IBC’s Section 29A: Experts say Mumbai, NCLT’s order threatens code’s intent

Code explicitly bars promoters from bids, even where process initiated, say officials.

A ruling by the Mumbai bench of the National Company Law Tribunal (NCLT) — that provisions of a November 2017 ordinance on the ineligibility of defaulting promoters to bid for their stressed firms can’t be applicable to cases where insolvency proceedings had started before its promulgation — may open a Pandora’s box and negate the very objective of the explicit bar.

Lawyers and government officials are perplexed by the NCLT’s interpretation of the ordinance (which was made into law in January), as the verdict could be cited in other cases by defaulting promoters of most of the 12 large accounts recommended by the central bank including Bhushan Steel and Essar Steel to be eligible to bid. Their cases were admitted by the adjudicating authority before the promulgation of the ordinance.

Although NCLT benches hearing other cases are not mandated to go by this ruling, it, nonetheless, could lead to a litany of unnecessary legal tussles and further delay the resolution process.

The government had introduced a new section to the Insolvency and Bankruptcy Code on November 23, 2017, through the ordinance.

Section 29A of the code explicitly prescribed that an entity that is connected to the promoters or the management of the company going through insolvency process is ineligible to bid for the stressed firm and the provisions will be applicable even where such ineligible candidates have already submitted resolution plans (a recent ordinance has amplified the bar by expressly excluding “related parties” and kin of promoters).

In fact, Section 30 (4) of the IBC clearly says: “Provided that the Committee of Creditors shall not approve a resolution plan submitted before the commencement of the Insolvency & Bankruptcy Code (Amendment Ordinance) 2017 (ORD. 7 of 2017), where the Resolution Applicant is ineligible under Section 29A and may require the resolution Professional to invite a fresh resolution plan where no other resolution plan is available with it.”

However, to give a fair chance to the defaulting promoters who had already submitted resolution plans, the amendments allowed them one month to clear their dues to be able to bid for their firm.

But delivering the verdict in case of Wig Associates, justice MK Shrawat said: “…when a repeal of an enactment is followed by fresh legislation, such legislation does not affect the substantive rights of parties on the date of the suit or adjudication of the suit unless such legislation is retrospective and a court of appeal cannot take into consideration a new law brought into existence after the judgement appealed from has been rendered because the rights of the parties in an appeal is determined under the law in force on the date of suit”. The ruling also said it is unfair to change the rules of a game once the game has started.

Asked if the government will issue a clarification of the law in the wake of this verdict, a top official said: “What is there to clarify? The provisions are already explicitly mentioned in the code.”
Senior Supreme Court lawyer Abhishek Manu Singhvi said: “(The verdict) is significant because it nullifies the entire intention of the legislature for earlier filings. Frankly, Indian executive-based law-making frequently has knee-jerk reactions and does patchwork amendments through ordinances. That is why, despite the best of intentions, Section 29A is a lawyers’ delight and a draughtsman’s and litigant’s nightmare!”

Bishwajit Dubey, partner, Cyril Amarchand Mangaldas, said: “The statement of object and reasons to the IBC Amendment Ordinance, 2017, and proviso to Section 30 (4) of the code makes it clear that the provisions inserted vide the ordinance in particular Section 29A was to make it applicable in all cases (except where the plans are already approved by NCLT) including the ones where insolvency resolution proceeding has already been initiated.”

Additional solicitor general Tushar Mehta, said: “The tribunal has decided that the amended provision would have only prospective effect. This may defeat the very object of the amendment and may not be the correct interpretation of the code.” However, he added that the “moot question is as to whether the disqualification prescribed against defaulting/outgoing directors/promoters under amended Section 29A from participating in a resolution process (whether directly or indirectly) would/should apply dehors the intent, object and purpose of the code itself.”

According to Devansh Mohta, who specialises in insolvency law, applying Section 29A prospectively runs contrary to the spirit of the amendment. “The prohibition is absolute and is meant to prevent abuse. There cannot be a distinction between directors disqualified before November 23, 2017, and after.”

KP Sreejith, managing partner, India Law, said: “This order has been passed by the Mumbai bench of the NCLT for one case. It is not binding on the other benches, or even other cases.” However, he said that the promoters might cite reference to this order in their arguments before the NCLT or the National Company Law Appellate Tribunal to persuade the bench, but the final outcome, he added, would depend the decision of the bench concerned.

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First published on: 13-06-2018 at 05:48:51 am