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Section 29A under the Insolvency and Bankruptcy Code, 2016, plays a key role in determining the eligibility of Resolution Applicant for providing resolution plan in the Corporate Insolvency Resolution Process.
Earlier, there were no provisions, restricting the defaulting promoters from participating in to CIRP of the corporate debtor, which would generally, occur potentially in an unfair manner.
To overcome such problems, Section 29A was introduced, in retrospective effect, from November 23, 2017.
Before the introduction of section 29A, any individual or corporate entity, be it the promoters, directors, key managers, or any other related person, can participate in the bidding process of Corporate Debtor under CIRP.
As a result, the persons responsible for the failure of the company, or contributed to the default of the Corporate Debtor, could regain the control of the company by bidding at heavy discounts which the other bidders like banks and other financial institutes cannot afford to make.
Thus, amendments were required in the IBC 2016, to provide a criterion for eligibility for a resolution applicant, submitting the resolution plan during CIRP, and thereby restricting the persons, responsible for downfall of the corporate debtor or were unsuitable to run the company, from regaining their control.
During CIRP, under IBC 2016, the Resolution Professional shall invite plans from eligible resolution applicants, and the said plan to be approved by the committee of creditors, and the same shall be based on the complexity and scale of operations of the business of the corporate debtor, along with any other conditions, as may be specified by the Board.
For a person to qualify as a resolution applicant, is required to fulfil the following two conditions –
DISQUALIFICATION OF RESOLUTION APPLICANT : A person shall be disqualified for being a resolution applicant –
It is to be noted that such disqualification shall apply to persons mentioned in the section acting individually or jointly or in concert with such persons.
As we know that the Indian business environment is more a promoter-driven business, it becomes difficult to place a resolution for the revival of such businesses without involving promoters.
To illuminate such aspect, a significant amendment is made in Section 29A, thereby relaxing the provisions of resolution applicant for micro, small and medium enterprises
As discussed above, Section 29A lays down a multiple layered and comprehensive standard of disqualification for a resolution applicant. A certain amount of leniency has been provided by the courts in deciding the issue of disqualification.
A middle path could be provided, thereby permitting promoters from becoming a resolution applicant, though proper safeguards to protect the other stakeholders be provided and thus, the CIRP process can be initiated much more economically.
Certain relaxation is required in related party transactions, so that any excess payments that the competent companies’ promoters are willing to make to the lenders cannot be debarred on the cost of morality.
Thus, the ultimate aim should always be to revive the company and avoid liquidation to preserve the rights of both, the Corporate Debtors and Creditors.
Earlier, IBC had no framework to prevent promoters from regaining control over their companies by default. Therefore, to avoid any irregularity, the legislator introduced Section 29A to disqualify such persons.
Thus, the rationale behind this was to generate fear among promoters to take decisions wisely, to avoid failure of their companies.
In the case of Andhra Bank v. Sterling Biotech, the promoters offered a onetime settlement proposal to creditors, in exchange of withdrawal of CIRP request application.
NCLAT held that the promoters are allowed to withdraw the application under Section 12A as COC has given approval of more than 90%.
Such a ruling was provided, as the main intention and objective of the code is the revival of the distressed corporate entities in a time bound manner.
The introduction of Section 29A to disqualify certain persons, who should not take benefit of their own wrong, but, with the introduction of Section 12A, it can be clearly seen that the dilution of Section 29A is taking place.
Section 29A under the Insolvency and Bankruptcy Code, 2016, plays a key role in determining the eligibility of Resolution Applicant for providing resolution plan in the Corporate Insolvency Resolution Process.
Earlier, there were no provisions, restricting the defaulting promoters from participating in to CIRP of the corporate debtor, which would generally, occur potentially in an unfair manner.
This Section was included not only to disqualify persons responsible for the mismanagement of the corporate debtor who is facing CIRP, but also to prevent undischarged insolvents from participating in the resolution process and to ensure maximization of assets.
Initially, the entire Section 29A applicable to Resolution Applicants submitting Resolution Plans for MSMEs. However, the Insolvency Law Committee, in 2018, submitted a report stating that since MSMEs form the foundation of Indian economy, certain relaxations must be provided to them.
As per the report, they wanted the promoter who is not a wilful defaulter, to be permitted to bid for an MSME in insolvency because it is believed that an MSME attracts mainly the interests of its promoters and disqualifying them will hinder the efficiency of the Resolution Process.
After considering the recommendations, another section named Section 240A was inserted. It thereby provides relaxation to promoters of MSMEs, who are not a wilful defaulter, to become a resolution applicant, and participate in CIRP of such MSMEs.
With the increasing distress caused by the pandemic on the MSMEs, IBC Ordinance, 2021 was proposed by the President, to include the Pre-Packaged Insolvency Resolution Process for corporate persons classified as MSME having default of up to Rs 1 Crore. Pre-Packaged Insolvency is a system or an arrangement between the Corporate Debtor, buyer and creditors of the Corporate Debtor, wherein the resolution of the Corporate Debtor’s business is negotiated between the buyer and the creditors before the appointment of an Insolvency Professional.
Coming on to the provide sure and conditions for pre-packed insolvency, an application to initiate Pre-Packaged Insolvency is to be made only if the eligibility requirement provided under Section 29A of IBC is fulfilled.
A confusion persists because, on one hand, the report in 2021 provides that where all the conditions enumerated under Section 29A are fulfilled, an application be for initiation of the Pre-Packaged Insolvency.
However, on the other hand, the judicial pronouncements prior to the Ordinance emphasized the importance of diluting certain disqualifications provided under Section 29A to Insolvency of MSMEs.
It was believed that the law pertaining to applicability of Section 29A to CIRP is well settled and evolved over the course of years, but the same cannot be applied to Pre-Packaged Insolvency of MSMEs.
Since, the Pre-Packaged Insolvency Process is at its initial stage, it is important for the Legislature to notice such confusion and provide a clarity on the effect of Section 29A to Pre-Packaged Insolvency Process.
As per the Supreme Court judgment, it is proposed that the Resolution Professional shall be very careful in taking up and approving the resolution plan in a CIRP. They need to confirm that a resolution plan, among other things, does not contravene the provisions of Section 29A.
Each and every Resolution Applicant, is required to provide an affidavit stating the list of all of their connected persons. During the due diligence process, the RP may come across some entities and individuals that were not specified as connected persons by the Resolution Applicants in their affidavit. In such a case, it is important to perform due diligence on such entities and they be considered as connected persons.
The RP is required to conduct effective public domain research including media, regulatory, litigation, bankruptcy, credit default and other relevant checks across jurisdictions, subject to the extent of information available in the public domain.
They also need to identify, review, and report any red flags relevant to Section 29A. and where any significant reg flag is found, leading to ineligibility of a Resolution Applicant under Section 29A, the same be reported to COC.
We take this opportunity to introduce IFCCL as a leading consulting firm engaged in providing Assurance, Tax & Advisory services having offices across 10 locations in India. In forensic services, we are a 10 members team consisting of partners & directors having varied domain & industry experience.
We would like to highlight that IFCCL has elaborate experience of performing Transaction and Forensic Audits for IRP’s / RP’s and we had conducted certain key transaction audits including cases from top 3 accounts listed by RBI for IBC proceedings. Additionally, we have worked extensively for forensic audit on behalf of lenders where we have conducted forensic audit of key accounts in few companies. We also have experience in Section 29 A Due diligence and Asset tracing assignments.
You may also know more about 29A certificate
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