Home » Between The Lines » NCLAT: IBC has no bar for the ‘Promoter’ to file ‘resolution application’, even if otherwise not eligible in terms of Section 29A

Disclaimer: While every care has been taken in the preparation of this Between the Lines to ensure its accuracy at the time of publication, Vaish Associates Advocates assumes no responsibility for any errors which despite all precautions, may be found therein. Neither this bulletin nor the information contained herein constitutes a contract or will form the basis of a contract. The material contained in this document does not constitute / substitute professional advice that may be required before acting on any matter. All logos and trademarks appearing in the newsletter are property of their respective owners.

The National Company Law Appellate Tribunal (“NCLAT”) in the case of Sreeram E. Techno School Private Limitedv. Beans and More Hospitality Private Limited Through R.P. Prabhjit Singh Soni (decided on September 11, 2019) upheld the order dated July 19, 2019 passed by the NCLT, III bench, Delhi (“Adjudicating Authority”) under Section 30(6) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and held that IBC has no bar for the ‘Promoter’ to file ‘resolution application’, even if otherwise not eligible in terms of Section 29A.

Facts
An application under Section 7 of IBC was filed by Shree Siyaram Automations Private Limited (now Shreeram E Techno School Private Limited) (“Appellant”) for initiation of Corporate Insolvency Resolution Process (“CIRP”) against Beans and More Hospitality Private Limited (“Corporate Debtor”) for a default of INR 90,00,000 (Rupees Ninety Lacs Only) along with interest. The said application for initiation of CIRP was admitted by the Adjudicating Authority by its order dated 13.03.2018 imposing moratorium under Section 14 of IBC and appointing Mr. Prabhjit Singh Soni as the Interim Resolution Professional, who at the first meeting of the Committee of Creditors (“CoC”) held on 25.04.2018 was appointed as the Resolution Professional (“RP”) in accordance with the provisions of Section 22(3)(a) of IBC.

The RP in furtherance to his duties under Section 25(2)(h) of IBC invited prospective resolution applicants on 31.08.2018. In response to the same, three resolution applicants submitted their Expression of Interest and further submitted their resolution plans. Out of the three plans received, one plan of Mr. Abhay Jain, Ex Director and promoter of the Corporate Debtor was found satisfactory and was discussed fully in the CoC meeting. The RP further examined the said resolution plan submitted by Mr. Abhay Jain and the CoC and the RP found the resolution plan submitted by him to be consistent with Section 30(2) and other provisions of the IBC and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). The resolution plan proposed that the financial creditors are to be paid in full in final settlement of their entire debt against the Corporate Debtor including contingent liabilities and the resolution plan further proposed the continuation of the Corporate Debtor as a “going concern” and previous management would run the Corporate Debtor to make it viable, for the benefit of the society, stakeholders and the government.

The Adjudicating Authority noticed that the resolution applicant had issued an affidavit negating the existence of ineligibility under Section 29A of the IBC. The said resolution plan was duly approved by the CoC by a voting of 74.19% and the RP filed an application before the Adjudicating Authority under Section 30(6) of the IBC read with Regulation 39(4) of the CIRP Regulations seeking approval of the Resolution Plan duly approved by the CoC. The Adjudicating Authority, taking view of the facts that the resolution plan was approved by the CoC is in accordance with Section 30(2) read with Section 31 of IBC, the resolution applicant is not disqualified under Section 29A of IBC and no infirmity seems to have been brought out upon screening of the resolution plan, approved the plan under Section 31(1) of the IBC.

Aggrieved by the said order, the Appellant, one of the ‘dissenting financial creditors’ challenged the order of the Adjudicating Authority alleging different infirmities and irregularities.

Issue

  • Whether the resolution applicant, being the erstwhile promoter, is barred from filing of the resolution plan in terms of Section 29A of IBC.
  • Whether the issue of viability, feasibility and other conditions of the Corporate Debtor can be looked into by the Adjudicating Authority or by the NCLAT.

Arguments

The submissions of the counsel for the Appellant were:

  • The resolution applicant was the erstwhile promoter and, therefore, is the relevant eligible party under Section 29A of the IBC.
  • The Corporate Debtor is not a going concern.
  • Regulation 38 of the CIRP Regulations has not been complied with by the resolution applicant.

Observations of the NCLAT

With regard to the first submission of the counsel for the Appellant, the NCLAT refused to accept such a submission as the IBC has no bar for the promoter to file a resolution application, even if such promoter is ineligible in terms of Section 29A of IBC. Further there is nothing on record to suggest that the Corporate Debtor is an undischarged insolvent or a willful defaulter in accordance with the guidelines of the Reserve Bank of India, issued under the Banking Regulations Act, 1949; or at the time of submission of the resolution plan has an account classified as a ‘Non-Performing Asset’ in accordance with the guidelines of the Reserve Bank of India; or that the promoter or its directors have been convicted for any offence punishable with imprisonment; or is disqualified to act as a director under the Companies Act, 2013; or was prohibited by the Securities and Exchange Board of India; or made any preferential transaction, an undervalued transaction or granted extortionate credit transaction or entered into a fraudulent transaction, etc.

With regard to the second submission of the counsel for the Appellant, the NCLAT stated that even if Corporate Debtor is not a going concern, a resolution plan cannot be rejected on such ground if the resolution applicant can show the feasibility to run the company in future. The question of viability, feasibility and other conditions as prescribed by the Insolvency and Bankruptcy Board of India of a Corporate Debtor can be looked into by the CoC which has expertise in the financial field. Such issues of viability, feasibility and other conditions of the Corporate Debtor cannot be looked into by the Adjudicating Authority or by the NCLAT. Since the CoC had gone through the financial aspects, including the viability, feasibility and other conditions of the resolution plan and had approved the plan with 74.19% of voting share, the NCLAT was not inclined to decide such an issue.

Further with regard to the third submission of the counsel for the Appellant, the NCLAT noted that the CoC has noticed all the aspects and merely because the Appellant is a dissenting financial creditor, no interference is called for in absence of any illegality.

Decision of the NCLAT

The NCLAT upheld the order of the Adjudicating Authority, approving the resolution plan submitted by the successful resolution applicant and stated that as the successful resolution applicant proposed to pay 100% dues of all the financial creditors with interest including the Appellant, hence no interference is called for and the appeal was dismissed.

Vaish Associates Advocates View

Section 29A of the IBC, being a restrictive provision, determines the eligibility of a prospective resolution applicant in the CIRP of a corporate debtor. IBC in its initial form did not have this provision to prevent any defaulting promoters from bidding for a corporate debtor and hence Section 29A was introduced with the purpose of preventing such defaulting promoters and any such person from participating in the CIRP of the corporate debtor who had contributed in the downfall of the corporate debtor and ultimately restricting them from acquiring the corporate debtor at steep discounts.

In the landmark case of Chitra Sharma v. Union of India [Writ Petition (Civil) No. 744 of 2017] the Hon’ble Supreme Court of India, while holding the promoters to be ineligible to participate in the CIRP by virtue of Section 29A of IBC, stated that “accepting the proposal submitted on behalf of JAL would cause serious prejudice to the discipline of the IBC and would set at naught the salutary provisions of the statute.” It further went on to observe that the provision of Section 29A of IBC is intended to ensure that among others, persons responsible for the insolvency of the corporate debtor do not participate in the resolution process.

However, the NCLT, Kolkata in the matter of RBL Bank Limited v. MBL Infrastructures Limited [CA(IB) No. 543/KB/2017] while dealing with clause (h) of Section 29A was of the view that “clause (h) of section 29A is not to disqualify the promoters as a class for submitting a resolution plan. The intent is to exclude such class of persons from offering a resolution plan, who on account of their antecedents, may adversely impact the credibility of the processes under the Code”. The NCLT further went on to say that “in insolvency proceedings, the promoters of Insolvent Company is the most natural person to submit a plan unless the insolvency is caused due to his acts of omission and commission or if he has an indulgence, fraud, malfeasance or other criminal activity and causes financial loss to creditors, knowingly or with criminal intent.” This order was further upheld by the Hon’ble NCLAT as well.

So it can be observed that the Hon’ble NCLAT in the present matter seems to agree with the findings of the Hon’ble NCLT Kolkata in the above referred matter of RBL Bank Limited v. MBL Infrastructures Limited [CA(IB) No. 543/KB/2017], as in the instant case it stated that, as the resolution applicant, who was also a promoter of the Corporate Debtor, doesn’t fall within the restrictive ambit of Section 29A of the IBC, it can be allowed to file its resolution plan in the CIRP of the Corporate Debtor.

For more information please write to Mr. Bomi Daruwala at [email protected]

DOWNLOAD NEWSLETTER