Retention of directors by resolution applicant does make resolution ineligible

retention-of-directors-by-resolution-applicant-does-make-resolution-ineligible

Status as on 04/02/2019

The soul and spirit of Insolvency and Bankruptcy Code 2016 (IBC) is the resolution of the corporate debtor so as to maximize the assets of the corporate debtor. To achieve this above-mentioned key objective, the Committee of Creditors (COC) approve the resolution plan which bids the maximum value of assets and offers maximum amount to the creditors and stakeholders.

However, retaining a director by the resolution applicant does not debar the resolution applicant from proposing a resolution plan.

Once an insolvency application is admitted and Resolution Professional takes over the whole management of the company, thereafter the Resolution Professional invites for the resolution plans to revive the company. By resolution plans, various resolution applicants submit the proposals to take over the whole company of the corporate debtor.

Initially, there were no bar or qualification criteria to become a resolution applicant due to which even the promoters or directors of the defaulting corporate debtors used to try to take the business back and retain their positions easily.

Thus, to curb down this practice and regulate the fair acquiring of the corporate debtor, section 29A was added into the code.

According to Section 29A (c) and (j) of IBC, anyone who is suffering from the under following disqualifications shall not be eligible to submit a resolution plan ;

  • The person 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 RBI Guidelines issued under the Banking Regulation Act, 1949 and at least a period of 1 (One) year has elapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:

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 the resolution plan.

  • Connected persons, i.e. persons connected to the person disqualified under this section.

Connected person means-

      1. Any person who is the promoter or in the management or control of the resolution applicant; or
      2. Any person who shall be a promoter or in the management or control of the business of the corporate debtor during the implementation of the resolution plan.
      3. The holding company, subsidiary company, associate company, a related party of a person referred to in clause (i) and (ii).

Even, as per section 5(24) of IBC, the persons who are a related party to the corporate debtor shall be ineligible to file resolution plan but no provisions stress that the eligible resolution applicant cannot retain one or two directors of the corporate debtor. Thus enabling the eligible resolution applicant to retain one or two directors of the corporate debtor to effectively run the business as a going concern.

The above-said law has been laid down by National Company Law Appellate Tribunal (NCLAT) in Tomorrow Sales agency Pvt. Ltd. vs. Rajiv Khurana, R.P.  for power Himalayas Ltd. & Ors. wherein NCLAT observed that the resolution plan has the consent of 94.5% of the shareholders and approval of COC by 100% voting share. Also, the payment plan has been renewed to provide 100% upfront payment for OCs and to pay promoters only if the financial position of the Corporate Debtor allows and held that mere retention of two of directors of the Corporate Debtor doesn’t violate section 29A of the code.

Conclusion

In the light of above provisions and decision laid down by the Appellate Authority, it becomes clear that the resolution applicant who is eligible under section 29A of IBC cannot be declared ineligible on the grounds that two directors of the corporate debtor were retained by the resolution applicant. Therefore, even if the resolution applicant wants to retain any of the directors of the corporate debtor the resolution applicant is allowed to retain if the plan proposes the maximum valuation of assets.

Disclaimer –  Please note that the above view is based on personal interpretation and for general awareness. The readers are required to take opinion from the Top IBC professionals or Insolvency Professionals before relying on the article. For any clarifications, please write to us at ibc@centrik.in

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