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Section 29A(c) of the Insolvency and Bankruptcy Code (IBC) bars a person or promoter who has an NPA classified account of the corporate debtor under their control from taking part in the insolvency resolution of the corporate debtor. In a recent case, the National Company Law Tribunal (NCLT) had to decide whether Section 29A(c) of the IBC disqualified individuals who were not in charge of the company when it became a non-performing asset (NPA) but were in charge when they submitted a resolution plan. The decision would have far-reaching implications for how the section should be interpreted.
The case was an appeal filed by Navayuga Engineering challenging its disqualification from presenting a resolution plan for the corporate debtor, Athena Demwe Power Ltd, a company set up for executing a hydroelectric project in Demwe, Arunachal Pradesh.
The bone of contention and the reason for disqualification was Navayuga’s close business ties with Athena. In 2013, Navayuga invested ₹235.35 crore through its wholly owned subsidiary Regina Infrastructure for 21.55 per cent stake in Athena. Subsequently, in 2016, an MoU was signed stipulating further investment by Navayuga for an equity share of 51 per cent in Athena.
In 2013, Athena’s loans were declared a NPA On October 22, 2017, Navayuga transferred its entire shareholding in RIPL to two other individuals. Soon after, insolvency proceedings were initiated against Athena by Indian Bank, a short-term lender, triggering the Corporate Insolvency Resolution Process (CIRP) on October 29, 2017.
Navayuga submitted a resolution plan for the lenders’ consideration and approval. However, the committee of creditors informed Navayuga that it was not eligible to submit a resolution plan under Section 29A(c) of the IBC. Navayuga argued that the objective of Section 29A(c) was to disqualify only those individuals or promoters who caused or were responsible for the corporate debtor’s account being declared NPA. It said that Athena’s account was classified as an NPA long before the 2016 MoU. Further, Navayuga also argued that it did not have any control over Athena either before or after the signing of the MoU in 2016.
The rationale behind Navayuga’s arguments was that the MoU entered in 2016 was merely a conditional contract which never saw the light of the day. Navayuga also underscored fact that it had transferred 100 per cent shareholding in RIPL prior to the initiation of CIRP.
When the IBC was enacted, the concern was that individuals who contributed to the default of a company could misuse the Code to gain control of the company after forcing heavy ‘haircuts’ by the lenders. To prevent such individuals from misusing the law, Section 29A was brought in.
The NCLAT opined that given the object of Section 29A(c), giving a restrictive interpretation to the provision would be incorrect.
In this regard, reliance was placed on the decision in ArcelorMittal India Pvt Ltd vs Satish Kumar Gupta to observe that Section 29(A) applied to not only those who led the corporate debtor to slip into NPA status but would also apply to those who despite being control, were either avoiding or not taking any steps to pull out the corporate debtor from financial misery and de-classify the account of NPA.
NCLAT felt that the MoU could not be read to mean that the management and control of Athena was to be given to Navayuga only upon fulfilment of certain contingencies—so, Navayuga may be right in arguing that it was not a promoter of Athena from the beginning. However, after the execution of the MoU in 2016, Navayuga was given control and management of Athena. Thus, Navayuga was held to be ineligible to submit the resolution plan under Section 29A(c) of IBC.
The NCLAT’s decision marks a significant development in strengthening jurisprudence concerning the prohibition outlined in Section 29 of the IBC, shedding light on its interpretation and application in insolvency resolution process.
(The writers are advocates at Trinity Chambers, Delhi)
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