Retrospective Operation of S. 29A & OTS under IBC – Analysing Prospects

– Megha Mittal

The Hon’ble NCLAT vide its order Martin SK Golla v. Wig Associates, 2019[1] has set aside the order of the Adjudicating Authority which had accepted a one-time settlement-cum-resolution plan submitted by a connected person of Corporate Debtor, who later on, after the implementation of section 29A became ineligible to submit a plan. Hence, the question before the Hon’ble Tribunal was whether sec 29A of IBC will be applicable with retrospective effect in section 10 proceedings which were initiated prior to sec 29A came into force?

The Hon’ble NCLAT held that the reason that once CIRP is commenced, provisions as existing on the day of the petition would continue to apply even in the face of amendment brought about by way of 29A- cannot be maintained, and as such the one time settlement-cum-resolution plan, offered by the connected person of the Corporate Debtor cannot be considered good under law.

In this article, along with the issue of retrospective applicability of section 29A and its likely impact on the stakeholders, the Author also delves into the question whether a one-time settlement scheme could tantamount to a resolution plan under the Code.

Analysis-

As discussed above, the analysis will be two fold. First, we shall discuss the retrospective operation of section 29A; second the contours of one time settlement schemes vis-à-vis the Code.

(i) Retrospective effect of sec 29 A

Sec 29A has emerged as one of the key provisions of the Code. It sets out the list of entities/ persons ineligible to be Resolution Applicants. The provision was inserted through the Insolvency and Bankruptcy Code (Amendment) Act[2] (‘2018 Amendment Act’) notified on 18^th January, 2018 and effective from the date of the Ordinance[3] dated 23^rd November, 2017. The purpose for insertion of the clause was to suppress the mischief of a back-door entry of promoter directors/ connected persons. It was observed that the absence of any restriction on persons to submit resolution plan, the Code had become an easy-way out for promoter directors to buy back the company at subsidized rates and more importantly free of its past liabilities. This loophole gave benefit to the unscrupulous person to regain control of the corporate debtor – Section 29A was introduced as a remedy to the same.

Below we discuss the various aspects of section 29A in light of the judicial precedents and recent developments –

§ Validity of sec 29A-

After its roll-out, the constitutional validity of sec 29A, in particular, clause (c)[4], was challenged in the famous case of Swiss Ribbons Pvt. Ltd & Anr v. UOI & Ors, 2018[5] (“Swiss Ribbons”) wherein, the Hon’ble Supreme Court upheld the validity of the provision in view of the statement of Object and Reasons of the IBC (Amendment) Ordinance, 2017. The Apex Court further relied to its judgments in Chitra Sharma v. UOI, 2017[6] and Arcelormittal India Private Limited v. Satish Kumar Gupta, 2018[7] (“Arcelor Mittal”), where the Apex Court held that –

“31. Parliament has introduced Section 29A into the IBC with a specific purpose. The provisions of Section 29A are intended to ensure that among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process…..

32…… The Court must bear in mind that Section 29Ahas been enacted in the larger public interest and to facilitate effective corporate governance. Parliament rectified a loophole in the Act which allowed a back- door entry to erstwhile managements in the CIRP.”

Again, in Arun Jagtramka v.Jindal Steel and Power Ltd, 2021[8] the Hon’ble Court gave a purposive interpretation to the section – following the trend of recent precedents of the Hon’ble Court to IBC provisions. In order to fulfil the objectives of IBC, it is pertinent that ‘ineligible persons’ should not be allowed to return in the new avatar of resolution applicants. The purpose of ineligibility is to achieve a sustainable revival and to ensure that a person who is the cause of the problem either by a design or a default cannot be a part of the process of solution.

Thus, the validity of section 29A has been clearly upheld as constitutional and has in fact played an instrumental role in achieving the objectives of the Code in its true spirit.

§ Retrospective Operation-

In Black’s Dictionary[9], “retrospective law” is defined as a law which looks backward or contemplates the past; one which is made to affect acts or facts occurring, or rights accruing, before it came into force. Every statute which takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability in respect to transactions or considerations already past. One that relates back to a previous transaction and gives it a different legal effect from that which it had under the law when it occurred.

One of the plenary powers of legislation is to legislate prospectively or retrospectively. Following the general rule of law, the parliament exercising its power to legislate brought the 2018 Amendment Act with retrospective operation, that is, from the date of the Ordinance. There is a presumption of prospectivity articulated in the legal maxim “nova constitutio futuris formam imponere debet non praeteritis”, i.e. “a new law ought to regulate what is to follow, not the past”, and this presumption operates unless shown to the contrary by express provision in the statute or is otherwise discernible by necessary implication.

The Hon’ble Supreme Court in Keshvan v. State of Bombay[10] held that it is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation. Again, in Mohd. Rashid Ahmad v. State of U.P,[11] the Apex Court held that “if the enactment is expressed in a language which is fairly capable of either interpretation, it ought to be construed as prospective only. But where, as here, it is expressly stated that an enactment shall be retrospective, the courts will give it such an operation. It is obviously competent for the legislature in its wisdom, to make the provisions of an Act of Parliament retrospective.”

In the case under consideration, the 2018 Amendment Act, by its express provision made the Act operational from November, 2017. Thus the presumption of prospectivity is not applicable. The intention of legislature to plug the loophole and give it a retrospective effect is discernible in the clear words of the Act.

§ The stage at which retrospective operation comes into effect

It is at the stage when resolution plan is submitted that ineligibility attaches to the person. The person eligible on the commencement date would not make him eligible on the date of submission of plan.

In Arcelor Mittal, the Hon’ble SC stated-

“43. According to us, it is clear that the opening words of Section 29A furnish a clue as to the time at which sub-clause (c) is to operate. The opening words of Section 29A state: “a person shall not be eligible to submit a resolution plan…”. It is clear therefore that the stage of ineligibility when the resolution plan is submitted by the resolution applicant.”

§ Can vested right be taken away?

While the operation of section 29A, in terms of date of effect as well as its contours have been clarified and upheld by the Hon’ble Supreme Court at several instances, in the given state of affairs, one may argue that the 2018 Amendment Act takes away the vested right of the person who was allowed to be part of the resolution process prior to its enforcement. It may be contended that the retrospective operation (from the date of Ordinance) impairs this right of participation and consideration to be resolution applicant.

In this regard, it is important to take note of the following leading precedents –

In State Bank’s Staff Union (Madras Circle) v. Union of India and Ors.[12], the Apex Court held that every sovereign legislature is clothed with competence to make retrospective laws – It is open to the Legislature, while making retrospective law, to take away vested rights. If a vested right can be taken away by a retrospective law, there can be no reason why the Legislature cannot modify the vested rights.

Again in Manish Kumar vs. Union of India (UOI) and Ors[13], this Court held that that a vested right can be the subject matter of retrospective law, cannot be doubted. Since, the law made, under the Constitution, must pass muster, Under Articles 14, 19, 21 and 300A of the Constitution, the issue really boils down to, whether or not, it is manifestly arbitrary.

In Vijay v. State of Maharashtra[14] the Hon’ble Supreme Court held that –

“It is now well settled that when a literal reading of the provision giving retrospective effect does not produce absurdity or anomaly, the same would not be construed to be only prospective. The negation is not a rigid Rule and varies with the intention and purport of the legislature, but to apply it in such a case is a doctrine of fairness. When a law is enacted for the benefit of the community as a whole, even in the absence of a provision, the statute may be held to be retrospective in nature. The Appellant does not and cannot question the competence of the legislature in this behalf.” (emphasis supplied)

Interestingly, in Swiss Ribbons (supra) it was argued by the defence counsel that due to the application of section 29A, the vested rights of erstwhile promoters to participate in the recovery process of a corporate debtor has been impaired retrospectively. However, the Hon’ble SC held that a statute is not retrospective merely because it affects existing rights. Further, noting that the resolution applicant has no vested right for consideration or approval of its resolution plan, the Apex Court held that the legislature did not exercise its power to make retrospective law arbitrarily – There is reasonable nexus with the objectives to be achieved by the amendment, that is, to restrict entry of persons who contributed to the default from regaining control of the Corporate Debtor.

(ii) One Time Settlement Scheme

One time settlement offers often originates from the promoters of the Corporate Debtor in order to settle dues with its creditors. At the various stages, such one-time settlement (‘OTS’) can be offered to the creditors to save corporate debtor from the stab by fateful knife of liquidation.

The stages are-

Pre admission of CIRP application- Rule 8 of Adjudicating Authority Rules, 2016 allows withdrawal of CIRP application. It permits parties to settle prior to the admission.
Post admission of CIRP application– Sec 12A of the Code allow settlement with the requisite of 90% voting share of CoC voting in its favour. Regulation 30A imposes an additional condition for withdrawal of CIRP that such application shall be filed before issue of invitation for expression of interest under regulation 36A.
After invitation of Expression of Interest– in Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors[15] the Hon’ble Supreme Court allowed withdrawal of corporate insolvency resolution process (“CIRP”) under Insolvency and Bankruptcy Code 2016 (“IBC”) even after the issue of invitation for expression of interest.

OTS vis-à-vis Resolution Plans

In the instant case of Martin SK Golla v. Wig Associates, 2019, the Hon’ble Adjudicating Authority approved the OTS as a resolution plan under the Code. For once, leaving aside the moot issue of the eligibility of the resolution applicant in the instant case, a significant question that crops up is whether an OTS can replace a Resolution Plan?

Collective vs. Individual Proceedings.

As is well-established, IBC propounds the idea of collective proceedings as against individual proceedings. Thus, upon commencement of CIRP, the cake gets distributed amongst all creditors – no single or group of creditors can claim the whole cake. It is in the same lines that a resolution plan must consider and provide value for the claims of all stakeholders, in any case not lower than the liquidation value.

On the other hand, an OTS most often caters to financial creditors only – the OTS schemes focus on the outstanding dues of one or more financial creditors. Operational Creditors and Statutory and/ or employee dues are generally not covered under the ambit of OTS offers. Evidently, by its very nature, an OTS does not fall in line with a resolution plan – the two are fundamentally different.

Hence, the Author humbly submits as also upheld and acknowledged by the Hon’ble Supreme Court in Swiss Ribbons (supra), the FCs constituting the committee of creditors are under the moral as well as legal duty to ensure that the interests of all stakeholders, inter-alia operational creditors and workmen and employees are taken care of in the plan. In the absence of the minimum liquidation value being provided to the operational creditors and the dissenting financial creditors, the resolution plan must not be approved by the FC[16]

Further, a resolution plan is not a mere plan of repayment to creditors, but also a blue-print of how the resolution applicants propose to revive the corporate debtor. An OTS on the other hand, is only concerned with settlement of dues. Thus, an OTS, being a predominantly individual and recovery process, cannot be construed to be a resolution plan under the Code.

Conclusion

The Author humbly concurs with the view of the Hon’ble Appellate Tribunal which upheld the applicability of section 29A in the given state of affairs. The fact that the resolution applicant was not ineligible on the date of the admission of CIRP cannot be an excuse for non-applicability of section 29A, even though the same was implemented after commencement of CIRP.

[1] https://ibbi.gov.in/uploads/order/64f1a44583c13e4b09844f7a8e684e41.pdf

[2] https://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Jan/182066_2018-01-20%2023:35:29.pdf

[3] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 – https://ibbi.gov.in//webadmin/pdf/legalframwork/2017/Nov/180404_2017-11-24%2007:16:09.pdf

[4] Ineligibility attracted due to NPA

[5] https://indiankanoon.org/doc/17372683/

[6] https://indiankanoon.org/doc/118903856/

[7] https://indiankanoon.org/doc/161012846/

[8] https://indiankanoon.org/doc/54725749/

[9] Black’s Law Dictionary, 6^th Edition

[10] https://indiankanoon.org/doc/656658/

[11] https://indiankanoon.org/doc/958646/

[12] https://indiankanoon.org/doc/213931/