Section 29A ineligibility doesn’t apply to ongoing insolvency proceedings, NCLT

The Mumbai Bench of the National Company Law Tribunal (NCLT) has, in a single stroke, passed a set of orders that are new to the Insolvency and Bankruptcy Code (IBC) jurisprudence. Judicial Member MK Shrawat has ruled that Section 29A ineligibility doesn’t apply to ongoing insolvency proceedings.The decision is one that is likely to have far-reaching consequences, given all the eligibility hurdles the resolution applicants face in big cases. It also possibly points out an argument which could have been pursued by lawyers in such big cases, but for some reason, wasn’t..Wig Associates Pvt Ltd triggered insolvency proceedings against itself in August 2017. The sole financial creditor in this case, Bank of Baroda, appeared to have reached a one-time settlement with one Mahindra Wig for settlement of dues..To comply with the provisions of the IBC, Mahindra Wig offered a resolution plan which was then approved by Bank of Baroda. The resolution plan was submitted following an Expression of Interest (EOI) floated in April 2018, after the IBC Amendment Act, 2018/Ordinance was passed..Wig is admittedly a ‘connected person’ as per Section 29A, which makes him an ineligible resolution applicant as per the IBC Amendment Act, 2018..In this order, the single member Bench:.Approved the plan submitted by Wig, who is otherwise ineligible under Section 29A of the IBC Amendment Act, 2018.After perusing several precedents and provisions of the IBC, it was observed that the insolvency resolution processes are continuous proceedings and therefore cannot be halted, altered or changed once commenced till its finalisation, much like it is unfair to alter the rules of a game in a playground once it has started..The tribunal heavily relied on a the Supreme Court ruling in the case of Videocon International Ltd v. SEBI, wherein it was held that a statute which affects substantive rights is presumed to be prospective in operation unless made retrospective, either expressly or by necessary intendment..Thus, without getting into the exception carved out under Section 30(4) by the IBC Amendment Act 2018, the NCLT took the view that this amendment cannot be applied retrospectively to the rights of the parties in the absence of express language to that effect..This ruling gains immense significance in view of the eligibility hurdles which applicants are facing in cases like Essar Steel, Bhushan Steel and Amtek Auto. If this ruling was to apply to those cases too, none of the applicants would face the hurdles and litigation which they have been going through..Offered its two cents on what constitutes “satisfaction” of the NCLT under Section 31.The tribunal ruled that satisfaction can be objective or subjective, or both. Objective satisfaction is about achieving the objects of the IBC in accordance with the preamble, while subjective satisfaction depends on logical analysis of the financial data supplied so as to match with the business model of the corporate debtor. Accordingly, the pros and cons of the resolution plan is required to be studied before recording subjective satisfaction, says the order..This can be said to be against the intent of the law, which attempts to minimise the role of the judiciary in the selection of resolution plan, to that of an administrative role. The role of the NCLT in approving the resolution plan is limited to the points mentioned in Section 30(2). Nowhere does the law allow the NCLT to override the commercial wisdom of the creditors..Recommended certain alterations to the plan in furtherance of subjective assessment.The tribunal agreed with cramming down the operational creditor dues to a 5 per cent recovery rate. However, even while observing that no claim was received from the sales tax department, the NCLT cast a duty on both the corporate debtor and the resolution applicant to get sales tax dues resolved, and to discharge income tax dues..Subject to the qualifications, the resolution plan submitted by a ‘Section 29A ineligible resolution applicant’ was approved..However, this case is unique insofar as there will be no opposition to the said order, given that all the parties involved in this case are satisfied with the outcome. For that reason, an appeal against this order is unlikely and it appears that Wig Associates is one company which has successfully avoided the application of Section 29A, while others continue to face eligibility issues under this provision..Advocate Amir Arsiwala appeared for the corporate debtor/resolution applicant..Read the order below.