Promoters under IBC: 29A, Settlements and Liquidation

The Code was built on the idea that promoters who presided over a company's failure should lose control of it. Section 29A bars most of them from bidding, and the bar extends into liquidation. Yet promoters are often the people who know the business best, and in small companies they may be the only realistic buyers. The law has therefore left some routes open and closed others. This note maps where promoters stand at each stage of insolvency.

1. From Debtor in Possession to Creditor in Control

Under the old regime, promoters remained in control throughout and often used the delay to their advantage. Under the Code, admission suspends the board and vests management in an insolvency professional, and the committee of creditors decides the company's future. Promoters remain obliged to cooperate (section 19), may attend meetings of the committee without vote, and remain exposed to claims for their past conduct.

Figure 1: Can the promoters participate?

2. Section 29A in CIRP

• The usual position. Promoters of a corporate debtor whose accounts have been non-performing for a year, who gave guarantees that have been invoked and remain unpaid, or against whom avoidance orders have been made, are ineligible to submit a plan, and so are their connected persons (Topic 38)
• Curing ineligibility. A promoter barred only under clause (c) may become eligible by paying all overdue amounts before submitting the plan, though in practice this is rarely possible for a promoter whose company is insolvent.
• Promoters not barred. A promoter who falls within none of the clauses, for example where the default was to operational creditors and no account was non-performing, may bid like any other applicant.

3. MSMEs and Pre-packs

• Section 240A. Clauses (c) and (h) of section 29A do not apply to resolution applicants for micro, small and medium enterprises, since their promoters are often the only persons interested in reviving them.
• Pre-packaged process. The corporate debtor itself, through its promoters, prepares the base resolution plan, and the existing management continues to run the business under supervision; competing plans are invited only if the base plan is not approved or impairs operational creditors (Topic 21)

4. Settlement and Withdrawal

• Section 12A. A promoter may settle with the creditors and seek withdrawal of the CIRP, which requires the approval of 90 per cent of the committee; section 29A applies to resolution applicants and does not prevent such a settlement.
• Vallal RCK v Siva Industries and Holdings, 2022. The Supreme Court held that the tribunals should respect the committee's commercial decision to accept a promoter's settlement proposal and allow withdrawal (Topic 20)
• 2026 limit. Withdrawal is now barred once the first invitation for resolution plans has been issued, so a promoter must settle early in the process.

5. In Liquidation

• Sale of assets, section 35(1)(f). The liquidator may sell the assets of the corporate debtor, but a proviso inserted in 2018 bars a sale of immovable and movable property or actionable claims to any person who is not eligible to be a resolution applicant.
• Schemes of compromise. Tribunals allowed a compromise or arrangement under section 230 of the Companies Act, 2013 to be proposed during liquidation, and Regulation 2B of the Liquidation Regulations, inserted in 2019, regulates this, requiring it to be completed within the specified time.
• Bar on ineligible persons. A proviso to Regulation 2B, inserted in 2020, provides that a person ineligible under section 29A cannot propose such a compromise or arrangement.

Figure 2: Promoters and schemes in liquidation

6. Arun Kumar Jagatramka v Jindal Steel and Power, 2021

• Facts. The promoter of Gujarat NRE Coke, which was in liquidation, sought to propose a scheme of compromise under section 230 of the Companies Act; he was ineligible under section 29A, and challenged the proviso to Regulation 2B.
• Holding. Decided on 15 March 2021, the Supreme Court held that a person ineligible under section 29A cannot propose a scheme of compromise or arrangement during liquidation under the Code, and upheld the proviso to Regulation 2B.
• Reasoning. A scheme in liquidation is part of the process under the Code and achieves the same result as a resolution plan or a sale, returning the company to its promoters; allowing ineligible persons to use section 230 would defeat the purpose of section 29A and of the bar in section 35(1)(f)

7. Promoters as Guarantors and Wrongdoers

• Personal guarantees. Promoters who personally guaranteed the company's loans remain liable even after a resolution plan is approved, and may face insolvency proceedings under Part III (Lalit Kumar Jain, 2021; Topic 66)
• Fraudulent and wrongful trading. Directors and promoters may be required to contribute to the company's assets if they carried on business with intent to defraud creditors, or failed to minimise losses when insolvency was inevitable (section 66; Topic 51)
• Avoidance and criminal liability. Avoidance orders may make them ineligible under section 29A(g), and section 32A, which protects the company and the successful bidder, does not protect former promoters and officers from prosecution (Topic 46)

8. Frequently Asked Questions

Can an ineligible promoter buy the company's factory from the liquidator?

No. The proviso to section 35(1)(f) bars the liquidator from selling property or actionable claims to any person not eligible to be a resolution applicant under section 29A.

Can a promoter propose a scheme under section 230 of the Companies Act during liquidation?

Only if he is not ineligible under section 29A. The Supreme Court in Arun Kumar Jagatramka (2021) upheld the bar in Regulation 2B of the Liquidation Regulations.

Can a promoter get the company back by settling with creditors?

Yes, through withdrawal under section 12A with the approval of 90 per cent of the committee of creditors, which is not barred by section 29A. After the 2026 Amendment, this must happen before the first invitation for resolution plans.

9. Related Topics

• Topic 20: Section 12A. Withdrawal and settlement.
• Topic 38: Section 29A. Ineligible resolution applicants.
• Topic 59: Going Concern Sale, Schemes and Dissolution. Options in liquidation.