India: Re-engineering the Insolvency and Bankruptcy Code in light of Section 29A

Last Updated: 25 September 2018
Practice Guide by Dhir & Dhir Associates

By Sachin Gupta, Partner and Pragya Khaitan, Senior Associate.

Insolvency and Bankruptcy Code (IBC) is a legislation that has been evolving with various amendments since its enactment. One such amendment is the introduction of Section 29A by way of ordinance dated 23rd November, 2017. Prior to this, there was no bar on the eligibility of the resolution applicant. This led to an open ended platform for even defaulters to bid for the assets of a company undergoing Corporate Insolvency Resolution Process (CIRP) subsequently leading to an undue advantage of the provision, which would defeat the very purpose of IBC. Thus, in order to curtail the same, section 29A was introduced. Section 29A is a restrictive provision, which specifically lists down the persons who are not eligible to be resolution applicants.

Section 29A states that a person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person

1. Is an undischarged insolvent;

2. Is a wilful defaulter in accordance with the guidelines of the RBI issued under the Banking Regulation Act, 1949;

3. 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 by the RBI and at least a period of 1 year has lapsed from the date of such classification;

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;

4. Has been convicted for any offence punishable with imprisonment for 2 years or more;

5. Is disqualified to act as a director under the Companies Act, 2013;

6. Is prohibited by the SEBI from accessing the securities markets;

7. 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 in respect of which an order has been made by the Adjudicating Authority under this Code;

8. Has executed an enforceable guarantee in favor 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;

9. Has been subject to any disability, corresponding to clauses (1) to (8), under any law in a jurisdiction outside India; or

10. Has a connected person[1] not eligible under clauses (1) to (9)[2].

This was an attempt to tighten the bidding and evaluation process, to keep dishonest promoters and people who have gamed the system out from acquiring back the assets at a steep discount including the ex-promoters, key managerial persons (KMPs) and their relatives. This narrative seems to be based on a moralistic ground to allow only ‘Clean and Credible people’ to run businesses in India and keep others, who have been responsible for bringing the borrower to this state, out of the process. As mentioned earlier, before section 29A was introduced, even the people (promoters, directors, connected person(s) etc.) who had contributed to the downfall of the corporate debtor were eligible to bid for the corporate debtor at a heavy discount causing the creditors (financial and operational) to take a sizeable haircut.

Though the purpose of section 29A under the Ordinance was well intended but the net it casted was too wide. Further, if one goes into the definition of Wilful Defaulter, it covered not only the dishonest promoters but a host of other genuine promoters, KMPs and connected persons who come under this tag due to technical defaults. With the aim to streamline the provisions of Section 29A, the Insolvency and Bankruptcy Code Amendment (Ordinance) 2018 was introduced on 6th June, 2018, wherein the following amendments were implemented:

  1. The Ordinance does not disqualify the promoter from bidding for his company undergoing CIRP, as long as he is not a wilful defaulter and does not permit disqualification in any other manner, in the case of MSME.
  2. The Ordinance does not disqualify financial entities, including asset reconstruction companies (“ARC”), financial institutions functioning overseas, alternate investment funds, scheduled banks, registered foreign portfolio investors and foreign venture capital investors, who are not associated with the corporate debtor.
  3. The Ordinance does not disqualify the guarantor of a corporate debtor, unless the guarantee after enforcement remains unpaid.
  4. The Ordinance does not disqualify entities who have acquired a corporate debtor with an NPA in the past by virtue of an earlier insolvency resolution process for a period of three years.
  5. The Ordinance does not disqualify those financial creditors who are regulated but are affiliated to the corporate debtor simply due to their equity holdings resulting from a debt restructuring scheme prior to the initiation of CIRP.

The impact of Section 29A could be seen in a few high profile cases which were in news frequently. Numetal which has the scion of the Ruia family as its helm and 25% stake being owned by the Aurora Trust of the Ruia family was disqualified from bidding for Essar Steel. ArcelorMittal was also restricted from bidding for Essar Steel as it was contended that ArcelorMittal was holding shares in companies like Uttam Galva Steel and KKS Petron whose loan account had been declared as NPA. The bidding race for Ruchi Soya is another example where the two participants Patanjali and Adani Wilmar were neck to neck till Patanjali contended that the wife of the promoter of Adani Wilmar was the daughter of the promoter of Rotomac, which is a loan defaulting entity. It is clear that in both cases the Resolution Applicant was hit by the provisions of Section 29A.

This regulatory and legislative re-engineering of IBC by introducing section 29A  and the Insolvency and Bankruptcy Code Amendment (Ordinance) 2018  have given adequate protection to genuine resolution applicants who have suffered due to macroeconomic and external factors, errors of policy, systematic fault lines in the economy and financial sector et al. This amendment has balanced the interest of all stakeholders and ensured maximisation of the value of assets of the Corporate Debtor in line with the scope and object of the Code.


[1] The  "connected person" means—

(i) any person who is the promoter or in the management or control of the resolution applicant; or

(ii) 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

(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):

[2] Related Party shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date

This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Free Personalized News Alert: Sign-up/Edit
Other India Advice Centres
Arbitration, Litigation and Conciliation
Trademarks
More Advice Centers
Significant Recent Cases
Highlights of commercially relevant recent news and events.
Recent judgments and court decisions of interest.
Upcoming Events
Media from our most recent events and conferences.
Tools
Font Size:
Translation
Channels
Mondaq on Twitter

|
|
© Mondaq® Ltd 1994 - 2018
All Rights Reserved
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions