Persons not eligible to be resolution applicant [Section 29A ] - Insolvency Resolution And Liquidation For Corporate Persons - IBC

Persons not eligible to be resolution applicant Following person are not eligible to submit a resolution plan [ Section 29A ] if such person, or any other person acting jointly or in concert with such person- (a) is an undischarged insolvent ; (b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 ; (c) at the time of submission of the resolution plan 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 The guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 or The guidelines of a financial sector regulator issued under any other law for the time being in force, 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: Exception of this sub clause 1. 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; 2. this clause shall not apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor. Explanation I .- For the purposes of this proviso, the expression 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, or completion of such transactions as may be prescribed, prior to the insolvency commencement date. Explanation II.-For the purposes of this clause , where a resolution applicant 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 and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from the date of approval of such resolution plan by the Adjudicating Authority under this Code; (d) has been convicted for any offence punishable with imprisonment- (i ) for two years or more under any Act specified under the Twelfth Schedule; or (ii) for seven years or more under any other law for the time being in force: Exception This clause shall not apply to a person after the expiry of a period of two years from the date of his release from imprisonment: This clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I; (e) is disqualified to act as a director under the Companies Act, 2013; Exception :- this clause shall not apply in relation to a connected person referred to in clause (iii) of Explanation I; (f) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets; (g) 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; Exceptions :- this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction; (h) has executed a 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 this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part; (i) is subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or (j) has a connected person not eligible under clauses (a) to (i). Explanation I .- For the purposes of this clause, the expression 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): Provided that nothing in clause (iii) of Explanation I shall apply to a resolution applicant where such applicant is a financial entity and is not a related party of the corporate debtor: Provided further that the expression 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, or completion of such transactions as may be prescribed, prior to the insolvency commencement date; Explanation II .- For the purposes of this section, financial entity shall mean the following entities which meet such criteria or conditions as the Central Government may, in consultation with the financial sector regulator, notify in this behalf, namely:- (a) a scheduled bank; (b) any entity regulated by a foreign central bank or a securities market regulator or other financial sector regulator of a jurisdiction outside India which jurisdiction is compliant with the Financial Action Task Force Standards and is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding; (c) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor, where the terms shall have the meaning assigned to them in regulation 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 made under the Foreign Exchange Management Act, 1999 ; (d) an asset reconstruction company registered with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (e) an Alternate Investment Fund registered with the Securities and Exchange Board of India; (f) such categories of persons as may be notified by the Central Government. Relevant Case Law Arcelormittal India Pvt. Ltd. Vs. Satish Kumar Gupta and Ors. [ 2018 (10) TMI 312 ] Dated 04.10.2018 the Supreme Court held that Section 29A is a de facto as opposed to a de jure position of persons mentioned therein. This is a typical see through provision so that one can see persons who are actually in control, whether jointly or in concert. A purposeful and contextual interpretation of section 29A is imperative to pierce the corporate veil to find out as to who are the real individuals or entities who are acting jointly or in concert for submission of a resolution plan. Swiss Ribbons Pvt. Ltd. Anr. Vs. Union of India Ors. [ 2019 (1) TMI 1508] , Dated 25.01.2019 . The Constitutional validity of section 29A was upheld by the Supreme Court Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. Anr. [ 2021 (3) TMI 611] Dated 15.03.2021 the Supreme Court upholding the constitutional validity of regulation 2B of the Liquidation Process Regulations, held that prohibition in section 29A and section 35(1)(f) of the Code must also attach to a scheme of compromise or arrangement under section 230 of the Companies Act, 2013 (scheme) , where a company is undergoing liquidation under the Code. Even in the absence of said regulation, a person ineligible under section 29A read with section 35(1)(f) is not permitted to propose a scheme for revival of a company undergoing liquidation under the Code. In case of a company undergoing liquidation pursuant to the provisions of Chapter III of the Code, a scheme is a facet of the liquidation process. It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a going concern , are somehow permitted to propose a scheme. The same rationale which permeates the resolution process under Chapter II (by virtue of the provisions of section 29A) permeates the liquidation process under Chapter III (by virtue of the provisions of section 35(1)(f)) . Sandip Kumar Bajaj Anr. Vs. State Bank of India Anr. [ 2020 (9) TMI 844 ] HC, Calcutta Dated 15.09.2020 Section 29A or section 31 would not provide a shield against the operation of section 14(3)(b) of the Code and that CD/Promoter would not come under the immunity blanket of section 14 as the same is contrary to the law governing CIRP and RBI guidelines. State Bank of India Vs. Anuj Bajpai [ 2020 (3) TMI 705 ] NCLAT Dated 18.11.2019 The NCLAT held that if it comes to the notice of the liquidator that a secured creditor intends to sell the assets to a person who is ineligible in terms of section 29A , it is always open to reject the application under section 52(1)(b ) read with section 52(2) and (3) of the Code. Jindal Steel and Power Ltd. Vs. Arun Kumar Jagatramka Anr. [ 2020 (2) TMI 1130 ] NCLAT Dated 24.10.2019 Promoter, if ineligible under section 29A, cannot make an application for compromise and arrangement for taking back the immovable and movable properties or actionable claims of the corporate debtor (CD). Saravana Global Holdings Ltd. Anr. Vs. Bafna Pharmaceuticals Ltd. Ors. [ 2019 (9) TMI 841 ] NCLAT Dated 04.07.2019 The intention of the Legislature shows that the promoters of MSME should be encouraged to pay back the amount with the satisfaction of the committee of Creditors (CoC) to regain control of the corporate debtor (CD) and entrepreneurship by filing resolution plan, which is viable, feasible and fulfils other criteria as laid down by the IBBI. T. Johnson Vs. St. John Freight Systems Ltd. Anr. [ 2020 (8) TMI 494 ] NCLAT Dated 04.03.2020 The promoters/employees of the corporate debtor (CD) without the knowledge of resolution professional (RP) had secured the registration certificate under the MSME Act to overcome the bar under section 29A of the Code and submitted their resolution plan. The same was not approved by the committee of Creditors (CoC) although no other resolution plan was submitted and that the adjudicating authority s order of liquidation of the corporate debtor (CD) does not have any legal flaw. Digambar Anandrao Pingle Vs. Shrikant Madanlal Zawar, Erstwhile RP of M/s Pingle Builders Pvt. Ltd. Ors. [ 2021 (7) TMI 456 ] NCLAT Dated 09.07.2021 After CIRP was initiated former promoter/ director cannot suppress from IRP/RP and apply for MSME Certificate and tide over ineligibility under section 29A of the Code. Telangana State Trade Promotion Corporation Vs. A.P. Gems Jewellery Park Private Limited Anr. [ 2021 (9) TMI 991 ] NCLAT Dated 21.09.2021 The expression control in section 29A(c) of the Code symbolizes only the positive control i.e., that the mere power to block special resolutions of a Company cannot amount to control. In reality, the word control juxtaposed with the term management means defacto control of actual management or policy decisions that may be or are in reality taken.