Section 29A IBC: Ineligible Resolution Applicants

When the first large insolvencies began in 2017, it became clear that the promoters whose companies had failed could bid to buy them back at a steep discount, using the insolvency process to shed their debts. Section 29A was introduced to prevent this, by barring defaulting promoters and other unsuitable persons, and anyone connected to them, from submitting resolution plans. It is among the most litigated provisions of the Code. This note explains each ground of ineligibility, the exceptions and the leading cases.

1. Background

• Introduction. Inserted by the Insolvency and Bankruptcy Code (Amendment) Ordinance of 23 November 2017, replaced by the Amendment Act of 2018, and amended again later in 2018.
• Purpose. To ensure that persons responsible for the insolvency of the corporate debtor, or otherwise unsuitable, do not regain control of it through the process, and to maintain public confidence that the Code is not a route for defaulters to buy back their assets cheaply.
• Scope. A person shall not be eligible to submit a resolution plan if it, or any person acting jointly or in concert with it, falls within any of the clauses (a) to (j)

2. The Grounds

Figure 1: Clauses (a) to (j) of section 29A

• (a) and (b). An undischarged insolvent, and a wilful defaulter in accordance with the guidelines of the RBI.
• (c) Non-performing accounts. A person who, or whose controlled or promoted corporate debtor, has an account classified as a non-performing asset for one year or more before the insolvency commencement date, unless it pays all overdue amounts with interest and charges relating to such accounts before submitting the plan; this clause does not apply to a financial entity that is not a related party of the corporate debtor, or to an account acquired under an approved resolution plan for three years from that plan.
• (d) Conviction. A person convicted of an offence punishable with imprisonment of two years or more under the Acts listed in the Twelfth Schedule, or of seven years or more under any law, until two years after release from imprisonment.
• (e) and (f). A person disqualified to act as a director under the Companies Act, 2013, and a person prohibited by SEBI from trading in securities or accessing the securities markets.
• (g) Avoidance orders. A person who was a promoter or in the management or control of a corporate debtor in which a preferential, undervalued, extortionate or fraudulent transaction took place and in respect of which an order has been made by the NCLT.
• (h) Invoked guarantees. A person who has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution has been admitted, where the guarantee has been invoked and remains unpaid.
• (i) Foreign disabilities. A person subject to any disability corresponding to clauses (a) to (h) under any law in a jurisdiction outside India.
• (j) Connected persons. A person who has a connected person not eligible under clauses (a) to (i)

3. Connected Persons

Figure 2: Who is a connected person

• Explanation I. A connected person means any person who is the promoter or in the management or control of the resolution applicant; any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the plan; and the holding company, subsidiary, associate company or related party of any of these persons.
• Financial entities. The related party limb does not apply to scheduled banks, asset reconstruction companies, alternate investment funds and other financial entities notified, which commonly hold shares in many companies, unless they are related parties of the corporate debtor.
• Narrow reading. In Swiss Ribbons (2019), the Supreme Court read related party in this context as covering only persons connected with the business activity of the resolution applicant, to avoid an absurdly wide disqualification.

4. ArcelorMittal India v Satish Kumar Gupta, 2018

• Facts. ArcelorMittal and Numetal both bid for Essar Steel; each challenged the other's eligibility, ArcelorMittal because of its past links with Uttam Galva and KSS Petron, whose accounts were non-performing, and Numetal because of its links with the Ruia promoters of Essar Steel.
• Holding. Decided on 4 October 2018, the Supreme Court held that both were ineligible as they stood, but allowed each to become eligible by paying the overdue amounts of the non-performing accounts under the proviso to clause (c) within two weeks; ArcelorMittal paid about 7,000 crore rupees and its plan was later approved.
• Acting jointly or in concert. The Court gave these words their ordinary meaning, so that persons acting together towards a common objective, even informally, are covered, and one must look behind corporate structures.
• Management or control. Control includes de facto control as well as de jure control, and positive control, meaning the ability to direct, rather than merely a power to block decisions.
• Time of testing. Eligibility is tested when the resolution plan is submitted, not at the stage of expression of interest; ineligibility at that time cannot be cured by later restructuring.
• Role of the RP and CoC. The resolution professional examines eligibility and presents his view, but the committee decides; the NCLT may review the decision at the stage of approval.

5. Other Aspects

Figure 3: Is the resolution applicant eligible?

• Retrospective application. Swiss Ribbons (2019) upheld the application of section 29A to processes pending when it was introduced, since a resolution applicant has no vested right to have its plan considered (Topic 3)
• Not only malfeasance. Clause (c) bars persons whose accounts are non-performing even without fraud or wrongdoing; the Court held this to be a legitimate policy choice, since such persons have shown an inability to run the business.
• Affidavit, section 30(1). Every resolution applicant must submit an affidavit stating that it is eligible under section 29A, and the professional verifies it; a plan from an ineligible applicant cannot be approved.
• MSMEs, section 240A. Clauses (c) and (h) do not apply to resolution applicants for MSMEs, so that their promoters, often the only realistic bidders, may propose plans (Topic 21)
• Liquidation. A liquidator cannot sell property to a person ineligible under section 29A, and such a person cannot propose a scheme of compromise during liquidation (Topic 39)

6. Frequently Asked Questions

Can a promoter whose company's loan became an NPA two years ago bid for it?

Only if, before submitting the plan, it pays all overdue amounts with interest and charges on the non-performing accounts, under the proviso to clause (c). Otherwise it is ineligible, unless the debtor is an MSME, for which section 240A disapplies clause (c).

When is eligibility under section 29A decided?

At the time of submission of the resolution plan, as held in ArcelorMittal (2018). Restructuring a bidding entity after that point cannot cure an ineligibility.

Does section 29A apply to banks and ARCs that bid?

Clause (c) and the related party limb of connected persons do not apply to financial entities such as scheduled banks, ARCs and alternate investment funds that are not related parties of the corporate debtor, but the other clauses do.

7. Related Topics

• Topic 26: Related Party Creditors. Related parties in the CoC.
• Topic 39: Promoters, Section 29A and Liquidation Schemes. Promoters after section 29A.
• Topic 40: Section 30. Contents of a resolution plan.