In the matter of RBL Bank Ltd. v. MBL Infrastructures Ltd., Order of NCLT dated 18th December, 2017.
Background of the Case:
In the case of RBL Bank Ltd. v. MBL Infrastructures Ltd. a resolution plan, submitted by the promoter was rejected after the Insolvency and Bankruptcy (Amendment) Ordinance, 2017 (‘Ordinance’), which notified Section 29A to the Insolvency and Bankruptcy Code, 2016 (‘the Code’), was brought into force.
The Plan was rejected by the Committee of Creditors as per clause (c) and (h) of Section 29A, on account of attraction of ineligibility under the aforesaid new provision. Application is thereon filed by the resolution applicant under Section 60 of the Code, before the Adjudicating Authority (‘NCLT’) to set aside the decision of the Committee of Creditors.
Section 29A: Persons not eligible to be resolution applicant: A Person shall not be eligible to submit a resolution plan, if such a person, or any other person acting jointly with such person, or any person who is a promoter or in the management or control of such person , –
(c) whose account is classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 and period of one year or more has lapsed from the date of such classification and who has failed to make the payment of all overdue amounts with interest thereon and charges relating to non-performing asset before submission of the resolution plan;
(h) has executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor under insolvency resolution process or liquidation under this Code;
Observations of the Bench:
The NCLT took a view that rejection under clause (c) should not be valid, as the period of one year was not lapsed after the account was notified as NPA.
With respect to clause (h), NCLT took a view that there was no intent of the Government to debar all the promoters, only for the reason for issuing a guarantee which is enforceable, unless such guarantee has been invoked and not paid for, or the guarantor suffers from any other antecedent listed in Section 29(a) to (g).
The objective of the Ordinance is to prohibit certain persons from submitting a Resolution Plan who, on account of their antecedents, may adversely impact the credibility of the process under the Code.
The guarantors in respect of whom, a creditor has not invoked the guarantee or made a demand under guarantee should not be prohibited. Therefore, no default in the payment of dues by the guarantor has occurred, cannot be covered under clause (h) of Section 29(A). It cannot be the intent of clause (h) to penalize those guarantors who have not been offered an opportunity to pay by calling upon them to pay the dues, by invoking the guarantee. Therefore, the words “enforceable guarantee” appearing in clause (h) are not to be understood by their ordinary meaning or in the context of enforceability of the guarantee as a legal and binding contract, but in the context of the objectives of the Code and Ordinance in general and clause (h) in particular.
With the aforesaid observations, the Kolkata Bench of NCLT, clarified the legal position of the case, leaving the committee of creditors to make its independent decision to either accept or reject the Resolution Plan of the applicant.
The intent of the Ordinance might have been to ensure that those who have defaulted once lose their right to submit resolution plans. If the creditors want the Company to remain in the hands of the existing management, the creditors may very well decide the same. However, a promoter submitting a Resolution Plan for his own Company will arguably take away the very purpose with which the Ordinance was passed in the first place.
The changes vide the Amendment Bill, 2017, have been summarized in the following table:
|Text Pre-amendment to the Code||Text Post-amendment to the Code||Rationale for changes and analysis|
|Amendment in clause (c) to Section 29A|
|whose account is||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||These changes have been made with a view to bring clarity on the extent of coverage and provide reasonable time for a person having non-performing asset to repay overdue amounts;
|period of one year or more has lapsed from the date of such classification||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|
|and who has failed to make the payment of all overdue amounts with interest thereon and charges relating to non-performing asset before submission of the resolution plan||Replaced with a new proviso to the clause: 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 non-performing asset accounts before submission of resolution plan;|
|Amendment in clause (h) to Section 29A|
|under insolvency resolution process or liquidation||against which an application for insolvency resolution made by such creditor has been admitted||In order to clarify the extent of applicability of the disability on guarantors;”
The bill grants extant liberty to the promoter to pay off the delinquent dues and then gain eligibility. Having said so, a guarantor, even against whom the guarantee has not been invoked, should also be allowed to submit resolution plans. The intent of the legislature should not be to allow any defaulting promoters, who could not make the default good even after the opportunity being provided to bid for a resolution of a Corporate Debtor.
The objective is to bar such persons from bidding through resolution plans, who have been willful defaulters, continuing non-payment of their outstanding dues. However, those who are not willful defaulters and were unable to pay for a restricted period of time should be allowed the opportunity to make good their default.
In separate appeals filed by RBL Bank and Punjab National Bank to NCLAT, matter is pending for final judgment. However, the NCLAT has passed interim orders, directing that any resolution plan should not be accepted/ rejected, without taking prior approval of the Appellate Authority.