As we approach the 10th anniversary of the Insolvency and Bankruptcy Code (IBC) 2016, the legal landscape surrounding the Corporate Insolvency Resolution Process (CIRP) has evolved significantly. The active participation of stakeholders has brought to light various tactics to gain control over Corporate Debtors (CD), often leading to disputes over Committee of Creditors (CoC) memberships and resolution plan submissions. Central to these issues are Sections 29A and 30(5) of the IBC, which have been pivotal in shaping the current legal framework.
Section 29A: Guarding Against Ineligible Stakeholders
Section 29A, introduced in November 2017, aims to safeguard stakeholders’ interests during CIRP by disqualifying certain entities from submitting resolution plans (RPs). Initially, these restrictions applied only to RPs submitted during the CIRP. However, stakeholders continued to exploit procedural gaps, prompting further amendments. Currently, Section 29A disqualifies not only undischarged insolvents but also those whose accounts have been non-performing assets for over a year. The prohibition extends to related parties and associates of ineligible applicants, as defined in the expanded ‘related party’ clause in Section 5 (24) of the IBC, amended in 2018.
Section 30(5): The Role of Resolution Applicants
Section 30(5) presents another layer of complexity. It permits Resolution Applicants (RAs) who are also financial creditors to participate in CoC meetings. However, this provision has been manipulated by RAs acquiring debt from existing CoC members, thus gaining undue influence in approving their own RPs. Judicial interpretations have upheld the rights of financial creditors to submit and vote on their RPs, highlighting a legislative gap that unscrupulous RAs have exploited.
The Need for Judicial and Legislative Intervention
The National Company Law Appellate Tribunal (NCLAT) has addressed these issues, emphasizing that the CoC’s authority cannot protect processes tainted by conflicts of interest or procedural flaws, as seen in decisions such as Pragiti Construction and Expert Realty Professionals (P) Ltd.. Despite guidelines from the Insolvency and Bankruptcy Board of India (IBBI) to maintain CoC impartiality, stakeholders continue to circumvent these safeguards, undermining the intent of Section 29A.
The misuse of Section 30(5) challenges the foundational legal principle that no one should be a judge in their own cause (nemo judex in causa sua). The legislative void between Section 29A and Section 30(5) requires urgent attention to prevent these practices and uphold the integrity of the CIRP process.
Shweta Bharti, Managing Partner at Hammurabi & Solomon Partners, along with Senior Partner Jyoti K Choudhary and Partner Designate Avdesh Bairwa, provides insights into these pressing legal challenges. The views expressed are those of the authors and do not necessarily reflect the position of Bar & Bench.
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