Securities and Exchange Board of India.
Related party
- “Related party” has been defined in Section 5 (24) but, the definition is particular to corporate debtor, i.e. the definition specifies the persons who shall be treated as “related party’ of the corporate debtor. Hence, where the persons referred to in clauses (i) and (ii) of the Explanation are persons other than the corporate debtor, the definition U/s 5(24) becomes irrelevant, and the following may be noted-
Ineligibility Criteria u/s 29A of Insolvency and Bankruptcy Code, 2016:
A Net too wide?
- Where one of the person is a company, “related party” shall be interpreted in terms of sub section 76 of section 2 of the Act, 2013;
- Where-none of the persons is a company, Definition of the term “related party” has been left In the context of natural persons, Normally the term “relative” is used
Associate Company
- For the purpose of determining whether a company is an associate of the other, the definition as under sub section 6 of section 2 of the Companies Act, 2013 shall be referred, wherein “Associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
“significant influence” means control of at least 20%
- For the purpose of the said definition, “significant influence” means control of at least 20% of total share capital, or of business decisions under an agreement.
- For-instance- “ABC Company” holds 20% of total share capital of “DFG company”, then ABC Company will be deemed to be an associate company of DFG Company.
Relevant time- whether lookback allowed?
- The point in time at which the ineligibility must be established would be a pertinent question. According to the section’s language, just the resolution applicant’s current status needs to be considered. The lookback period has not been specified. But as per our option, it would be up to the CoC to decide whether or not past events should be taken into consideration when making a final decision.
More of a Diktat?
- The Insolvency and Bankruptcy Code was made to be more inclusive in its approach and to find the best possible solution for a failing organisation. The four levels covered by Section 29A, however, may have the exact opposite effect. The Insolvency and Bankruptcy Code only intended to bar participation from habitual offenders or applicants who might be sick themselves. But, Section 29A may result in the exclusion of persons who would be interested in purchasing interests in the entity.
In the matter of RBL Bank Ltd. v. MBL Infrastructures Ltd.
- where the National Company Law Tribunal, considering the objective of the Ordinance, 2017, opined that Section 29A(h) is not to disqualify the promoters as a class for submitting a resolution plan. The intent is to exclude such class of persons from offering a resolution plan, who on account of their antecedents, may adversely impact the credibility of the processes under the Insolvency and Bankruptcy Code. The case is, for the time being, pending with National Company Law Appellate Tribunal.
In the matter of Swiss Ribbons vs. Union of India
- In the matter of Swiss Ribbons vs. Union of India, (Hon’ble Supreme Court, in its landmark ruling) has upheld the constitutional validity of section 29A of Insolvency And Bankruptcy Code.
- Swiss Ribbons moved the application by, section 29A, a “disqualifier section” was alleged to be unconstitutional as it was in apparent breach of “right to equality” under article 14 of our Constitution of India.
- Questions have been raised about the validity of the IBC’s “blanket ban” on all promoters per se because it presumes “vested interest” and misconduct on the part of all promoters without distinguishing between dishonest and honest ones.
- It was further stated that genuine promoters who are able to underbid other resolution applicants are also harmed by the denial of promoters as a class.
- Taking into account the abovementioned arguments, The Hon’ble Supreme Court noted that section 29A of the IBC includes in its purview those persons or class of persons who are unfit or are considered to be unfit for purchasing, managing, and/or reviving the business of the corporate debtor in question, namely insolvent persons, persons managing accounts that have been classified as non-performing assets, etc.
- Furthermore, the Insolvency and Bankruptcy Code now provides a doorway via section 12A for the withdrawal of the corporate debtor from CIRP insofar as maximisation of value by genuine promoters is involved.
- As a consequence, Section 29A of the Insolvency and Bankruptcy Code was upheld in its entirety, with a tapering definition of “related parties” subject to the disqualification test.
- IBC was intended to be more inclusive in approach and there was clearly no desire to prevent promoters from presenting resolution plans. Its goal was to identify the best feasible solution for a failing organisation. The four layers that Section 29A covers, however, could have the exact opposite effect. It is necessary to make sure the Citadel of Insolvency Resolution does not have any holes in it, but it is as crucial to make sure the Citadel is not impenetrable, lacking any steps, doors, or windows.
- The intent of Section 29A under IBC will be unsuccessful if it disentitled a large number of intending resolution applicants because the recursive definitions of “related party” and “connected individuals” include all entities backed by an entity.
- 29A Cerificate under the IBC law
- Related party under section 29a of ibc Code
- Section 29A of IBC act
- Who is ineligible according to section 29A of IBC law
- Time to time change in the IBC Section 29A
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