Insolvency & BankruptcySection 29A of the IBC: Who can be a Resolution Applicant?

Introduction

Section 29A of the Insolvency and Bankruptcy Code (IBC), 2016, is a critical and often-debated provision that has fundamentally shaped India’s insolvency landscape. It acts as a gatekeeper, establishing a restrictive framework that determines who is ineligible to submit a resolution plan for a distressed company.

The section was introduced to protect the integrity of the insolvency process and ensure that those responsible for a company’s failure cannot regain control through the backdoor.

The Rationale Behind Section 29A

When the IBC was first enacted in 2016, it lacked stringent eligibility criteria, allowing a company’s original promoters to submit resolution plans. This created a significant loophole, as it could permit individuals responsible for the company’s default to benefit from the very resolution process designed to rescue it.

To close this gap, Section 29A was introduced via an amendment in 2017. Its core philosophy was captured by the Supreme Court in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd., where it was observed that a person who has contributed to the problem cannot be permitted to participate in its resolution. This principle is the bedrock of Section 29A.

Ineligibility Criteria: A Detailed Breakdown

Section 29A provides an exhaustive list of persons who are barred from submitting a resolution plan. A person, or anyone acting jointly or in concert with them, is disqualified if they fall into any of the following categories:

1. Undischarged Insolvent: Any person who is an undischarged insolvent.
2. Wilful Defaulter: A person identified as a “wilful defaulter” in accordance with guidelines issued by the Reserve Bank of India (RBI).
3. Non-Performing Asset (NPA) Holder: A person who is a promoter or in control of a corporate debtor whose account has been classified as a Non-Performing Asset (NPA) for one year or more.
   • Exception: This disqualification is lifted if the person pays all overdue amounts, including interest and charges, on the NPA account before submitting the resolution plan.
4. Convicted of Certain Offences: Anyone convicted of an offence punishable with imprisonment for two years or more.
5. Disqualified Director: A person disqualified from acting as a director under the Companies Act, 2013.
6. Prohibited by SEBI: An individual prohibited by the Securities and Exchange Board of India (SEBI) from trading in securities or accessing the securities market.
7. Involved in Fraudulent Transactions: A person who was a promoter or in control of a corporate debtor where a preferential, undervalued, fraudulent, or extortionate credit transaction has occurred, against which an order has been passed by the NCLT.
8. Guarantor for Defaulting Debtor: A person who has executed an enforceable guarantee in favour of a creditor for the corporate debtor undergoing insolvency.
9. Subject to Foreign Disabilities: Anyone subject to similar disqualifications under the laws of a foreign jurisdiction.

The Four-Layered Disqualification Framework

Section 29A casts a wide net by applying its disqualifications across four layers to prevent circumvention:

1. The Applicant: The primary individual or entity submitting the resolution plan.
2. Connected Persons: This includes promoters or those in management or control of the applicant.
3. Related Parties: The disqualification extends to “related parties” of the connected persons, capturing a broader network of individuals and entities.
4. Persons Acting in Concert: Anyone acting jointly or in concert with a disqualified person from any of the above layers is also barred.

This multi-tiered framework ensures that not only the ineligible applicant but also their associates and collaborators are prevented from participating in the resolution process.

The Role of the Resolution Professional and the CoC

The Resolution Professional (RP) has a pivotal duty to enforce Section 29A. They must conduct comprehensive due diligence on every prospective resolution applicant to verify their eligibility. An affidavit from the applicant is not sufficient. The RP is required to provide a detailed due diligence report to the Committee of Creditors (CoC), which must consider this report when evaluating and approving any resolution plan.

Conclusion and Strategic Importance

Section 29A of the IBC serves as a firewall, protecting the insolvency process from being manipulated by those responsible for a company’s financial distress. While sometimes criticized for its rigidity, its core purpose—to protect creditor interests and uphold the integrity of the resolution process—remains fundamentally sound.

The effectiveness of Section 29A lies in its ability to balance deterring bad actors with allowing genuine applicants to participate in corporate rescue efforts. For legal practitioners and insolvency professionals, a thorough understanding of this provision’s layered disqualifications is essential. Meticulous due diligence is not just a procedural requirement but a cornerstone for ensuring that the resolution process remains fair, transparent, and effective.

— Team AMLEGALS

Please reach out to us at rohit.lalwani@amlegals.com in case of any query.