Introduction
Section 29A(c) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) makes a person ineligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person,-
at the time of submission of the resolution plan 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, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 and at least 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:
The Proviso allows such a person to ‘cure’ the ineligibility by making payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts (‘NPA account’) before submission of resolution plan. Thus, the disqualification is a de facto and not a de jure disqualification and can be overcome by the concerned person by making the pending payments overdue under a NPA account.
In Cosmic CRF Limited v Myotic Trading Pvt Ltd & Ors (‘Cosmic CRF case’), the Supreme Court interpreted Section 29A(c) and its Proviso to mean that if no dues were pending on date of submission of a resolution plan Cosmic CRF cannot be deemed to be ineligible because of a NPA account which was redundant. The Supreme Court disagreed from the National Company Law Appellate Tribunal (‘NCLAT’) which interpreted the Proviso to Section 29A(c) literally and held that until Cosmic CRF pays pending dues under the NPA account, it was ineligible to submit a resolution plan under Section 29A(c).
Basis of Ineligibility: Literal Reading of Proviso to Section 29A(c)
When Cosmic CRF submitted its resolution plan, financial creditors had already suffered a loss/haircut in respect of another company: Cosmic Ferro Alloys Ltd (‘CFAL’). Financial creditors had declared CFAL as a NPA account, but it had already undergone a successful CIRP. The connection between Cosmic CRF and CFAL was – Aditya Vikram Birla.
Aditya Vikram Birla was the Managing Director of Cosmic CRF.
Aditya Vikram Birla was also a shareholder of CFAL when it was declared a NPA account.
Also, father of Aditya Vikram Birla was a promoter and shareholder of CFAL when it was declared a NPA account.
The Corporate Insolvency Resolution Process (‘CIRP’) of CFAL succeeded when resolution plan of a third party was approved by the Committee of Creditors (‘CoC’) and the National Company Law Tribunal (‘NCLT’). The question was whether Cosmic CRF is disqualified as a resolution applicant under Section 29A(c) because its managing director was a shareholder of CFAL which was declared a NPA account. NCLAT answered in the affirmative.
As per NCLAT, the only way to cure the ineligibility under Section 29A(c) was to pay all the overdue amounts with interest and charges relating to the NPA account. And that resolution of CFAL and transfer of its ownership to another entity via CIRP did not take away the ineligibility of promoters who were responsible downfall of CFAL and caused financial creditors to take a haircut on the loans. The limitation of NCLAT’s view was that the NPA account was redundant in view of completion of CIRP making it unfeasible for Cosmic CRF and its Managing Director – Aditya Vikram Birla – to pay the pending amounts. In fact, there were no pending amounts.
At the same time, NCLAT’s observation were, prima facie, aligned with the Supreme Court’s interpretation of Proviso to Section 29A(c). In Arcelormittal Pvt Ltd v Satish Kumar Gupta (‘Arcelormittal case’), the Supreme Court held that Proviso to Section 29A(c):
… makes it clear that the ineligibility can only be removed if the person submitting a resolution plan makes payment of all overdue amounts with interest thereon and charges relating to the non-performing asset in question before submission of a resolution plan. The position in law is thus clear. Any person who wishes to submit a resolution plan acting jointly or in concert with other persons, any of whom may either manage, control or be a promoter of a corporate debtor classified as a non-performing asset in the period abovementioned, must first pay off the debt of the said corporate debtor classified as a non-performing asset in order to become eligible under Section 29A(c). (para 54)
On a prima facie basis, NCLAT’s order was in consonance with the Supreme Court’s observations in Arcelormittal case. But the Supreme Court in Arcelormittal case was not faced with a situation where the company with NPA account had undergone a successful CIRP. So, NCLAT’s reading of the Proviso to Section 29A(c) was pedantic because it did not distinguish facts in Cosmic CRF case from the facts of Arcelormittal case.
Supreme Court Adopts a More Pragmatic Approach
The Supreme Court disagreed with the NCLAT’s approach and termed its reasoning as ‘fallacious’. As per the Supreme Court, the ineligibility under Section 29A(c) must be reckoned on the date of submission of a resolution plan and applies ‘in praesenti’. And, on date of submission of a resolution plan no dues were pending as CIRP of CFA had already concluded six years ago.
The Supreme Court also relied on Arcelormittal case to further emphasize that the ineligibility attaches at the time of submission of a resolution plan. Though it needs to be kept in mind that in Arcelormittal case the argument was that under Proviso to Section 29A(c) a resolution applicant can cure the ineligibility after approval of a resolution plan. Else, if the resolution applicant pays pending dues of a NPA account at the time of submission, but its resolution plan is not eventually approved by the Committee of Creditors/National Company Law Tribunal it would narrow the limit the no. of resolution applicants. The Supreme Court though held that the ineligibility must not exist at the time of submission of a resolution plan and all pending dues must be cleared at the stage of submission itself. The NCLAT read the dictum of Arcelormittal case literally and insisted on payment, the Supreme Court remarked that the Proviso was not applicable to Cosmic CRF case because no dues under the NPA account were pending.
There were a few additional facts that the Supreme Court interpreted in favor of Cosmic CFR: (i) it was not even incorporated when CIRP of CFAL was concluded; (ii) management of CFAL was under a different entity and Aditya Vikram Birla or anyone connected with him was no in management or control of CFAL; (iii) Aditya Vikram Birla held a miniscule share in CFAL and was neither its promoter or director and all his ties anyways stood severed after conclusion of CIRP.
Clarity on Applicability of Section 29A(c) and its Proviso
In Cosmic CRF case, the Supreme Court reinforced interpretation of Section 29A(c) and its Proviso by clarifying that the ineligibility under the former is relevant only at the time of submission of a resolution plan. And if dues under a NPA account are not pending at the time of submission of a resolution plan then the resolution applicant or a person connected with the resolution applicant cannot be deemed to be ineligible under Section 29A(c). The Proviso will not be applicable if there are no pending dues due to successful completion of CIRP of a company which had a NPA account. The Supreme Court added that:
Since all remaining dues stand extinguished and the company operates on a clean slate, there is no question of such unpaid dues being ‘resurrected’ for the purposes of gauging eligibility in terms of Section 29A. (para 53)
The Supreme Court also reasoned that if NCLAT’s interpretation – of payment of pending dues under a redundant NPA account – is accepted it would result in making Cosmic CRF ineligible to participate in any CIRP in the future. And that would be an irreversible and drastic consequence.
Further, while payment of pending dues under NPA account is necessary to be eligible under Proviso to Section 29A(c), courts cannot insist on the payment if the dues are no longer pending due to successful completion of CIRP. It would be tantamount to diluting the clean slate doctrine and/or forcing the resolution applicant to fulfil an impossible condition. Either is not desirable.
To conclude, the emphasis on ‘in praesenti’ remains a common theme initiated in the Arcelormittal case and reinforced in the Cosmic CRF case. The situation at the time of submission of a resolution plan is the only relevant criteria. While in Arcelormittal case the Supreme Court refused to postpone payment of pending dues to stage of approval of a resolution plan; in the Cosmic CRF case the Supreme Court said a NPA account, made redundant by completion of CIRP, cannot subsequently affect submission of a resolution plan. If no dues under a NPA account are pending at the time of submission of a resolution plan then the resolution applicant is eligible. Else not. This is the interpretation of Section 29A(c) and its Proviso.
