Conundrum of Committee of Creditors vis-à-vis Section 29A and Section 30(5), IBC 2016

Standing closer to the 10th anniversary of its promulgation, the Insolvency and Bankruptcy Code (Code) has seen extensive stakeholders’ participation/action amidst the Corporate Insolvency Resolution Process (CIRP) ecosystem, including resort to various measures to gain control over the affairs of Corporate Debtor (CD). In that course, securing a seat in the Committee of Creditors (CoC) as well as claiming entitlements to submit resolution plan or preferring one resolution plan over others, have been at the centre-stage, evoking serious disputes and tussles amidst stakeholders.

In fact, these developments also witnessed pertinent amendments being brought into the Code, including Section 29A towards laying down criteria for prescribing ineligibility of certain stakeholders to submit resolution plan (RP), as well as prescriptions to testify a valid RP. Meanwhile, the disputes amidst stakeholders for securing a seat in the CoC also led to various judicial pronouncements and legislative amendments capturing essentials for such entitlements, apart from meeting the criteria of a financial creditor.

These judicial and legislative indulgences have been mindful to curb the devious intent that the relevant stakeholder might harbour while attempting to get into CoC or cause submission of an RP, as a measure to take control over the CD. This article delves into analysing the exercises made towards identifying and curbing the unscrupulous intents, while laying down legislative and judicial prescriptions.

As stated hereinabove, Section 29A was brought in the Code in November 2017, with a legislative intent to safeguard the interest of the stakeholders and the CD during the course of CIRP. The legislative intent behind Section 29A of the Code was to bar certain persons from submitting a RP. Initially, the said restriction was only limited to RP submitted during the CIRP.

However, despite repeated legislative and judicial indulgences of Section 29A, the stakeholders continued to adopt deceitful means during the CIRP to find loopholes in procedure to defeat the legislative intent. This led to subsequent amendments in the provisions of Section 29A, and presently, the ineligibility thereunder includes an undischarged insolvent and a person whose account, or an account of a CD they control or promote, has been classified as a non-performing asset for at least a period of one (1) year.

Importantly, the ineligibility under Section 29A, extends in layers beyond the applicant, including persons acting in concert, connected persons, related parties and anyone acting jointly with a person disqualified under the aforementioned categories, which ensured that the associates and collaborators of an ineligible applicant are excluded along with it. To that effect the definition of ‘related party’ [Section 5 (24), IBC] in the Code stood expanded by amendment brought in the year 2018. Besides, judicial interpretations continued to determine the impact of ‘related party’ status of the relevant stakeholders.

Meanwhile, resort came to be taken to Section 30(5) by devious Resolution Applicants (RA). The provision allows RAs to attend and vote in the CoC meeting when they are also the financial creditor of the CD. The proviso of the Section 30(5) provides a loophole for the RAs who acquires the debt from an existing CoC, which allows them to manipulate the voting called for approval of the RP submitted by the said CoC member. In that regard, the judicial pronouncements allow FC to submit a resolution plan in the CIRP as the proviso to Section 30(5) clearly allows for FC to file and cast its votes on its own plan and Section 29A does not deny the right of related parties to bid for the plan.

The conundrum of the present situation is that deceitful RA who acquires financial debt from existing financial creditor of CD, has an undue advantage during the voting on the RP, and since there is no outright bar or restriction under Section 29A, on such acquisition of financial debt by the RA, this unscrupulous practice has flourished. 

With respect to Section 30(5), the object was “to prevent a resolution applicant from influencing the decision-making process in its own favour and to ensure that voting on Resolution Plans remains independent and free from conflict of interest.”

The object clearly shows that the intention was always to provide fair process to all applicants. However, the same is being misused by financial creditors by casting vote on their RP.

It is relevant to highlight that the principles of natural justice and fairness were the essential ingredients of Section 29A and Section 30(5). Nonetheless, the applicants/ stakeholders have used one against the other to evade the safeguards created by Section 29A by malafidely acquiring the debts of the members of the CoC and fraudulently manipulating the CoC, as there is minimal judicial intervention in the decision of CoC. The reason for such minimum judicial intervention being assumption that votes in the CoC being disinterested.

However, NCLAT in Pragiti Construction, clarified that this supremacy of CoC cannot be extended to shield a process that is fundamentally flawed by conflict of interest, violation of Section 30(5) of the Code or absence of procedural safeguards. In Expert Realty Professionals (P) Ltd., the NCLAT has categorically held that fraud invalidates everything, including a resolution plan.

In the above context, the Insolvency and Bankruptcy Board of India (IBBI) tried to minimise such practices by issuing guidelines for CoC to maintain the independence and impartiality. In that regard, the Supreme Court has also noted that compliance with said guidelines is necessary to prevent any adverse decision on the part of CoC which affects the interests of the CD. However, despite the glare of IBBI and Judicial intervention, the stakeholders/ applicants keep resorting to such practices, which in fact stand contrary to the intent and objective of Section 29A.

It is settled law that Section 29A was introduced to achieve a sustainable revival 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, however, contrary to such legislative intent, the unscrupulous stakeholders/ applicants have used Section 30(5) to infiltrate the CoC and influence the decision making process.

In this context while the IBBI guidelines for Committee of Creditor, lays down the requirement for disclosure by CoC members of any existing or potential conflict of interest due to pecuniary, personal or professional relationship with any stakeholder, the consequence of such disclosure does not get implemented due to the shield adopted under proviso to Section 30(5).

In fact, the misuse of the proviso of Section 30(5) allows such applicants to violate one of the fundamental principles of law, i.e., maxim nemo judex in causa sua, i.e., that no person can be a judge in his own cause. Therefore, the legislative vacuum created by Section 30(5) vis-à-vis Section 29A needs to be addressed at the earliest by the judiciary as well as the legislature, in order to curb this unscrupulous practice.

About the authors: Shweta Bharti is the Managing Partner of Hammurabi & Solomon Partners. Jyoti K Choudhary is Senior Partner and Avdesh Bairwa is Partner Designate.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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