The Quandary of Retrospective Effect of Section 29A of IBC through the Lens of Wig Associates Judgment – By Hiteshi Wadhwani

The Quandary of Retrospective Effect of Section 29A of IBC through the Lens of Wig Associates Judgment

– By Hiteshi Wadhwani

Insolvency and Bankruptcy Code, 2016(hereinafter referred as “IBC”) is the umbrella regime for all the insolvency resolutions across India and there have been dozens of amendments to eliminate the loopholes and make the legislative framework smooth and effective for implementation. One of the major amendments to the code was the inclusion of Section 29A on 23-11-2017 which highlighted on the eligibility of the resolution applicants in the insolvency process. Before the amendment, every individual could participate in the bidding process of the Corporate Debtor irrespective of their connection with the debtor which lead to the debtor entity going back to the fraudulent people who were actually responsible for the insolvency.

The amendment to the code signifies on the disqualification of all those individuals and entities that have actually contributed towards the downfall of the corporate debtor through their fraudulent motives and are related parties or connected persons of the corporate debtor. Section 29A constructively facilitates corporate governance as it prudently suppresses the promoters to buy back the sick entity at subsidized rates and also free from any of its past liabilities. It is conspicuous to understand that the resolution plan not only helps the creditors but also the sick entity which is on the verge of liquidation. Hence, the legislative intention behind insertion of Section 29A as a retrospective amendment is multi-fold.

The present article will highlight on the judgment of Martin S.K. Golla v. Wig Associates Pvt. Ltd. dated 4-6-2021, reported at (2021) ibclaw.in 257 NCLAT, which extensively discusses the nature of Section 29A of the code and has held that the ineligibility which has been mentioned in Section 29A shall be attached when the resolution plan is submitted by the applicant.

Factual background:

The judgment arose through the order dated 2-6-2018, reported at (2018) ibclaw.in 51 NCLT, wherein the corporate debtor, Wig Associates had filed an application for the initiation of the CIRP under section 10 of the code. The application was admitted and Mr. Golla was appointed as the interim resolution professional in August 2017. The company had a sole financial creditor which was the Bank of Baroda which had approved the one time settlement offer issued by the Resolution Applicant, Mr. Mahendra Wig. Section 29A IBC came as a retrospective amendment to the code which highlighted that “connected persons” shall be ineligible to submit the resolution plan and in this case, Mr. Wig came under the ambit of connected person and despite the same, the resolution plan was approved by the Committee of Creditors with 100% votes.

NCLT bench Mumbai through order in June, 2018 assented the resolution plan without giving due notice to the retrospective amendment. Considering the same ambiguity, an appeal was filed by the Insolvency and Bankruptcy Board of India (hereinafter referred as “IBBI”) against the NCLT order wherein the NCLAT Delhi held hat IBBI has no locus to maintain the complain and an appeal can be filed by the resolution profession to seek clarity on the issue and the question of law involved. NCLAT, Delhi made the observations that the ineligibility mentioned in Section 29A of the code will be attached when the resolution plan has been submitted by the applicant. The judgment categorically mentioned that Mr Wig being a connected party to the Corporate debtor cannot become the resolution applicant as per 29-A of IBC.

Issues considered by NCLAT Delhi:

  • Whether Section 29A shall be applicable in Section 10 proceedings which were initiated before the amendment?

To understand the same, the court emphasized on the concept of “connected person” mentioned in the code which says:

Section 29A Explanation [I] :

For the purposes of this clause, the expression “connected person” means—

(i) any person who is the promoter or in the management or control of the resolution applicant; or

(ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or

(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):

Aligning the same, it can be gathered that Mr. Wig being related to the promoter directors of the corporate debtor’s company, clearly came under the ambit of connected person but despite the same, the adjudicating authority accepted the resolution plan. The recent order dated 4-6-2021 certainly ruled that the resolution plan so submitted by Mr. Wig should be set aside. The judgment has clearly highlighted that the ineligibility mentioned under section 29-A comes into place when the resolution plan is actually submitted.

Additionally, NCLAT in the recent judgment of Navneet Jain v. Manoj Sehgal, Resolution Professional of Sarbat Cotfab (P) Ltd [2019] ibclaw.in 214 NCLAT emphasized that the respondent were the connected parties of the corporate debtor and hence ineligible to submit the plan as per Section 29A and the resolution plan previously submitted and approved was considered bad in law. Furthermore, in the case of Chitra Sharma & Ors v. Union of India [2018] ibclaw.in 37 SC i.e. the Jaypee Infratech Case, the Apex Court held that the willful defaulters of the Corporate debtors shall have no chance to submit the Resolution plan and hence Jaiprakash Assosiates Ltd (JAL), which was the parent company of Jaypee Infratech and other promoters were clearly disqualified as they fell under the scope of 29A.

  • Whether One Time Settlement Scheme can replace a Resolution plan?

One time settlement (hereinafter referred as “OTS”) Scheme is basically the payment made to the creditors by the promoters of the Corporate Debtor to settle the dues and save the debtor’s entity from liquidation. It is noteworthy to highlight that OTS mostly caters to the needs of financial creditors and the other stakeholders such as Operational Creditors or the employees are not given due importance. The courts in various cases have held that the financial creditors have an obligation to ensure that the interest of all the stakeholders is taken into consideration and the resolution plan cannot be approved until the minimum liquidation value is being provided. Evidently, it can be concluded that resolution plan and OTS are two fundamentally different concepts that cannot replace each other.

In the present case, NLCAT gave due consideration to the OTS as proposed by the Resolution Applicant and treating the same as Resolution plan. Even after the amendment to the code and insertion of Section 29A which makes Mr. Wig ineligible to submit the plan, Mr. Golla gave assent to the resolution plan and Mr. Wig paid 103 Lakhs as OTS to the bank which was the sole financial creditor. After analyzing entire facts and the law, NCLAT dismissed the NCLT, Mumbai rulings and clearly held the OTS-cum- resolution plan submitted by the resolution applicant was not permissible and ruled that the same should be quashed and set aside.

Conclusion:

The Supreme Court has time and again in various judgments observed that IBC though at a nascent stage, is a thoroughly considered piece of legislation, which has been introduced to overhaul the insolvency practice in India and revive the businesses that have scope and capabilities. Furthermore, the court has categorically mentioned that the aim of the code is to encourage revival of the sick entity over liquidation, but for the same it is necessary to limit the scope of intervention by the NCLTs and NCLATs and ensuring that they do not muddle the basic principles of IBC.

Section 29A of the code has enacted multiple layers to restrict the entry of promoters or connected persons; however the ambiguity regarding the same has still been in place. Formerly the section has created barriers on the entry of the defaulting promoters; on the other hand it has provided adequate safeguards to the stakeholders of the company. In this case mentioned above, NCLT Mumbai not only digressed from the amendment but also from the fundamental concepts of the code. Section 31 of the code clearly mandates the adjudicating authority to record “satisfaction” after carefully examining the plan and that the plan should be accepted after proper due-diligence. The NCLT being the adjudicating authority has failed to carry out proper assessment and assented to the erroneous plan which defeated the establishment of the code.

Furthermore, through numerous judgments, the validity of section 29A has been challenged but the courts have effectively put a blanket ban on the promoters and related parties to submit the resolution plan even if the plans are worthy enough to revive the sick entity. The present case is an important judgment where NCLT faced ambiguity regarding the new amendment, but the final ruling paved way for fair interpretation to the amendment and prevents misuse of the code.

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