India before 2016, and for a good part of 2016 had poor insolvency regime. There were multiple legislations such as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFESI Act) of 2002, the Companies Act of 2013, the Recovery of Debts due to Banks and Financial Institutions Act of 1993 and the Sick Industrial Companies Act of 1985. Each of them governed specific types of companies however, there were overlaps in many cases which, coupled with the existence of multiple forums such as the National Company Law Tribunal, The Debt Recovery Tribunal and the Board of Industrial and Financial Reconstruction, led to multiplicity of proceedings and assets being tied up for years together as they lose value while the creditors, with the exception of those with a secured charge on assets, had little power to recover the debts.
This led to the pressing need for reform and hence the Bankruptcy Law Reforms Committee was formed in 2014 with a two-fold mandate. This legislation has been largely credited as the reason behind the huge jump in India’s rankings in the Ease of Doing Business Index released by the World Bank1 where India moved from 130 to a 100. However, the all-encompassing code is not without its drawbacks and issues.
One of them was the possibility of the people responsible for running the company to the ground regaining control of the company at a far cheaper price with the debts substantially reduced or completely gone. In this regard, there have been many attempts to address this issue in different forms. The most prominent of which is Section 29A which has seen two amendments already since its inception through an Ordinance in November 2017.
BANKRUPTCY LAW REFORMS COMMITTEE REPORT (4/11/15)2
A report with an aim to arrive at a comprehensive code for Bankruptcy by the Committee constituted to look into reforms for Bankruptcy laws which ultimately led to the revamped regime of IBC.
The principles driving the design of the new legislation and framework as envisaged in the Report in brief are as follows:
One of the points raised by the report with regard to what a structured and thorough bankruptcy law can achieve is drawing a line between malfeasance and business failure. (Page 22-23)
Points in summary:
“Some business plans always go wrong
Limited liability of corporations is an important mechanism that fosters risk taking
Control of a company is not a divine right” (i.e., control will shift to creditors in case of default in debt)
“Illegitimate transfer of wealth out of companies by controlling shareholders is malfeasance
Above all, Bankruptcy Law must give honest debtors a second chance and penalize those who act with mala fide intentions in default”
As noted by the Committee and one of the principles of IBC is that the Code does not exist to punish those responsible for running the company into an unfavourable position but instead give those in control a chance at damage control or to get the best possible outcome for all stakeholders involved.
INSOLVENCY AND BANKRUPTCY CODE, 20163
Under the IBC first enacted, once Corporate Insolvency Resolution Process begins the Interim Professional and subsequently the Resolution Professional takes over the control of affairs and is answerable to the Committee of Creditors (COC). Essentially, it is the COC that takes major decisions concerning approval of the resolution plan. However, there was no restriction on who could submit a resolution plan.
Prior to its amendment, S.5(25) read thus: ““resolution applicant” means any person who submits a resolution plan to the resolution professional;” and S.5(26) read thus: ““resolution plan” means a plan proposed by any person for insolvency resolution of the corporate debtor as a going concern in accordance with Part II”
Any person could submit a plan before the COC, including the promoters and persons responsible for running the company into the ground. This gave rise to the concern that the IBC will act as a means for willful defaulters and promoters to regain control of a company at a much cheaper rate while also being rid of a large burden of debt obligations. While there are genuine cases of promoters regaining control with a bona fide intention, and the fact that it is not always the fault of the promoters or those in control but due to various other reasons a company might be forced into CIRP, it was clear that the IBC also allowed exploitation of the provisions by those with mala fide intentions. This seems to go against one of the stated achievements in the BLRC Report of drawing a line between malfeasance and business failure as there was no such distinction and no restriction on malfeasors from exploiting the legislation.
INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (INSOLVENCY RESOLUTION PROCESS FOR CORPORATE PERSONS) REGULATIONS 2016 [THIRD AMENDMENT 7/11/17]4
In late 2017, an amendment too IBBI Regulations for Corporate Insolvency was notified. One of the key points is amendment to Regulation 38 which is titled Mandatory Contents of Resolution Plan.
to in items (a) and (b).”
This notification clarified that promoters themselves can submit plans directly without having to go through shell companies and other similar measures as long as they make the disclosure with relevant details. This enables the COC to better evaluate the plans with more information at hand and thereby gauge interest and motive of the resolution applicant and subsequently assess whether the proposed plan is best suited to deal with all the interests. This last part is also aided with R.38(1A) as reproduced above. This has both clarified the ability of promoters to submit plans while also increasing transparency to an extent.
INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE 2017 (23/11/17)5
This was a key amendment and among a series of changes made were restricting the scope of resolution applicant. The definition under S.5(25) was amended to: “(25) "resolution applicant" means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25” S.25(2)(h) was also introduced in the amendment (Section 25 is titled Duties of Resolution Professional) as one of the actions the Resolution Professional must take. It reads thus: “invite prospective resolution applicants, who fulfil such criteria as may be laid down by him with the approval of committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified by the Board, to submit a resolution plan or plans.”
Apart from this restriction on resolution applicants, a new section 29A was introduced, “Persons not eligible to be Resolution Applicants” which has then been subject to a lot of scrutiny.
Soon after this section came into force, it attracted a lot of criticism for making the ineligibility net too wide. The conditions prevented even genuine cases where promoters may have not been responsible directly and prevented them from submitting plans for resolution. The provision provided multiple layers of ineligibility from individual, to connected person, to related person to person acting jointly with any of these persons. These multiple layers cover a large number of people, especially in criteria such as having NPAs with no payment of dues for one year. It also raised the question of the scope of another criterion pertaining to execution of enforceable guarantee. It appeared to disqualify any guarantor in case of guarantees in favour of creditor in respect of a corporate. This interpretation ends up excluding a vast majority of promoters.
Another important amendment in the Ordinance was to Section 30 whereby COC cannot approve a plan submitted by a person ineligible under 29A and no sale can be made by liquidator to such person as per Section 35.
From the initial version of the IBC where there was no distinction between malfeasance and business failure as envisaged in the BLRC Report since both of them could take advantage of the process, this amendment did not result in much of a distinction and instead went the other end and prevented both malfeasors and genuine cases of business failure from taking advantage of the process.
RBL BANK LTD. V. MBL INFRASTRUCTURES LTD. [CA(IB) NO. 543/KB/2017; ORDER DATED 18.12.2017]6
In this application before the NCLT to set aside an opinion expressed by the CoC of MBL Infrastructure, the NCLT looked into the object and scope of the above ordinance. A resolution applicant had submitted a resolution plan before the COC and in subsequent meetings, the plan was discussed, recommendations made and towards the end of the period for submitting application, the Ordinance was passed upon which the COC felt that the applicant was ineligible under S29A and hence the Resolution Professional must invite applicants from others. The claim was that the applicant was ineligible under S29A(c), i.e., NPAs and S29A(h), i.e., Enforceable Guarantee in favour of creditor. Though the section seemed to suggest all promoters and connected persons meeting any of the conditions, the Tribunal looked at the object of the Ordinance and adopted a harmonious approach.
Though the Ordinance appeared to have a wide net and seemed to affect honest promoters seeking a second chance, this order managed to clarify the stance of the Ordinance, at least with respect to 29A(h) if not all criteria.
INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT 2018 (18/01/2018)7
In the parliamentary session following the Ordinance, the IBC Amendment bill was submitted and it was subsequently passed with certain modifications made, especially to Section 29A.
Apart from minor modifications, the scope of some provisions has been better clarified. For starters, “promoter or person in management or control of applicant” has been removed and “person acting in concert” has been put in the first paragraph of the section. Since this term has not been defined under the IBC, the definition provided under Regulation 2(1)(q) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation 2011 is adopted. However, this replacing does not reduce the scope of 29A and if anything expands it further. 29A(j) which says the conditions also apply to connected persons includes promoters, persons in management or control and related persons in its ambit. Hence the removal of promoters from paragraph one is merely to address the redundancy and persons acting in concert has widened the scope of the section further. Promoters have also been specifically included in the NPA criterion. However, a small relaxation was provided in this clause where if payments pertaining to NPA are made before submitting the Resolution Plan, the person shall stand eligible. Promoters and persons in management or control have also been specifically included in the clause relating to undervalued, fraudulent and preferential transactions thereby making the scope clearer.
An issue that was raised earlier was that due to inclusion of connected persons including associate companies in the ineligibility, this will prevent Asset Reconstruction Companies (ARC) or certain investment funds (AIFs) from submitting plans and this interferes with the carrying out of their business. This has been addressed by way of exclusions to the explanation of scope of connected persons in the proviso the Explanation. The Amendment addressed certain disadvantages from the Ordinance but still widened the scope of the provision. Another area requiring clarity is the period for which the ineligibility must be ascertained. The section appears to refer to only present ineligibility yet there is the question of whether the COC will have the power to decide in cases of past ineligibilities.
REPORT OF INSOLVENCY LAW COMMITTEE (MARCH 2018)8
In the month of March 2018, the Insolvency Law Committee, which was set up to make recommendations to the Government on issues arising from the implementation of IBC and issues raised by stakeholders, submitted its report. Among various amendments proposed by the Committee were some recommendations pertaining to eligibility to submit a resolution plan. The Committee made the following recommendations:
INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE 2018 (6/6/2018)9
Following the ILC Report, a series of amendments were brought about to the IBC by way of an Ordinance in June 2018. One of the notable changes was to the voting threshold in COC which was reduced to 66% from 75%. Further, Section 29A once again saw certain key changes. Some of the recommendations of the ILC report was adopted and changes were made which to an extent reduced the scope of innocents and people in a genuine need of a second chance from getting caught in the vast criteria for ineligibility.
The object of this ordinance, inter alia, is also “to balance the interests of various stakeholders in the Code, especially interests of home buyers and micro, small and medium enterprises, promoting resolution over liquidation of corporate debtor by lowering the voting threshold of committee of creditors and streamlining provisions relating to eligibility of resolution applicants.”
Further, the Ordinance also introduced Schedule XII to IBC pursuant to the ILC recommendations with a list of 26 legislations which will apply to 29A(d).
Section 29A has been expanded and the major additions are by way of explanations and provisos which lay down the areas and groups of people to whom parts of the sections won’t apply. Most of the amendments proposed by the ILC have been adopted. This has streamlined the provision significantly. Much needed clarity in different clauses has been provided and the genuine cases of people submitting plans without any malafide interest is protected. The section now appears much further along than its version in the 2017 Ordinance in terms of achieving its objective of “provide for prohibition of certain persons from submitting a resolution plan who, on account of their antecedents, may adversely impact the credibility of the processes under the Code”. What was first viewed as an unnecessarily extensive provision which might end up doing more harm than good is now largely targeting the intended areas without interfering with the interests of other parties. Finally, this Amendment has come the closest to the initial stated achievement in the BLRC Report about drawing a line between malfeasance and business failure. However, there are still certain issues that arise from the provision for which there is little clarity.
Some of the recommendations proposed by the ILC in its March Report have not been adopted which has resulted in a lack of clarity.
The terms ‘person acting jointly or in concert’ has not been deleted. As noted in the report, the use of these terms in the first portion of the section gives rise to the question of whether such persons acting jointly or in concert is with respect to the resolution applicant alone or even to connected persons under 29A(j) which increases the already existing layers of ineligibility. The term “acting in concert” has a wide definition under SEBI SAST Regulations as noted earlier. This results in disqualification of an applicant due to some remote persons attracting ineligibility. This goes against the intention of the provision to disqualify the contributories to the downfall of the Corporate Debtor.
Among the criteria for ineligibility are some disqualifications due to offences under various legislations. These include Companies Act, SEBI Act, Acts under Schedule XII and other legislations in cases of sentence exceeding 7 years. However, there is no clarity as to the status of the ineligibility in case of appeals or stay of conviction. Regarding the status of an order of conviction during the pendency of an appeal, the Supreme Court has held that as a general principle of law if an appeal filed against an order of conviction and sentence is allowed, the conviction and sentence becomes non-est and the judgment in the appeal operates with retrospective effect and anything done on the basis of the conviction becomes null and void.10 In case of staying of a Sentence without suspension, the position of law is unclear on the applicability of such stay to any disqualifications. In case of Representation of People’s Act, the Election Commission issued directions that staying of a sentence will not impact disqualification of candidature. However, this direction and the power of EC to issue such direction has been questioned by Justice V Ramaswami in an opinion piece in The Hindu.11 This ambiguity could be resolved if a clarification is provided in the statute itself in case of 29A of IBC but such an aspect is lacking in the provision.
One of the recommendations of the report was pertaining to the ascertainment of the date of applicability of S.29A as without clarity in that regard, insolvency proceedings which are nearing the completion will be affected despite the applications having been submitted and reviewed by the COC which was the case with the RBL Bank Case. In the IBC Amendment Act of 2018, a proviso to S30 was inserted whereby applications received prior to the date of commencement of the IBC Amendment Ordinance 2017, if submitted by an ineligible applicant will be rejected and fresh applications are required to be invited by the Resolution Professional. However, in case of ineligibility due to 29A(c), i.e., NPAs a period of 30 days could be given to the applicant to make the overdue payments as this was a proviso inserted to 29A in the same Amendment Act. However, in the Amendment Ordinance of 2018, the recommendations of the Committee have been adopted and another proviso added to S30 now states that the terms of the new 29A after the amendment will apply only to those applicants who are yet to submit as on the date of amendment. Unlike the earlier proviso, this upholds the generally accepted principle of laws having a prospective effect. Further, considering the amendments made to the section in the 2018 Ordinance are largely to reduce the scope of the section and to create numerous exceptions, it will have made it possible for more applicants who might have been ineligible under the previous versions of the section.
While on the topic of S30, another issue to be contemplated is the time limit for completion of the process as provided under S12 of IBC which is a maximum period of 270 days. As stated earlier, the ILC recommended an extension of the limit due to the nature and extent of verification under S29A. A proviso to S30 inserted in the Amendment Act 2017 is that in case of an extension granted to applicants who may have NPAs to make payment, this cannot be construed as an extension of the overall time limit. While this proviso is specific to one clause, it sends a clear message that there is to be no extension of the time limit to complete. However, the ambit of 29A is quite wide and despite any affidavits by applicants and details disclosed along with the submission of the Resolution Plan, there is still a responsibility on part of the Resolution Professional to ensure the correctness of details. With more details forming part of the submission, more is the extent of work and an extension in the time limit is not something to be disregarded especially since S29A is no small unimportant provision. However, one of the essential reasons behind IBC was the long time the process took generally. If the time limit begins to stretch for a provision, this may trigger similar extensions for other existing and future provisions which might end up defeating the purpose of the revamped Insolvency Law Regime. Perhaps the best way to address this concern would be to ensure highly capable and qualified persons alone join the Insolvency Professionals Agency and do away with the needs for extension of the time limit.
Another issue that is less technical and more an increase in procedure is that of requirement of various details under Regulation 38(3) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 when an affidavit stating qualification under 29A IBC must be submitted as per an amendment made to Section 30 in the recent Ordinance. Regulation 38(3) was inserted prior to the introduction of Section 29A and at that point it served the purpose of better disclosure to COC in order to facilitate a more informed evaluation of Resolution Plans. However, with a comprehensive Section dedicated to eligibility of Resolution Applicants and an affidavit requirement, further disclosure under the Regulation is redundant and results in an unnecessary additional procedural formality, especially considering the requirements of both these provisions are largely the same. Be it minor or major, unnecessary procedure must be done away with, in order to further the goal of improving the Ease of Doing Business in India, which was one of the main drivers behind the comprehensive IBC.