The Implication of Section 29A of Insolvency and Bankruptcy Code On Pre-Packaged Insolvency

Author: VAISHNAVI VATS, BANASTHALI VIDYAPEETH, JAMNALAL BAJAJ SCHOOL OF LEGAL STUDIES

INTRODUCTION

Section 29A was added to the code of Insolvency and Bankruptcy in the year 2017 through the amendment act, by giving it a retrospective effect. Before its introduction, the rule used to be, that in the process of bidding in respect of a Corporate Debtor under Corporate Insolvency Resolution Process (hereinafter referred to as CIRP) any corporate entity or individual, like directors, promoters, key managers, or another similar person can take part. Due to this the people who had contributed to Corporate Debtor’s default, or the people who are the reason for the company’s failure, end up regaining its control through bidding at heavy discounts, that financial institutions and other bidders couldn’t afford to do.

Therefore, this section was added through amendment in the code, which states the conditions in which a person should be disqualified from being a resolution applicant during the Corporate Insolvency Resolution Process, to qualify as one, he/she has to fulfill two conditions, which are as follows:

1. Any criteria that have been established with the assent of creditors committee by the resolution professional, must be fulfilled by him/her and
2. He/she must not be disqualified from being resolution applicant u/s 29A of Insolvency and Bankruptcy Code, 2016.

Provided that such disqualification must apply on persons so mentioned in this section, “acting individually, or jointly, or in concert with such persons.”

AMENDMENTS DUE TO OUTBREAK OF PANDEMIC COVID 19

Since the outbreak of the COVID-19 pandemic and the lockdown in the country due to the same business is severely affected nationwide, to protect a large number of proceedings related to insolvency and keeping the current situation in the mind, an Ordinance was promulgated by the President of India stating that:

“No applications u/s 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016 can be filed for 6 months period, if extended then up to 1 year, for any kind of default arising after 25^th March 2020.” The ordinance mentioned above was promulgated to make sure that in these times of chaos the National Company Law Tribunals, do not get overburdened with the cases that arose due to the situation of the pandemic.

The issue that remains lingering is that for resolution CIRP is always a preferred option, but it is acclaimed that CIRP is a time-consuming process, which cannot be afforded during the pandemic, except to the extent of moratorium permitted by the Reserve Bank of India, there are still various laws under which the liability of the debtor in respect of default are not suspended, the outcome of which is that either creditor tries to pursue any means that will recover them their dues, or the company will remain in stress without resolution for a long period, ultimately the company will not be able to last.

Hence, there arose a need to find such mechanism for the resolution that overcomes the difficulties that are present under CIRP and which have a component of informality nut at the same time contains advantages of formal framework and sanctity. And the only suitable one fulfilling these requirements is Pre-Pack.

Keeping in mind that since, Micro, Small, and Medium enterprises are the foundation of the economy of India, and because of the pandemic these entities are the ones most badly affected, therefore, President in April 2021 promulgated another ordinance. This amendment act added Chapter IIIA to the code of Insolvency and Bankruptcy, and further focused on MSMEs, as they have a simple corporate structure, and for these enterprises introduced Pre-Packaged Insolvency Resolution Process, CIRP being impossible for them to use.

This process is less time-consuming, less cost consuming, and provides outcomes that maximize the value for all shareholders in a way that preserves their jobs and is least troublesome for their business continuity.

To understand the implication of section 29A on pre-packaged insolvency first there is a need to understand this section’s application on MSMEs.

HOW SECTION 29A APPLIES ON MSMEs?

As previously stated, this section provides conditions that provide a criterion for the disqualification of resolution applicants, in submitting the Resolution Plan for CRIP. Section 29A(c), and (h) are the two sub-clauses that have an impact on the MSMEs.

The former states that “if at time of submission of the plan he/she has an account of ‘corporate debtor’ or an account in his control, classified as an NPA (Non-performing asset) by the Reserve Bank of India, one year before, from CRIP’s date of commencement, a person shall become disqualified from submitting resolution plan,” the latter states that, ” if a person who is submitting for a resolution plan executed a guarantee in creditor’s favor in regards of Corporate debtor against whom CIRP has been started, then such person will be disqualified from being a resolution applicant.

When this section was inserted in the code it was entirely applicable to applicants who are submitting resolution plans, for Micro, Small, or Medium enterprises. But afterward, based on the recommendation given by Insolvency Law Committee, through amendment act 2018, another section was included to the code section 24A, which stated that Section 29A(c) and (h) will not apply to any Resolution Applicant who are submitting a plan for MSMEs. 

This insertion was done because MSMEs are the foundation of our country’s economy, hence, they must be provided with few relaxations, and if in a case a promoter is not a willful defaulter then not allowing him to bid for MSME during insolvency might hamper MSME’s resolution process’s efficiency.

WHAT IS PRE-PACKAGED INSOLVENCY?

There does not exist any statutory definition of the Pre-pack, but as the name suggests, it refers to a “restructuring plan that is agreed to between debtors and their creditors before the insolvency is filed, and it is then sanctioned by a court on an expedited basis.”

In pre-pack insolvency, “a troubled co. and their creditors negotiate the terms of insolvency resolution plan, before the formal process to insolvency starts, that ultimately allows that process to flow speedily.”

SECTION 29A’s EFFECT ON PRE-PACKAGED INSOLVENCY

The ordinance, 2021, promulgated by the President, stated that the corporate persons who are classified in the category of MSMEs will follow the Pre-Packaged Insolvency Resolution Process, where default occurred is up to Rs.1 crore.

This ordinance also added section 54A to the code of Insolvency and Bankruptcy, this section states that this pr-packaged process of insolvency could be initiated only against a corporate debtor, who must be inclusive in the MSMEs criteria., S.54A(2)(d), clearly states that if the conditions of eligibility as stated u/s 29A are fulfilled then only an application for Pre-Packaged Insolvency initiation.

This creates a doubt:

• Whether S.54A should be read together with S.240A of the code to remove the application of two sub-clauses of S.29A which are (c), (h), or
• Whether disqualifications stated in the entire section 29A will apply to this insolvency process.

The Insolvency Law Committee on the basis of whose recommendation the President promulgated has stated in its report for this matter, that to initiate the Pre-Packaged Insolvency Process, all requirements of S.29A must be fulfilled before the application for its initiation is filed, but the decision given by the judiciary before this ordinance’s promulgation states opposite. Court of India has stated in its many judgments that where insolvency of MSMEs is in question, some disqualification mentioned u/s 29A might be diluted, for example in the case of Swiss Ribbons Pvt. Ltd. & Anr. V. Union of India & Ors.[1] The Apex Court of the country decided that “the ground due to which the eligibility requirements as laid down u/s 29A (c), and (h) excludes MSMEs, is their business model, in cases of these entities, there are very minimal chances that any resolution applicant other than the promoter of the same come forward forbidding, hence if they are not excluded from these sub-clauses, the liquidation of the corporate debtor will become inevitable, that goes against the object of the code, which is to save those corporate debtors which are in distress.

SOME IMPORTANT CASE LAWS

In a recent case of K. Satheesh Babu Rajesh v. Mr. George Varkey[2], a bench of National Company Law Tribunal decided that “where the corporate debtor is a Micro, Small and Medium Entity, its promoter is eligible as a resolution applicant, to submit a resolution plan, in his/her capacity.”

“This, in turn, clarifies the standing of Section 240A, that exempts, MSMEs from the application of section 29A(c), and (h), but the confusion here remains is the ordinance of 2021 promulgated by the President of the country states that this section, i.e., 29A applies to Pre-Packaged Insolvency of MSMEs.”

In the case of Arun Kumar Jagatramka v. Jindal Steel and Power Limited[3], the Supreme Court of India held that “a person who is disqualified under section 29A of the Code for submitting a resolution plan, will also be prohibited from proposing a compromising scheme and arrangement u/s 230 of the companies Act, 2013.”

In another case of Saravana Global Holdings Ltd. & Anr. V. Baafna Pharmaceuticals Ltd. & Anr. [4], NCLAT held that “in exceptional situations, if MSME is the corporate debtor, it is not required for the promoters of the same to compete with any other resolution applicants, to regain corporate debtor control.”

CONCLUSION

Because the amendment which inserted section 29A to the code has been a few years back, the law regarding its application on CIRP has been evolved over these years, making it well settled, but it’s not the same for this section’s applicability on MSMEs’ Pre-Packaged Insolvency. There still exists a scope of bringing clarity to its application.

The point here is Ordinance 2021, was brought into existence to make sure that MSMEs business remains alive and they get a machine that is time as well as cost-effective, but if the Promoters will not be allowed to apply for submission of resolution plans, then the said entity will not be able to stay alive anymore, the reason being mostly the Promoters are the only guarantors of the loan that is taken by the corporate debtor.

Pre-Package Insolvency is at a very initial stage today, hence it is necessary for the legislature to clear this confusion as soon as possible.

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[1] 2019 SCC Online SC 73

[2] I.A.(IBC) NO. 64/KOB/2021

[3] MANU/SC/0182/2021

[4] CP/682/IB/CB/2017