Insolvency and Bankruptcy Code (“Code”) was formulated to bring to life an almost dead corporate debtor – a thought echoed by Hon’ble Supreme Court in a recent judgment1. In its judgment, the Supreme Court (“SC”) directed to proceed with the resolution plan instead of dismissing the same on account of disqualification of the Resolution Applicant considering the purposive interpretation of the Code.
LEGISLATIVE AMENDMENT
Section 29A, an introduction via the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, provides for disqualification of a Resolution Applicant. Section 29A has matured the law in terms of disqualification of promoters. It previously disqualified a promoter, or person in control or management of operations if they had executed an enforceable guarantee in favour of a creditor of the corporate debtor (“Personal Guarantors”). Now, under Section 29A(h), only those Personal Guarantors whose personal guarantees have been invoked by the creditor and the claim remains unpaid in part or full, can be disqualified.
Hon’ble NCLT, adjudicating the concern of disqualification, has upheld that the disqualification is triggered only when the personal guarantee is invoked and not otherwise in accordance with Section 29A(h) of the Code.
REASONING
The application filed by the Personal Guarantor for approval of resolution plan as submitted was allowed since the approval by CoC was accorded as per the techno-economic viability and feasibility of the plan. This order was challenged before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”), seeking disqualification of the Personal Guarantor from submitting the resolution plan.
NCLAT, considered the change brought about by Section 29A(h) and confirmed the order of NCLT and approved an enhanced resolution plan, dismissing the appeal on grounds of no apparent discrimination.
Section 30 of the Code requires 66% of the voting share of CoC to approve the resolution plan as against 75%, previously.
STATUTORY INTERPRETATION
The SC quoted Lord Denning in the matter of Seaford Court Estates Ltd. v. Asher, (1949) 2 KB 481 (judge should supplement the written word of the legislation to give ‘force and life’ to the intention of a legislature), for interpreting Section 29A.
The rationale of implementation of Code – revival and rehabilitation of corporate debtor – was upheld in Swiss Ribbons (P) Ltd. v. Union of India2, and accepted in Arun Kumar Jagatramka v. Jindal Steel & Power Limited3. The SC considered the principle of purposive and creative interpretation while approving the interpretation of the Code given in ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta4.
For Section 29A, the SC highlighted, the objective is to avoid unwarranted and unscrupulous elements to get into the resolution process while preventing conflict of interest. This intent was also shared by Hon’ble Minister of Finance and Corporate Affairs while presenting the Amendment Bill, 20175, to introduce Section 29A.
It was further noted, that in interpreting resolution applicants, Section 29A is inadequate since definition of “persons” under Section 3(23) is merely illustrative/inclusive.
In Swiss Ribbons case (supra), once a resolution applicant was accepted on behalf of a creditor, then the resolution process which is a collective proceeding, would allow all creditors of the same class to have their respective rights at par with each other.
The disqualifier is the existence of an invoked personal guarantee by a single creditor, irrespective of the application being filed by any other creditor (non-guarantee holder) initiating insolvency resolution.
The ineligibility is restricted to participation in the resolution process and not qua one creditor as against others. The Exclusion is meant to facilitate a fair and transparent process.
The eligibility at the time of submission does not hold good if disqualification is triggered after submission of the resolution plan due to law which remains in force till approval by the CoC or adjudication by the authority. In Ebix Singapore Pvt. Ltd. vs. CoC of Educomp Solutions Ltd.6, regarded as a part of procedural law, it was upheld that a mere filing of the submission of a resolution plan has got no rationale since it does not create any right in favour of a facilitator, nor any right could be extinguished due to disqualification thereafter.
CONCLUSION
On the merits, the SC stated that the resolution plan did not qualify to be entertained in the first place since the personal guarantee had been invoked by three financial creditors prior to filing of CIRP Application.
The resolution plan had the approval of requisite threshold of CoC and was put in action since 2018, which helped the corporate debtor being established as a going concern. In the interest of shareholders and employees, the projects undertaken are of public importance, the infusion made by Personal Guarantor (INR 63 Cr.) and no prejudice to the interest of dissenting creditors the SC dismissed the appeal for disqualification of the Resolution Applicant and allowed continuation of resolution plan.
- bank-of-baroda-and-another-versus-mbl-infrastructures-ltd-and-others-407825.pdf (livelaw.in)
- Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17
- Arun Kumar Jagatramka v. Jindal Steel & Power Limited, (2021) 7 SCC 474
- ArcelorMittal India Private Limited v. Satish Kumar Gupta (2019) 2 SCC 1
- Insolvency and Bankruptcy Code (Amendment) Bill, 2017
- Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd., 2021 SCC OnLine 707
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