Dilution of Section 29A IBC – Outside Funding of Real Estate Companies
The Insolvency and Bankruptcy Code, 2016 (“IBC/ Code”) is a renaissance when it comes to the Indian legislations as multiple statistics and figures speak for its success in recovering strangled assets and improving the overall position of our country in the ‘ease of doing business’ index.
However, since its enactment, the Code is struggling with regard to the resolution of the Real Estate Companies and thus they have had a chequered history under the Code. Initially, it was decided that the only those homebuyers who have assured return plan are financial creditors of the Real Estate Companies[i] but due to the major real estate scams, the Government included the all the homebuyers as financial creditors by amending Section 5(8)(f) of the Code[ii] and the same passed the muster by the Supreme Court[iii] (“SC”) as well. Now, owing to numerous ongoing insolvency proceedings against the Real Estate Companies,[iv] the Government recently prescribed a threshold for homebuyers to file insolvency application under Section 7 of the Code,[v] which is currently under challenge before the SC.[vi]
This article analyses one such struggle that came into light by two recent judgments of the National Company Law Appellate Tribunal (“NCLAT”) wherein the erstwhile promoters have been allowed to enter into the resolution process and regain control of the corporate debtor by acting as an external financer contrary to the mandates of Section 29A, IBC.
The dragnet of Section 29A
Section 29A of the IBC was inserted by an amendment[vii] to interdict the specified classes of individuals from submitting a resolution plan under the code. It specifically bars the promoters of the corporate debtor to be resolution applicants to ensure that they should not through or by circular means come back in order to regain the company that they themselves had run to the insolvency.[viii] There has been a catena of precedents on how this provision should be construed harmoniously with the object sought to be achieved by it, which should never be stultified or defeated. The SC in Arcelor Mittal v. Satish Kumar Gupta (2018), while interpreting Section 29A ruled that the provision shall be given a purposive interpretation to make sure that the disqualified persons including the erstwhile promoter shall not regain the control of corporate debtor under the camouflage of Resolution Applicant.
Specifically, with regard to the Real Estate Companies, SC in the case of Chitra Sharma & Ors. v. Union of India & Ors. (2018), concerning the Jaypee Infratech Limited, disallowed the plea of the holding company i.e., Jaiprakash Associates Limited (erstwhile promoters) to participate in the resolution process owing to the mandate of clauses (c) and (g) of Section 29A of the IBC. Furthermore, the NCLAT itself in the matter of Jaypee Greens Krescent Home Buyers Welfare Association & Ors. v. Jaypee Infratech Ltd., (2019) ruled in consonance with the Chitra Sharma supra and disallowed the erstwhile promoter and connected persons from filing an ‘expression of interest’ or resolution plan for they were found to be ineligible under the muster of Section 29A of the IBC.
Divergent Opinions by the NCLAT
NCLAT has recently diverted itself from the settled position under the code with regard to Section 29A. In the case of Flat Buyer’s Association v. Umang Realtech Pvt. Ltd. (2020), it devised “Reverse Corporate Insolvency Resolution Process” for the case of real estate companies to explore the possibility of completing the resolution without the approval of a resolution plan to be submitted by a resolution applicant. Consequently, in the exercise of inherent powers conferred under Rule 11 of the NCLAT Rules, 2016 the NCLAT allowed the erstwhile promoter of the corporate debtor to assume the role of the financial creditor and fund the project from outside.
The NCLAT yet again in Rajesh Goyal v. Babita Gupta (2020), upheld its observations and directions given in the Flat Buyer’s (supra) and allowed outside funding by the promoter for the corporate debtor being a real estate infrastructure company it inter alia also passed directions as to the timelines for the completion of the project including construction, furnishing, common areas, etc.
Thus, the NCLAT’s ruling in these two specific cases is manifestly providing an indirect backdoor entry to the promoters by helping them regain control of the corporate debtor which in turn grossly violates the mandate and objective of Section 29A as discussed hereinabove.
Unwarranted Experiments with the IBC
Whilst it is true that an economic legislation such as the IBC has to show readiness for needful evolutions and experimentations. However, this domain lies with the legislature supported by special regulatory bodies established under the statute as also emphasized by the SC in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. (2019), and not with the adjudicating authority under the Code.
NCLAT has effectively provided an exception to the Real Estate Companies and the same is neither provided by the Code nor ever intended much less when there are quite many amendments with regard to the real estate companies under the Code. The only exception which was provided with regard to Section 29A is with regard to Micro Small and Medium Enterprises (“MSMEs”) under Section 240A of the Code on the recommendation of the Insolvency Committee Report of 2018. Hence, if at all there has to be an exception for the Real Estate Companies, the same has to be provided by the legislature and NCLAT cannot enter into the shoes of the legislature.
The rigor of Section 29A is unavoidable and is applicable even at the liquidation stage under the Code, wherein initially the erstwhile promoters were allowed[ix] to enter into a scheme of arrangement with creditors under by the virtue of Section 230 of the Companies Act. 2013 but later on the legislature amended the Liquidation Process Regulations, 2016, and clarified that the person disqualified under Section 29A is not allowed to propose any scheme of arrangement.[x]
NCLAT has failed to take note of the non-derogable nature of Section 29A while allowing the erstwhile promoters a chance to regain control of the company. It can be argued that this was required considering the peculiar working model of real estate companies but again the same has to be looked into by the legislature and the judicial bodies like NCLAT can at best recommend to bring about such changes.
The Aristotle quote “nothing is so unequal as the equal treatment of unequal people” becomes relevant for the subject of this article in light of the fact that the approach of the NCLAT is discriminating amongst the erstwhile promoters themselves. While some of the real estate companies have been afforded with the exceptions as discussed hereinabove, some are denied the same by the SC and NCLAT as well.
It is also essential to note that the interdictions under Section 29A intend to tear the corporate veil of the entity and get to the real persons who present the resolution plan. Be that as it may, the NCLAT in the abovementioned decisions overlooked the objectives of the inclusion of this provision in the IBC by allowing the erstwhile promoter to become an investor and manager for the corporate debtor rather than going for resolution as per the scheme of law. Nevertheless, it has opened a floodgate as every other promoter will try to regain control over the company by relying on these cases. It is pertinent to mention that even in cases where the erstwhile promoter was offering a higher bid (twelve thousand crores) than the concerned resolution applicant, the SC had disallowed the plea.[xi]
Lastly, it shall be borne in mind that the NCLAT is an adjudicatory body constituted under the Code and not rather a consumer redressal commission trying to settle the disputes between homebuyers and developers by giving a timeline to complete the strangled projects. The praxis may be summed up as an exercise of judicial activism with no legal backings.
[iv] Homebuyers have filed over 1800 cases under insolvency law: Govt, 20.11.2019, Live Mint. Source: <https://www.livemint.com/news/india/homebuyers-have-filed-over-1-800-cases-under-insolvency-law-govt-11574257028086.html>
[vi] Manish Kumar v. Union of India & Anr., 2020 SCC OnLine 384.
[vii] Insolvency and Bankruptcy Code (Amendment) Act, 2017, No. 8 of 2018, 18.01.2018.
[viii] Id., Statement of Objects and Reasons.
[xi] Arcelor Mittal v. Satish Kumar Gupta.
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