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  • The Insolvency Law Committee (“the Committee”) was constituted by the Ministry of Corporate Affairs on 16th November 2017.
  • To make recommendations to the Government on issues arising from the implementation of the Insolvency and Bankruptcy Code, 2016, as well as on the recommendations received from various stakeholders.
  • The Committee submitted its report (“the Report”) recently.
  • The Committee suggests substantial overhaul in the Code.

1. “person acting jointly or in concert with such person”

In practice, it is unclear whether the term 'connected person' in clause (j) applies to only the resolution applicant or even 'persons acting jointly or in concert with such person'. If the latter interpretation is taken, this provision would be applicable to multiple layers of persons who are related to the resolution applicant even remotely. Further, ARCs, banks and alternate investment funds which are specifically excluded from the definition of 'connected person' provided in section 29A may be caught by the term 'person acting jointly or in concert with such person

The Committee felt that section 29A was introduced to disqualify only those who had contributed to the downfall of the corporate debtor or were unsuitable to run the company because of their antecedents whether directly or indirectly. Therefore, extending the disqualification to a resolution application owing to infirmities in persons remotely related may have adverse consequences

Extending the disqualification to a resolution application owing to infirmities in persons remotely related may have adverse consequences. Such interpretation of this provision may shrink the pool of resolution applicants. Accordingly, the Committee felt that the words, “…, if such person, or any other person acting jointly or in concert with such person" in the first line of section 29A must be deleted. This would clarify that section 29A is applicable to the resolution applicant and its connected person only.

2. Clause (c) of Section 29A

Clause (c) of section 29A debars a person who –

  • has an account classified as NPA;
  • is a promoter of a corporate debtor the account of which has been classified as NPA;
  • is in the management of a corporate debtor the account of which has been classified as NPA;
  • is in control of a corporate debtor the account of which has been classified as NPA

The Committee agreed that a proviso must be added to section 29A(c) to state that if an NPA account is held only because of acquisition of a corporate debtor under the CIRP process laid down in the Code, then the disqualification in section 29A(c) shall not be applicable for a period of three years from the date of approval of the prior resolution plan by the NCLT.

It was stated to the Committee that clause (c) of section 29A, was limited in scope by recognizing only those NPAs that are declared in accordance with guidelines issued by the RBI under the BR Act. For example, entities such as Housing Finance Companies which declare accounts as NPAs under guidelines issued by the Housing Finance Bank were outside the purview of this clause. Therefore, it is proposed that clause (c) must include as a disqualification criterion, accounts that are declared NPA in accordance with guidelines issued under any applicable statute issued by a financial sector regulator in India.

3. Clauses (d) and (e)

Clause (d) of section 29A bars a person convicted for any offence punishable with imprisonment for two years or more, and clause (e) bars a person who is disqualified to act as a director under the Companies Act, 2013. The Committee was of the view that the disqualifications provided in the aforementioned clauses were personal and need not be extended to the related parties of the resolution applicant

Clause (d) of section 29A disqualifies persons who have been convicted of any offence punishable with imprisonment for two years or more. It was felt that, it may cast within its net offences which have no nexus with the ability to run a corporate debtor successfully. The Committee felt that this could be achieved by providing a schedule of offences, similar to schedule V of the CA 2013, the conviction under which would disqualify a resolution applicant. Schedule V of the CA 2013 will need to be suitably amended.

The Committee also felt the ambit of disqualification under clause (d) of section 29A must also be similarly narrowed down by limiting the disqualification period to six years from the date of release from imprisonment.

The Committee recommends that a proviso may be inserted in the definition of 'connected person' to state that the scope of the term connected person for the purpose of interpretation of these two clauses (i.e. (d) & (e)) would be limited to clause (i) and (ii) of the definition only.

4. Clauses (g)

Clause (g) must be amended to carve out from its ambit persons who acquired a corporate debtor pursuant to the CIRP process under the Code or a scheme or plan approved by a financial sector regulator or a court of law and preferential, undervalue, fraudulent or extortionate credit transactions had taken place in the corporate debtor prior to such acquisition

5. Clauses (h)

The Committee stated that, it was unclear whether the provision seeks to disqualify a guarantor only if the guarantee provided by it has been invoked and dishonoured or even in cases where the guarantee has not been invoked at all.

The Committee felt that the intent of the provision could not have been to disqualify every guarantor only for the reason of issuing an enforceable guarantee as that would be discriminatory. In order to clarify the position, the Committee felt that words "an enforceable" must be deleted from clause (h) and the words "and such guarantee has been invoked by the creditor and remains unpaid in full or part by the guarantor" must be added at the end of the clause

6. Clauses (i)

The Committee felt that the words "has been" in this clause must be replaced with "is" so as to clarify that the applicability of the provision is during the currency of the disability. This view is better aligned to the intent of the said section and streamlines the disqualification appropriately.

It was stated to the Committee that ensuring that every resolution applicant was in compliance with section 29A was extremely onerous and time-consuming for the CoC as well as the RP since they were expected to check whether every resolution applicant suffered from any of the disqualification mentioned in any of the clauses from (a) to (j) in India as well as overseas. Moreover, this section was made retrospectively applicable.

Given the wide array of disqualification criteria stated in section 29A and its broad-based applicability to the resolution applicant and connected persons, the Committee felt that in the interest of timely resolution, the resolution applicant may be required to give an affidavit stating that it is eligible to submit a resolution plan under section 29A. The affidavit must be submitted along with the resolution plan. Accordingly, the Committee along with IBBI felt that regulation 38(3) of the CIRP Regulations may be deleted as details sought to be captured in the resolution plan by this provision will be covered in the affidavit to be submitted by resolution applicants pursuant to section 29A of the Code.

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Category Corporate Law, Other Articles by - Viral Doshi