Creditors Face Dilemma Over Bankruptcy Laws

The Insolvency and Bankruptcy Code is approaching its 10th anniversary, with extensive stakeholders’ participation in the Corporate Insolvency Resolution Process ecosystem. Securing a seat in the Committee of Creditors and submitting resolution plans have been central to the process, evoking serious disputes and tussles amidst stakeholders.

These developments have led to amendments in the Code, including Section 29A, which prescribes criteria for ineligibility of certain stakeholders to submit resolution plans. The section aims to safeguard the interest of stakeholders and the Corporate Debtor during CIRP.

Legislative Intent and Judicial Pronouncements

Section 29A was introduced in November 2017 to bar certain persons from submitting resolution plans. The legislative intent was to prevent unscrupulous stakeholders from taking control of the CD. However, despite repeated legislative and judicial indulgences, stakeholders continued to adopt deceitful means to find loopholes in the procedure.

The ineligibility under Section 29A extends to undischarged insolvents and persons whose accounts have been classified as non-performing assets for at least a year. It also includes persons acting in concert, connected persons, related parties, and those acting jointly with a disqualified person.

Conundrum of Section 30(5)

Section 30(5) allows Resolution Applicants to attend and vote in CoC meetings when they are also financial creditors of the CD. However, this provision has been misused by deceitful applicants who acquire debt from existing financial creditors to manipulate the voting process.

Judicial pronouncements have allowed financial creditors to submit resolution plans and cast votes on their own plans, as Section 29A does not deny the right of related parties to bid for the plan. This has created a conundrum where deceitful applicants have an undue advantage during the voting process.

However, the provision has been misused by financial creditors to cast votes on their own resolution plans, which they have received notices for.

Principles of Natural Justice and Fairness

The principles of natural justice and fairness are essential ingredients of Section 29A and Section 30(5). However, applicants have used one against the other to evade the safeguards created by Section 29A by malafidely acquiring debts of CoC members and fraudulently manipulating the CoC.

In practice, this means that the CoC’s decision-making process can be compromised if a resolution applicant has a conflict of interest or has acquired debt from an existing financial creditor. This can lead to unfair outcomes and undermine the integrity of the insolvency resolution process, as seen in cases where companies like Paragon have been involved.

The Insolvency and Bankruptcy Board of India has issued guidelines for the CoC to maintain independence and impartiality. The Supreme Court has noted that compliance with these guidelines is necessary to prevent adverse decisions that affect the interests of the CD.

Despite the guidelines and judicial intervention, stakeholders continue to resort to unscrupulous practices, contrary to the intent and objective of Section 29A. The legislative vacuum created by Section 30(5) vis-à-vis Section 29A needs to be addressed to curb this practice.

They misuse the proviso to Section 30(5) to violate the fundamental principle of law that no person can be a judge in their own cause. The guidelines for the CoC require disclosure of any existing or potential conflict of interest, but the consequence of such disclosure does not get implemented due to the shield adopted under the proviso to Section 30(5).

It is necessary.

The issue is complex.