IBC: To resolve Sec 29A, distinguish wilful defaluters from other promoters

Prospective resolution applicants should substantially establish their disassociation from the promoters who are directly responsible for the NPA

In the course of the brief history of the Insolvency & Bankruptcy Code, 2016 (“Code”), the insertion of Section 29A has been one of the most-debated amendments. Section 29A aims to eliminate the inclusion of parties, who have engaged in any misconduct. However, the section has witnessed considerable litigation on account of the wide-sweeping ineligibility criteria, which could lead to the exclusion of a number of parties who may positively contribute to the resolution of NPAs.

The amendments made on August 17, 2018, have been based on the recommendations of the Insolvency Law Committee. These have refined the efficacy of Section 29A, which is a step in the right direction. The exclusion of financial entities from the ambit of Section 29A on account of the high probability of their association with NPAs has been a welcome move, as it allows distressed asset investors to invest in these assets and ensure a viable turnaround of these NPAs. 

One of the key concerns that plagued the section is the breadth of the exclusion of promoters and their connected persons from becoming prospective resolution applicants. In this year itself, there have been several examples and where this section has proved to be too broad and an impediment to the resolution process. Some helpful clarity has been provided in RBL Bank Ltd v. MBL Infrastructure Limited, wherein the NCLT expressed that the “intention of the legislature was not to exclude the class of promoters as a whole, but to rather ensure the exclusion of a class of people whose antecedents will affect the credibility”.

A key exclusion in accordance with the August amendment of the Code pertains to the promoters of MSMEs being permitted to bid for their company provided they are not wilful defaulters. This exemption has been included in recognition of their significance with respect of employment and financial inclusion.

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While the safeguards provided under Section 29A thrives on the principle of ‘prevention is better than cure’, it is necessary to distinguish between wilful defaulters and the promoters who were not involved in any misconduct, or those who were affected by business cycles or government regulations/ force majeure events.

Section 29A has led to excessive litigation which has delayed and affected the efficiency of a time-bound resolution process. Whilst the Essar Steel case has been instrumental in shaping Section 29A till date, it too has resulted in considerable delays. This results in the creation of a culture of mudslinging where the prospective resolution applicants challenge the eligibility criteria for the sole purpose of eliminating the competition or delaying the resolution process.

As the ambit of Section 29A is so wide, it also results in arbitrariness. Hence, the prospective resolution applicants should be granted an opportunity to be heard by the resolution professional or the committee of creditors, to be eligible to take part in the resolution process. This should be done only in cases where they can substantially establish their disassociation from the promoters who are directly responsible for the NPA. 

While Section 29A serves as a double-edged sword, there is scope for further rationalisation. This can be achieved by a reduction of the ineligibility layers, enforcing a timeline with regard to objections and permitting connected persons to be heard. It is imperative to put an end to the frivolous litigation which results in undue delay and runs counter to the crucial theme that time is of the essence, in the Code.

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The writer is co-founder and senior partner, AZB & Partners