The IBC Ordinance mandated that certain classes of identified persons or any other person acting jointly with such person or the promoter or any person in management of such person from submitting the resolution plan.
The IBC Ordinance made the following persons ineligible from submitting a resolution plan. A person shall be ineligible to submit a resolution plan if such person, or any person acting jointly with such person, or any person who is a promoter or in the management or control of such person:
(a) is an undischarged solvent;
(b) has been identified as a wilful defaulter by the Reserve Bank of India (“RBI”);
(c) whose account is classified as non-performing asset (“NPA”) by the RBI and period of one year or more has lapsed from the date of such classification and who has failed to make payment of all overdue amounts with interest and charges relating to the NPA before submission of the resolution plan;
(d) has been convicted of any offence punishable with imprisonment for two years or more;
(e) has been disqualified to act as a director under Companies Act 2013;
(f) has been prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;
(g) has indulged in preferential or undervalued or fraudulent transaction in respect of which an order has been made by the National Company Law Tribunal (“NCLT”); or
(h) has executed an enforceable guarantee in favour of creditor, in respect of a corporate debtor under Insolvency resolution process or liquidation under the Bankruptcy Code.
Further, any ‘connected person’ in respect of persons mentioned above, were also be barred from submitting resolution plan.
(i) A connected person for the purposes of the Bankruptcy Code means:
i) Any person who is 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).
(j) Has been subject to any disability, corresponding to above provisions, under any law in a jurisdiction outside India. |
The Amendment Act provides that a person shall not be eligible to submit a resolution plan if such person or any other person acting jointly or in concert with such person does not meet the conditions laid down under Section 29 A of the Amendment Act. Further, “a promoter or any person in management of a person” who does not specify the criteria under Section 29A is no longer excluded from submitting a resolution plan unless specifically provided under any sub-section of Section 29A.
Per the Amendment Act, the following persons will not be eligible for submitting a resolution plan:
(a) is an undischarged insolvent;
(b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949;
(c) has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as NPA in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:
Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to NPA accounts before submission of resolution plan;
(d) has been convicted for any offence punishable with imprisonment for two years or more;
(e) is prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets;
(f) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code;
(g) has executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code;
(h) has been subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or
(i) has a connected person not eligible under clauses (a) to (i).
“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).
However, point (iii) above shall not be applicable to:
A. a scheduled bank; or
B. an asset reconstruction company registered with the Reserve Bank of India under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; or
C. an Alternate Investment Fund registered with the Securities and Exchange Board of India (“AIF”). |
· The IBC Ordinance barred certain classes of persons along with any person acting jointly with such persons. The Amendment Act has gone a step further and also made such persons ineligible, who act in concert with person not eligible to submit a resolution plan under the Amendment Act.
· The term ‘in concert’ has not been defined under the Amendment Act. However, the Bankruptcy Code provides that words/expressions not defined under the Bankruptcy Code shall have the meaning assigned to them under other acts identified under the Bankruptcy Code1, including the Securities Exchange Board of India Act, 1992. Therefore, the definition of person acting in concert (“PAC”) will have to be borrowed from the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“Takeover Code”) that defines PAC as persons who have the common objective / purpose of acquisition of shares / voting rights in / exercising control over a company pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for acquisition of shares/ voting rights in / exercise of control of the company.
· Further, the Takeover Code provides that the following persons, among others, will be deemed to be a PAC2, unless the contrary is established:
(a) a company, its holding company, subsidiary company and any company under the same management or control;
(b) A company, its directors, and any person entrusted with the management of the company;
(c) Directors of companies referred under (a) and (b) above;
(d) Promoters and members of the promoter group;
(e) Immediate relatives;
(f) A mutual fund, its sponsors, trustee, trustee company and asset management company;
(g) A venture capital fund and its sponsor, trustee company and asset management company;
(h) An AIF and its sponsor, trustee company and asset management company;
(i) A portfolio manager and its client, who is an acquirer etc.
· While the Amendment Act may have excluded persons who are the promoter or in the management or control of an ineligible person from submitting the resolution plan, the inclusion of PAC in Section 29 A will have more far reaching consequences on strategic investors/ private equity investors and entities associated with such investors. It is recommended that the definition of PAC be specifically included in the Bankruptcy Ordinance and a reasonable definition be introduced for the purposes of submission of resolution plans.
Some additional changes made by the Amendment Act over the IBC Ordinance are as under. For the unchanged provisions, we draw your attention to our earlier hotline which can be found here.
· Section 29(A)(b): The words “has been identified as” under the IBC Ordinance has been replaced with “is” under the Amendment Act to clarify that the applicability of being a wilful defaulter is during the currency of the disability.
· Section 29(A)(c): No substantial amendment has been made to this sub-section. This sub-section makes any person, or any corporate debtor under the management or control of a person or of whom such person is a promoter who has an account classified as an NPA by the RBI and at least a period of one year has lapsed from the date of such classification till the date of commencement of resolution process, ineligible to submit a resolution plan.
The Amendment Act has now introduced a proviso (which was absent in the IBC Ordinance) that allows a person who has made payments of all overdue amounts with interest and charges relating to the NPA, eligible to submit resolution plan.
· Section 29(A)(e): the words “has disqualified to act as director” under the IBC Ordinance has been replaced by “is disqualified to act as director” by the Amendment Act. The change has been made to bring clarity that the applicability is during the currency of the disability.
· Section 29(A)(f): the words “has been prohibited by the Securities and Exchange Board of India” under the IBC Ordinance has been replaced by “is prohibited by the Securities and Exchange Board of India”.
· Section 29(A)(g): The Amendment Act has slightly modified the referenced sub-section. The Amendment Act stipulates that any person who has been a promoter/ in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and an order has been made by NCLT will be ineligible. While the nature of these transactions have not been illustrated in the Bankruptcy Code or the Amendment Act, the scope of the disability has been widened.
· Section 29(A)(h): The Amendment Act has clarified that any person who has executed an enforceable guarantee in favour of a creditor debtor against which an application for insolvency resolution made by such creditor has been admitted shall be ineligible to submit a resolution plan. The criteria for ineligibility of guarantors now depends upon the admission of application by NCLT.
· Connected Person: The definition of connected person has been amended by the Amendment Act. Per the Amendment Act, a connected person is used in the context of clauses (a) to (i). Earlier disability under any other jurisdiction outside India was not included for connected persons.
Also per the IBC Ordinance, a connected person meant (i) any person who 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 (i) and (ii). An explanation has been added which clarifies that point (iii) above shall not be applicable to a scheduled bank or an asset reconstruction company (“ARC”) or an AIF. While exclusion of scheduled bank and ARC is a welcome step, typically an AIF follows a trust structure where the question of holding/ subsidiary/ associate company does not arise. Therefore, exclusions for trust structure should also be built in. |