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Dilution of Section 29A of the Insolvency & Bankruptcy Code in India: A myth or reality?

Looking at the challenges in the Company Law, the Government of India came up with The Insolvency & Bankruptcy Code, 2016 (“IBC”), a mechanism for time-bound resolution of dispute of corporate entities in financial distress. Since, this code has been an evolving legislation therefore, in past few years it is noticed that many ordinances and amendments have been brought in the code. 9 (Amendment) Act, 2017 played a crucial role by adding Section 29A in the code, which created a drastic change, so as far as implementation of the objective and spirit of this code is concerned i.e. timely resolution. Before this amendment, IBC had no framework to prevent promoters to regain control over their companies in default. This could defeat the purpose and intent of the code. Therefore, to avoid such mishap, legislator introduced Section 29A to disqualify such persons. The rationale behind this was to generate fear among promoters so that they take wise decision to avoid failure of their companies and must be at arm's length to enable an independent entity to take control of their defaulting entity. In Essar Steel India Limited v. Satish Kumar Gupta & Ors, initially COC raised question on the eligibility of the prospective bidder (Arcelor Mittal) & Nu-metal under Section 29A of the code. Arcelor Mittal offered 25% higher than other bidders devoid of this, the promoters were barred from offering a bid due to the ineligibility under Section 29A. Promoters also attempted to invoke Section 12A to withdraw their application from Corporate Insolvency Resolution Process (CIRP), however, failed to get approval of lenders. Later on, Supreme Court of India allowed promoters to submit resolution plan stating it to be an exceptional circumstance. Keeping aside the commercial viability of the plan, it is believed that this will dilute the intent and purpose of Section 29A. As rationale behind inserting this section was to disallow promoters of the companies to submit the resolution plan. Subsequently, the judgment of Brilliant Alloys Private Limited v. S. Rajagopal brought new dimension by interpreting that the introduction of Regulation 30A is directory in the nature and Adjudicating Authorities may permit promoters to withdraw their application from insolvency proceedings with the approval of COC under Section 12A, even after submission of Expression of Interest (EOI) but in exceptional circumstances. The Court did not clarify what it meant by, neither laid down any definitive test to determine the same; as it will provide opportunity to promoters to withdraw insolvency proceedings after EOI by stating it as exceptional circumstances. The effect of above decisions was also seen in Andhra Bank v. Sterling Biotech; wherein the promoters of corporate debtor offered to creditors for a one-time settlement proposal and requested for withdrawal of application under Section 12A of the Code. The question was whether promoters can withdraw the insolvency application during CIRP because law permits such withdrawal before EOI only? But in this case, the National Company Law Appellant Tribunal (NCLAT) allowed promoters to withdraw the application under Section 12A as COC has given approval of more than 90%. Appellate tribunal also held that Section 29A is not applicable when promoters rely on Section 12A. Analysis    It seems Section 12 A is not controlled by Section 29A. NCLAT ordered promoters to pay off the dues within thirty days of the order of tribunal or failing which, liquidation proceedings will commence. This decision was considered to be a positive step towards safeguarding the interest of promoters and it was anticipated that creditors will be benefited by execution of the resolution plan. Months have been passed, but promoters have not yet paid the money and now requesting an additional time of six months from the NCLAT to repay their dues.  Moreover, NCLAT has not even initiated liquidation process against the company yet. Conclusion     The above analysis suggests that the intention and objective of the code was revival of the corporate entities in a time bound manner. However, after going through above cases, it is evident that the IBC has failed to comply with the timeline of 330 days as provided under the code & this has impacted the confidence of investors intending to participate in the bidding process of such defaulting entities. The introduction of Section 29A to disqualify certain persons, who should not take benefit of their own wrong and therefore, should not be given another opportunity to regain control over the defaulting entities. However, with the introduction of Section 12A and few decisions discussed above, the dilution of Section 29A is clearly evident.

 

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