Sec 29A in the Post-COVID World- To stay or not to stay

-Megha Mittal

(resolution@vinodkothari.com)

If the Insolvency and Bankruptcy Code, 2016 (‘Code’) is the car driving the ailing companies on road to revival, resolution plans are the wheels- Essentially designed to explore revival opportunities for an ailing entity, the Code invites potential resolution applicants to come forward and submit resolution plans.

Generally perceived as an alluring investment opportunity, resolution plans enable interested parties to acquire businesses at considerably reduced values. An indispensable aspect of these Resolution Plans, however, is the applicability of section 29A, which restricts several classes of entities, including ex-promoters of the corporate debtor, from becoming resolution applicants- for the very simple purpose of preventing re-possession of the corporate debtor at discounted rates. Hence, section 29A is seen as a crucial safeguard in revival of the corporate debtor, in its true sense.

In the present times, however, we cannot overlook the fact that the unprecedented COVID disruption, has compelled regulators around the globe, to reconsider the applicability and continuity of several laws, including those considered as significant; and one such provision is section 29A of the Code.

In a recent paper “Indian Banks: A Time to Reform? dated 21st September,2020, the authors, Viral V Archarya and Raghuram G. Rajan, the former Deputy Governor and Governor of the Reserve Bank of India, have discussed banking sector reforms in view of the COVID disruption, calling for privatisation of Public Sector Banks, setting up of a ‘Bad Bank’[1] amongst other suggested reforms.  In the said Paper, they also suggest that “for post-COVID NCLT cases to allow the original borrower to retain control, with the restructuring agreed with all creditors further blessed by the court. Another alternative might be to allow the original borrower to also bid in the NCLT-run auction”- thereby setting a stage for holding back applicability of section 29A in the post COVID world.

In this article, the author makes a humble attempt to analyse the feasibility and viability of doing-away with section 29A in the post-COVID world.

Sec 29A- A brief History

The Code, in its initial stage, adopted an all-inclusive stance, such that any person could come as a resolution applicant- even the promoters of the corporate debtor who led it into insolvency. This increased the risk of the resolution process becoming a second-chance for the defaulting promoters to buy-back the company at significantly discounted prices. Hence, to provide for this loose end, section 29A of the Code was introduced by way of the Insolvency and Bankruptcy Code (Amendment) Act, 2018[2].

However, the first version of sec. 29A was a little too rigid, and hence washed out way too many categories from being resolution applicants. Thus, to solve what became a riddle, a streamlined version of section 29A was introduced vide Notification dated 6th June, 2020; and since then there has been no looking back. Infact, section 29A is now also relevant to sale during liquidation, as well as sale outside the liquidation process,[3][4] and participation in scheme of arrangement during liquidation processes.

The extant provisions of section 29A were also upheld by the Hon’ble Supreme Court in the landmark judgement of Swiss Ribbons Pvt. Ltd. & Anr vs. Union of India, & Ors[5], wherein the Apex Court, while upholding the constitutionality of sec. 29A, stated that “a person, who is unable to service its own debt beyond the grace period, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with”

Hence, it may not be an exaggeration to say that section 29A has been one of the most talked about provisions of the Code, aiming to find the perfect trade-off between restricting wrongful re-possession and achieving the economic objectives.

The Code sans Sec. 29A- A Quick Analysis.  

The Problem Statement

The above discussion gives a clear impression that the tenet behind introduction of section 29A was to fill-up the gap of wrongful re-possession, and as such is a crucial catalyst to achieve the objectives of the Code. However, as mentioned above, the COVID disruption has compelled regulators world-wide to reconsider the applicability and continuity of several provisions of law, including section 29A of the Code.

It must be noted that view/ suggestion put forth by the Acharya and Rajan, comes in the backdrop of a high gross non-performing asset ratio (GNPA Ratio) of 11.3%, expected to rise to a whopping 12.5-14.7% in the post-COVID scenario. They suggest that allowing ex-promoters to re-acquire companies will help improvise recovery rates in India, which is still low as compared to the world-standards and is preparing for worse situations in the post-COVID world.

The prospect of washing out sec. 29A

While the Problem Statement, discussed above, is indeed worth consideration, the Author humbly deviates from the prospect of washing out section 29A in totality.

It is emphasized that the rationale behind introduction of section 29A was to provide cover for what posed to be permanent loophole in the statute. As much as the present times have raised apprehensions w.r.t. market recoveries, the doctrine of proportionality would not warrant a complete washout of sec 29A.

Further, it is pertinent to note that the scope of exclusions under section 29A is not only limited to ex-promoters- it also encompasses other disqualifications like wilful defaulters, disqualified directors and undischarged insolvent entities. Thus, absence of withholding provisions in the Code would lead to a greater misuse, especially when companies are more prone to financial distress and agony. Besides, insofar as importance of revival of companies is concerned, the extant provisions lay down carve-outs for MSMEs which constitute a significant component of the Indian corporate scenario. Thus, arguments stating section 29A as being aversive to the common economic interests would not sustain.

An Alternate Solution

In light of the discussion above, the Author is of the view that an all-in-all washout of section 29A may not be feasible in the view of the very reasons of its introduction at the first place. Having said so, the Author also acknowledges that a default by a promoter may not always be wilful, and can, in some cases, be attributed to external situations- in this case, the COVID disruption. Where the default is genuinely due to external conditions, a presumption that all defaults by promoters are wilful/ with the motive of discounted re-possession, would not be fair.

Thus, it is suggested that to maintain a balance, instead of washing out section 29A as a whole, the regulators may envisage other carve-outs and relaxations, so as to provide a conducive environment for market recoveries and prevent illicit re-possession of the corporate debtor, at the same time. Such carve-outs may be provided only in cases where the disqualifications that are attracted due to financial incompetence, viz.

  • Defaults which have been incurred by the promoters during the disruption period, or the period of suspension provided under the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020[6]; or
  • Failure to meet obligations towards an invoked guarantee.

Hence, against the background discussed above, it must also be appreciated that the disruption due to COVID is a temporary phenomenon vis-à-vis the permanent issue of wrongful re-possession by defaulting ex-promoters. As such, it is reiterated that outright disposal of section 29A for a transient purpose would only mean going back to square one, and undoing all steps taken so far to prevent wrongful re-possession of the corporate debtor at discounted prices.


[1] Banks that will take over bad loans/ NPAs from the existing lenders.

[2] With effect from 23rd November, 2017 pursuant to the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 dated 23rd November, 2017

[3] By such secured creditors who do not relinquish their security interest u/s 52

[4] Introduced vide the IBBI (Liquidation Process) (Amendment) Regulations, 2020- Notification No. IBBI/2019-20/GN/REG053, dated 06.01.2020

[5] [WP (Civil) Nos. 99, 100, 115, 459, 598, 775, 822, 849, and 1221 of 2018, SLP (Civil) No. 28623 of 2018 and WP (Civil) 37 of 2019] dated 25th January, 2019

[6] The suspension on fresh filings pursuant to the Second Amendment Bill, 2020, operates on the primary presumption that any and every default incurred during the 6 months/ 1 year, as notified, would be taken as a default due to COVID disruption. Hence, a similar assumption may be considered while determining applicability of section 29A.


Our related articles, discussing section 29A are available at-

http://vinodkothari.com/2018/02/section29a-ibc-a-net-too-wide/ 

http://vinodkothari.com/wp-content/uploads/2018/04/Streamlining-section-29A.pdf

http://vinodkothari.com/2020/01/ouster-of-ineligible-persons-liquidation-amendment-regulations/

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