Supreme Court (18.01.2022)) in Bank of Baroda & Anr. Vs. MBL Infrastructures Ltd. & Ors. [Civil Appeal No. 8411 of 2019] held that;
Section 29-A has been construed to be a crucial link in ensuring that the objects of the IBC are not defeated by allowing “ineligible persons”, including but not confined to those in the management who have run the company aground, to return in the new avatar of resolution applicants.
Section 35(1)(f) is placed in the same continuum when the Court observes that the erstwhile promoters of a corporate debtor have no vested right to bid for the property of the corporate debtor in liquidation.
The values which animate Section 29-A continue to provide sustenance to the rationale underlying the exclusion of the same category of persons from the process of liquidation involving the sale of assets, by virtue of the provisions of Section 35(1)(f).
Once a person executes a guarantee in favour of a creditor with respect to the credit facilities availed by a corporate debtor, and in a case where an application for insolvency resolution has been admitted, with the further fact of the said guarantee having been invoked, the bar qua eligibility would certainly come into play.
It is clear that once the Code gets triggered by admission of a creditor’s petition under Sections 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem.
The word “such creditor” in Section 29A(h) has to be interpreted to mean similarly placed creditors after the application for insolvency application is admitted by the adjudicating authority.
As a result, what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process.
Having understood the provision and the objective behind it, as well as the Code, it is clear that, if there is a bar at the time of submission of resolution plan by a resolution applicant, it is obviously not maintainable.
However, if the submission of the plan is maintainable at the time at which it is filed, and thereafter, by the operation of the law, a person becomes ineligible, which continues either till the time of approval by the CoC, or adjudication by the authority, then the subsequent amended provision would govern the question of eligibility of resolution applicant to submit a resolution plan.
Excerpts of the Order;
# 1. A judicial interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”), as amended by the Act 26 of 2018 is sought from us.
# 2. We have heard Shri. Tushar Mehta, learned Solicitor General and Mr. Bishwajit Dubey, learned counsel appearing for the Appellant, and Shri. Ranjit Kumar and Shri. Parag P. Tripathi, learned senior counsels on behalf of Respondent Nos. 1 and 3, respectively. Perused the documents filed by both sides, and additionally, we had the benefit of going through the written arguments placed on record.
A BRIEF JOURNEY:
# 3. M/s. MBL Infrastructures Limited (Respondent No.1) was set up by one, Mr. Anjanee Kumar Lakhotiya (Respondent No. 3) in the early 1990s. Loans/ credit facilities were obtained by the Respondent No.1 from the consortium of banks (State Bank of Mysore now State Bank of India as lead bank), some of who are also arrayed as respondents apart from the appellant. On the failure of the Respondent No.1 to act in tune with the terms of repayment, some of the respondents were forced to invoke the personal guarantees extended by the Respondent No.3 for the credit facilities availed by the Respondent No.1.
# 4. M/s. RBL Bank issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’ for short), after duly invoking the personal guarantee of the Respondent No.3. This was followed by a similar action at the hands of Respondent No.8 (M/s Allahabad Bank) and M/s. State Bank of Bikaner and Jaipur. We are given to understand that M/s. State Bank of Bikaner and Jaipur got merged with State Bank of India. The aforesaid two proceedings invoking Section 13(2) of the SARFAESI Act were initiated in the month of February and March, 2013, respectively.
# 5. On the aforesaid factual setting, M/s. RBL Bank filed an application bearing No. (IB)-170/KB/2017 under Section 7 of the Code before the National Company Law Tribunal, Kolkata (hereinafter referred to as “adjudicating authority”) to initiate corporate insolvency resolution process (CIRP) against Respondent No.1. It was admitted vide order dated 30.03.2017, appointing an Interim Resolution Professional, leading to imposition of moratorium in terms of Section 14 of the Code. After the expiry of the initial period of CIRP, an application was filed by the Resolution Professional for extending the duration of CIRP by an additional 90 days, which was duly granted.
# 6. Two resolution plans were received by the Resolution Professional (Respondent No.2 herein) as he then was, of which, one was authored by Respondent No.3 on 29.06.2017. This was done prior to the introduction of Section 29A of the Code.
# 7. A series of meetings took place with the active participation of the Committee of Creditors (CoC) on the resolution plan submitted by the Respondent No.3 between October 16, 2017 to November 17, 2017. A decision was made in the 9th meeting of the CoC held on 18.11.2017 seeking an appropriate resolution plan at the hands of Respondent No.3. In tune with the aforesaid directive, the Respondent No.3 submitted a modified resolution plan on 22.11.2017.
# 8. Thereafter, by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, Section 29A was introduced to the Code with which we are concerned in the present lis, specifically 29A(c) and (h). The same are reproduced as under:
“Section 29 A – Persons not eligible to be resolution applicant – A person shall not be eligible to submit a resolution plan, if such person or any other person acting jointly with such person or any other person who is a promoter or in the management or control of such person, –
xxx xxx xxx
(c) 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 the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 and at least a period of one year has lapsed 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 resolution plan;
xxx xxx xxx
(h) has executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor under insolvency resolution process or liquidation under this code.”
# 9. The CoC held its meeting on 01.12.2017 to deliberate upon the impact of the amendment qua the eligibility of the Respondent No.3 in submitting a resolution plan in the CIRP proceedings. In view of the lingering doubt expressed, the Respondent No.3 filed an application bearing CA(IB) No.543/KB/2017 praying for a declaration that he was not disqualified from submitting a resolution plan under sub-section (c) and (h) of Section 29A of the Code.
# 10. The adjudicating authority, vide its order dated 18.12.2017 held that the Respondent No.3 was eligible to submit a resolution plan, notwithstanding the fact that he did extend his personal guarantees on behalf of the Respondent No.1 which were duly invoked by some of the creditors, as aforesaid. This issue was never placed and raised before the adjudicating authority. Though the adjudicating authority took note of Section 29A(c) of the Code, it did not give any specific findings on it. However, it ruled that in as much as the personal guarantee having not been invoked and the Respondent No.3 merely having extended his personal guarantee, as such there is no disqualification per se under Section 29A(h) of the Code as the liability under a guarantee arises only upon its invocation. Thus, only those guarantors who had antecedents which might adversely impact the credibility of the process are alone to be excluded. As debt payable by Respondent No.3 was not crystalized, he could not be construed as a defaulter for breach of the guarantee. Incidentally, a finding has been given that the Respondent No.3 did not commit any default. With the aforesaid clarification, the application filed was allowed by taking into consideration the amendment made on 23.11.2017, introducing Section 29A to the Code.
# 11. The aforesaid order was assailed by the Punjab National Bank (Respondent No.10) before the National Company Law Appellate Tribunal (hereinafter referred to as “appellate tribunal”) in Company Appeal (AT) (Insolvency) No. 330 of 2017. Upon hearing the Respondent No.10, the following interim order was passed on 21.12.2017:
“Let notice be issued to respondents by speed post. Requisites by next dated. Dasti service permitted. Copy of this order may also be forwarded to the respondents. The appellant will file the certified copy of the impugned order by 5th January, 2018. Post the matter on 11th January, 2018. In the meantime, if the 2nd Respondent filed any Resolution Plan, the Resolution Professional and the Committee of Creditors may go through the same but the Adjudicating Authority will not accept or reject the resolution plan or pass any order in lower court without prior approval of this Appellant Tribunal.”
# 12. On the very same day, the resolution plan submitted by the Respondent No.3 was put to vote by the Respondent No.2 in the 12th meeting of the CoC by way of e-voting, and the process was completed the next day. The plan received 68.50% vote share of the CoC. Six financial creditors voted against the plan, including Respondent No.10 (PNB) and RBL Bank. The extended 270 day period of CIRP expired on 25.12.2017.
# 13. RBL Bank filed an appeal against the order dated 18.12.2017 being Company Appeal (AT) (Insolvency) No.1 of 2018 wherein an order was passed upon hearing the parties on 11.01.2018 facilitating the adjudicating authority to proceed further but not to accept the resolution plan, without its prior approval.
# 14. The Respondent No.3 filed an application on 12.01.2018 invoking Section 60 of the Code bearing CA No.(IB) 50/KB/2018 seeking an appropriate direction to the dissenting and abstaining creditors to facilitate a possible change of mind by supporting the resolution plan, as modified. Thereafter, Bank of Maharashtra (Respondent No. 11), since impleaded by the order of this court dated 26.10.2021, sent a letter to Respondent No.2 dated 31.01.2018 setting forth its conditions for its approval of the resolution plan. Further, Indian Overseas Bank was pleased to give its approval to the resolution plan. As such, the resolution plan gathered 78.50% vote share.
# 15. In the meanwhile, Section 29A(h) went through a further amendment which came into effect from 18.01.2018:
“Section 29 A – Persons not eligible to be resolution applicant – A person shall not be eligible to submit a resolution plan, if such person or any other person acting jointly or in concert with such person –
xxx xxx xxx
(h) has executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this code.”
# 16. On 23.03.2018, the appellate tribunal passed the following order in the appeals filed by Respondent No.10 and RBL Bank:
“When the matter was taken up learned counsel appearing on behalf of the Appellant – ‘Punjab National Bank’ sought permission to withdraw the appeal. One of the learned counsel appearing on behalf of the Respondent opposed the prayer. However, we are not inclined to the ground of opposition as made by the Respondent. Bank intends to withdraw the appeal, without any liberty. In this background, without taking into consideration the grounds shown in the affidavit for withdrawal, we allow the Appellant to withdraw the Appeal without any liberty to challenge the same very impugned order. The appeal is dismissed as withdrawn. I.A. No.311 of 2018 stands disposed of. The ‘question of law’ may be decided in some other case. No cost.
The interim order passed by this Appellant Tribunal on 21st December, 2017 stands vacated.”
# 17. The above order was passed while permitting the appellants to withdraw the appeals against the order of eligibility of Respondent No.3, in view of the resolution plan having reached the mandatory requirement of 75% as warranted under Section 30(4) of the Code. Thus, it is clear that those appellants did not have any grievance on the plan as accepted by the majority of the CoC. However, the request made by the present appellant who filed I.A. No. 311 of 2018 before the appellate tribunal, seeking to be impleaded as a party to the aforesaid proceedings to continue the lis was not favourably considered though no reason was assigned in the aforesaid order. We may also note that the appellant before us who incidentally filed the aforesaid application was not heard before the adjudicating authority. Suffice it is to state that the appellant did raise its objection to the withdrawal of appeal, presumably on the premise that it wanted to continue by substituting itself in place of the original appellants.
# 18. The resolution professional, the Respondent No.2 filed a report dated 12.02.2018 for recording the increase in voting share up to 78.50% together with the resolution plan stating that it was accordingly passed. Only on the aforesaid factual setting the pending appeal before the appellate tribunal was withdrawn on 27.02.2018. The adjudicating authority approved the resolution plan submitted by its order dated 18.04.2018 inter alia holding that there is a marked difference between extension and exclusion and therefore, the rigor of Section 12(1) of the Code would not get attracted on the facts of the case particularly when there were pending proceedings with interim orders. It was further held that the issue qua the eligibility under Section 29A(h) decided already, coupled with the resolution plan crossing the requisite threshold of approval by the CoC, i.e. 75% vote share, having considered the technoeconomic viability and feasibility of the plan, the application filed for approval of the resolution plan submitted by the Respondent No.3 was liable to be allowed. A direction was accordingly given, holding that the approved resolution plan shall come into force with immediate effect.
# 19. The appellant before us put into challenge, the aforesaid order passed by the adjudicating authority in Company Appeal (AT)(Insolvency) No. 194 of 2018.
# 20. In the meanwhile, Section 29A(h) went through a further change by way of ordinance dated 06.06.2018, which subsequently became an Act with effect from the same date through the Act 26 of 2018:
“Section 29 A- Persons not eligible to be resolution applicant – A person shall not be eligible to submit a resolution plan, if such person or any other person acting jointly or in concert with such person –
xxx xxx xxx
(h) has executed a guarantee in favour of a creditor, in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this code and such guarantee has been invoked by the credit and remains unpaid if full or part.”
# 21. The appellate tribunal did explore other possibilities during the pendency of the appeal. It also directed the Respondent No.3 to submit a revised resolution plan. After hearing the parties, the order passed by the adjudicating authority was confirmed, dismissing the appeal filed by the appellant while approving the revised resolution plan submitted by the Respondent No.3 before it. After the disposal of the appeals filed including that of the appellant along with the others who have not challenged the same before us, the shareholders of the Respondent No.1 approved the fund raising of Rs.300 crores in the Annual General Meeting.
# 22. The appeals including that of the appellant were dismissed on the ground that the resolution plan was approved with 78.50% of the voting share of the CoC, and it was backed by the techno-economic report qua the viability and feasibility. The earlier decision of the adjudicating authority dated 18.12.2017 has attained finality qua the issue of eligibility of the Respondent No.3 under Section 29A of the Code to submit a resolution plan, and it cannot sit in appeal over the decision of the adjudicating authority or the CoC in the absence of any apparent discrimination. It is this decision of the appellate authority confirming the order passed by the adjudicating authority, which is tested before us.
# 23. Before we proceed with the submissions made at the Bar, we have to record one more fact, namely, Section 30 of the Code also underwent a change by the introduction of amendment dated 06.06.2018 by way of an ordinance followed by an Act through which the percentage required for approval of a resolution plan by the CoC has been brought down from 75% to 66% of the voting share of the CoC.
# 33. Buttressing the aforesaid submissions, the counsels for the Respondents have sought to place reliance on the following decisions:
Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17
K.N. Rajkumar v. V.N. Nagarajan 2021 SCC OnLine 732
Arcellor Mittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1
Committee of Creditors, Essar Steel India Ltd. v. Satish Kumar Gupta (2020) 8 SCC 531.
Apollo Joti LLC & Ors. v. Jyoti Structures Ltd. (Company Appeal (AT) (Insolvency) No. 548 of 2018.
DBS Bank Ltd. vs. Sharad Sanghi (Civil Appeal No. 3434-3436 of 2019)
Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd. 2021 SCC OnLine SC 707
National Spot Exchange v. Anil Kohli 2021 SCC OnLine SC 716
STATUTORY INTERPRETATION:
# 34. The principle governing statutory interpretation has been repeated with regularity by this Court on quite a few occasions. While construing the said principle adequate thought will have to be given to the nature of the statute and the provisions contained thereunder. The focus is on avoiding any interpretation which might cause an injury or destroy the intent behind the legislation.
# 35. Lord Denning in Seaford Court Estates Ltd. v. Asher, (1949) 2 KB 481 deals with the role required to be played by the Court even when there is a possible defect:
“When a defect appears a Judge cannot simply fold his hands and blame the drafts man. He must set to work on the constructive task of finding the intention of Parliament and then he must supplement the written word so as to give ‘force and life’ to the intention of the legislature. A Judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out? He must then do as they would have done. A Judge must not alter the material of which the Act is woven, but he can and should iron out the creases.”
# 36. MAXWELL ON INTERPRETATION OF STATUES, 11th Edition
“It is said to be the duty of the judge to make such construction of a statute as shall suppress the mischief and advance the remedy. Even where the usual meaning of the language falls short of whole object of the legislature, a more extended meaning may be attributed to the words, if they are fairly susceptible of it. The construction must not, of course, be strained to include cases plainly omitted from the natural meaning of the words.” (Pg. 66)
“…In determining either the general object of the legislature, or the meaning of its language in any particular passage, it is obvious that the intention which appears to be most in accord with convenience, reason, justice or legal principles, should, in all cases of doubtful significance, be presumed to be the true one.” (Pg. 183)
# 37. CRAIES IN STATUTE LAW, 7th Edition, Pg. 262:
“… It is the duty of Courts of justice to try to get at the real intention of the legislature by carefully attending to the whole scope of the statute to be construed’ .. that in each case you must look to the subject-matter, consider the importance of the provision and the relation of that provision to the general object intended to be secured by the Act, and upon a review of the case in that aspect decide whether the enactment is what is called imperative or only directory.”
# 38. A DRIEDGER, CONSTRUCTION OF STATUTE, 2nd Edition, 1983, Pg. 37:
“Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the Scheme of the Act, the object of the Act, and the intention of Parliament.”
# 39. As repeated on various other occasions by this Court, judging a statute through ‘Literal to Heydon’s Golden rule’ has gone through a complete circle. Thus, we have come to a stage of applying a reasonable, creative and fair construction principle.
# 40. The often quoted words of Justice Chinnappa Reddy in the celebrated judgment in the Reserve Bank of India v. Peerless General Finance and Investment Company Limited, (1987) 1 SCC 424 holds the field even today:
“33. Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With these glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place….”
# 41. Apropos the passage in the case of Union of India v. Elphinstone Spg. and Wvg. Co. Ltd., (2001) 4 SCC 139:
“While examining a particular statute for finding out the legislative intent it is the attitude of Judges in arriving at a solution by striking a balance between the letter and spirit of the statute without acknowledging that they have in any way supplemented the statute would be the proper criterion. The duty of Judges is to expound and not to legislate is a fundamental rule. There is no doubt a marginal area in which the courts mould or creatively interpret legislation and they are thus finishers, refiners and polishers of legislation which comes to them in a state requiring varying degrees of further processing. (See: Corocraft Ltd. v. Pan American Airways Inc. [(1968) 3 WLR 714 : (1968) 2 All ER 1059 : (1969) 1 QB 616] WLR, p. 732 and State of Haryana v. Sampuran Singh [(1975) 2 SCC 810] .) But by no stretch of imagination a Judge is entitled to add something more than what is there in the statute by way of a supposed intention of the legislature. It is, therefore, a cardinal principle of construction of statutes that the true or legal meaning of an enactment is derived by considering the meaning of the words used in the enactment in the light of any discernible purpose or object which comprehends the mischief and its remedy to which the enactment is directed.”
# 42. Touching upon the very interpretation of the Code, this Court on more than one occasion has adopted the very same approach in Arcellor Mittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1, Phoenix Arc (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 and Arun Kumar Jagatramka v. Jindal Steel & Power Limited, (2021) 7 SCC 474.
INSOLVENCY AND BANKRUPTCY CODE, 2016:
# 43. The Code has got its laudable object. The idea is to facilitate a process of rehabilitation and revival of the corporate debtor with the active participation of the creditors. Thus, there are two principal actors in the entire process, viz.,
(i) the committee of creditors and,
(ii) the corporate debtor.
The others are mere facilitators. There can never be any other interest than that of the committee of creditors and the corporate debtor. We do not wish to multiply the rationale behind the enactment except by quoting the decision of this Court in the case of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, which has also found acceptance by the subsequent decision in the case of Arun Kumar(supra):
“28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor’s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.”
ON SECTION 29A AND ITS PURPOSIVE INTERPRETATION:
# 44. Section 29A of the Code has also come up for consideration before this Court on earlier occasions, though, the provision with which we are concerned, i.e. Section 29A(h), was not specifically considered. We do not wish to go into Section 29A(c) since no issue has been raised before us in these proceedings.
# 45. As stated, Section 29A is a facet of the Code, and therefore, this provision has to be read with the main objective enshrined thereunder. The objective behind Section 29A of the Code is to avoid unwarranted and unscrupulous elements to get into the resolution process while preventing their personal interests to step in. Secondly, it consciously seeks to prevent certain categories of persons who may not be in a position to lend credence to the resolution process by virtue of their disqualification.
# 52. While adverting to the earlier decision in Chitra Sharma [Chitra Sharma v. Union of India, (2018) 18 SCC 575] and ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] , which had elucidated the object underlying Section 29- A, this Court in Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] held that the norm underlying Section 29-A “continues to permeate” Section 35(1)(f) “when it applies not merely to resolution applicants, but to liquidation also”. Rejecting the plea that Section 35(1) (f) is ultra vires, this Court held : (Swiss Ribbons case [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] ,
“102. According to the learned counsel for the petitioners, when immovable and movable property is sold in liquidation, it ought to be sold to any person, including persons who are not eligible to be resolution applicants as, often, it is the erstwhile promoter who alone may purchase such properties piecemeal by public auction or by private contract. The same rationale that has been provided earlier in this judgment will apply to this proviso as well — there is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable and movable property of the corporate debtor in liquidation. Further, given the categories of persons who are ineligible under Section 29-A, which includes persons who are malfeasant, or persons who have fallen foul of the law in some way, and persons who are unable to pay their debts in the grace period allowed, are further, by this proviso, interdicted from purchasing assets of the corporate debtor whose debts they have either wilfully not paid or have been unable to pay. The legislative purpose which permeates Section 29-A continues to permeate the section when it applies not merely to resolution applicants, but to liquidation also. Consequently, this plea is also rejected.”
A purposive interpretation
# 53. This line of decisions, beginning with Chitra Sharma [Chitra Sharma v. Union of India, (2018) 18 SCC 575] and continuing to ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] and Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] is significant in adopting a purposive interpretation of Section 29-A. Section 29-A has been construed to be a crucial link in ensuring that the objects of the IBC are not defeated by allowing “ineligible persons”, including but not confined to those in the management who have run the company aground, to return in the new avatar of resolution applicants. Section 35(1)(f) is placed in the same continuum when the Court observes that the erstwhile promoters of a corporate debtor have no vested right to bid for the property of the corporate debtor in liquidation. The values which animate Section 29-A continue to provide sustenance to the rationale underlying the exclusion of the same category of persons from the process of liquidation involving the sale of assets, by virtue of the provisions of Section 35(1)(f). More recent precedents of this Court continue to adopt a purposive interpretation of the provisions of the IBC. [See in this context the judgments in Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd. [Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 : (2021) 2 SCC (Civ) 1 at paras 103-104] , Ramesh Kymal v. Siemens Gamesa Renewable Power (P) Ltd. [Ramesh Kymal v. Siemens Gamesa Renewable Power (P) Ltd., (2021) 3 SCC 224 : (2021) 2 SCC (Civ) 65 at paras 23 and 25] and Jaypee Infratech Ltd. v. Axis Bank Ltd. [Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401 : (2021) 2 SCC (Civ) 334 at paras 28.4 and 28.5] ]
Sustainable revival
# 54. The purpose of the ineligibility under Section 29-A is to achieve a sustainable revival and 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. Section 29-A, it must be noted, encompasses not only conduct in relation to the corporate debtor but in relation to other companies as well. This is evident from clause (c) (“an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as a non-performing asset”), and clauses (e), (f), (g), (h) and (i) which have widened the net beyond the conduct in relation to the corporate debtor.”
# 49. In Phoenix Arc (P) Ltd.(supra) case, this Court considered the principle of purposive and creative interpretation while approving the interpretation given and approach taken by this Court in the earlier decision in Arcellor Mittal(supra):
“89. In Arcelor Mittal (India) (P) Ltd. v. Satish Kumar Gupta [(2019) 2 SCC 1], the issue was whether ineligibility of the resolution applicant under Section 29-A(c) of the Code attached to an applicant at the date of commencement of the CIRP or at the time when the resolution plan is submitted by the resolution applicant. Speaking for this Court, Rohinton F. Nariman, J. interpreted the pre-2018 Amendment, framing of Section 29-A(c), in the following terms: (SCC pp. 61-62, para 46)
“46. According to us, it is clear that the opening words of Section 29- A furnish a clue as to the time at which clause (c) is to operate. The opening words of Section 29-A state:‘a person shall not be eligible to submit a resolution plan…’. It is clear therefore that the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant. The contrary view expressed by Shri Rohatgi is obviously incorrect, as the date of commencement of the corporate insolvency resolution process is only relevant for the purpose of calculating whether one year has lapsed from the date of classification of a person as a non-performing asset. Further, the expression used is “has”, which as Dr Singhvi has correctly argued, is in praesenti. This is to be contrasted with the expression “has been”, which is used in clauses (d) and (g), which refers to an anterior point of time. Consequently, the amendment of 2018 introducing the words ‘at the time of submission of the resolution plan’ is clarificatory, as this was always the correct interpretation as to the point of time at which the disqualification in clause (c) of Section 29-A will attach.”
# 50. We have already observed that we do not wish to interpret Section 29A(c) as no arguments have been addressed on that, perhaps for the reason that Respondent No.3 might not attract any disqualification on that score.
SCOPE OF SECTION 29A(h)
# 51. Section 29A(h) of the Code creates one more category of persons not being eligible to be a resolution applicant. Other than the persons mentioned thereunder, there may not be any disqualification. The word “person” is of a wider import to include a promoter or a director, as the case may be. The definition of “person” as mentioned under Section 3(23) of the Code includes certain categories of persons and thus, there is no such exclusion. It is merely illustrative/inclusive in nature and therefore, the persons mentioned in Section 29A alone are ineligible to be resolution applicants.
# 52. Once a person executes a guarantee in favour of a creditor with respect to the credit facilities availed by a corporate debtor, and in a case where an application for insolvency resolution has been admitted, with the further fact of the said guarantee having been invoked, the bar qua eligibility would certainly come into play. What the provision requires is a guarantee in favour of ‘a creditor’. Once an application for insolvency resolution is admitted on behalf of ‘a creditor’ then the process would be one of rem, and therefore, all creditors of the same class would have their respective rights at par with each other. This position has also been dealt with by this Court in the case of Swiss Ribbons(supra):
“82. It is clear that once the Code gets triggered by admission of a creditor’s petition under Sections 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a Committee of Creditors is constituted (as per the timelines that are specified, a Committee of Creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case.”
# 53. The word “such creditor” in Section 29A(h) has to be interpreted to mean similarly placed creditors after the application for insolvency application is admitted by the adjudicating authority. As a result, what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process. This is subject to further compliance of invocation of the said personal guarantee by any other creditor. We have already said that the concern of the Court is only from the point of view of two entities viz., corporate creditors and the corporate debtors. Any other interpretation would lead to an absurdity striking at the very objective of Section 29A, and hence, the Code. Ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. Exclusion is meant to facilitate a fair and transparent process.
# 54.The provision after the amendment speaks of invocation by a creditor. The manner of invocation can never be a factor for the adjudicating authority to adjudge, as against its existence. Adequate importance will have to be given to the latter part of the provision which also disqualifies a person whose liability under the personal guarantee executed in favour of a creditor, remains unpaid in full or in part for the amount due from him, upon invocation.
# 55. It is quite obvious that a resolution applicant, other than a financial creditor under Section 7, an operational creditor under Section 8 and a corporate debtor under Section 10, can ever have an independent right to insist for the protection of its own interest in the resolution process. Thus, Section 29A has a laudable object of protecting and balancing the interest of the committee of creditors and the corporate debtor, while shutting the doors to canvas the interests of others. That is the reason why it consciously excludes certain categories of persons. We may add that Section 29A(h) foresees the creditors who are otherwise either already under the insolvency resolution process or are entitled to go under it.
# 56. Yet another issue which requires consideration is to the date of reckoning qua the provision. That is, the date of submission of resolution plan or the date of adjudication by the authority. Having understood the provision and the objective behind it, as well as the Code, it is clear that, if there is a bar at the time of submission of resolution plan by a resolution applicant, it is obviously not maintainable. However, if the submission of the plan is maintainable at the time at which it is filed, and thereafter, by the operation of the law, a person becomes ineligible, which continues either till the time of approval by the CoC, or adjudication by the authority, then the subsequent amended provision would govern the question of eligibility of resolution applicant to submit a resolution plan. The resolution applicant has no role except to facilitate the process. If there is ineligibility which in turn prohibits the other stakeholders to proceed further and the amendment being in the nature of providing a better process, and that too in the interest of the creditors and the debtor, the same is required to be followed as against the provision that stood at an earlier point of time. Thus, a mere filing of the submission of a resolution plan has got no rationale, as it does not create any right in favour of a facilitator nor it can be extinguished. One cannot say, what is good today cannot be applied merely because an applicant was eligible to submit a resolution plan at an earlier point of time. It is only a part of procedural law. We quote with profit the decision in Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd., 2021 SCC OnLine 707:
“130. The CoC even with the requisite majority, while approving the Resolution Plan must consider the feasibility and viability of the Plan and the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53 of the IBC. The CoC cannot approve a Resolution Plan proposed by an applicant barred under Section 29A of the IBC. Regulation 37 and 38 of the CIRP Regulations govern the contents of a Resolution Plan. Furthermore, a Resolution Plan, if in compliance with the mandate of the IBC, cannot be rejected by the Adjudicating Authority and becomes binding on its approval upon all stakeholders – including the Central and State Government, local authorities to whom statutory dues are owed, operational creditors who were not a part of the CoC and the workforce of the Corporate Debtor who would now be governed by a new management. Such features of a Resolution Plan, where a statute extensively governs the form, mode, manner and effect of approval distinguishes it from a traditional contract, specifically in its ability to bind those who have not consented to it. In the pure contractual realm, an agreement binds parties who are privy to the contract. In the context of a resolution Plan governed by the IBC, the element of privity becomes inapplicable once the Adjudicating Authority confirms the Resolution Plan under Section 31(1) and declares it to be binding on all stakeholders, who are not a part of the negotiation stage or parties to the Resolution Plan. In fact, a commentator has noted that the purpose of bankruptcy law is to actually solve a specific ‘contracting failure’ that accompanies financial distress. Such a contracting failure arises because “financial distress involves too many parties with strategic bargaining incentives and too many contingencies for the firm and its creditors to define a set of rules of every scenario.” Thus, insolvency law recognizes that parties can take benefit of such ‘incomplete contract’ to hold each other up for their individual gain. In an attempt to solve the issue of incompleteness and the hold-up threat, the insolvency law provides procedural protections i.e., “the law puts in place guardrails that give the parties room to bargain while keeping them from taking position that veer toward extreme hold up”
ON MERIT
# 57.Having discussed Section 29A(h) of the Code as we understood, we shall now go into the facts of the instant case.
# 58. Admittedly, the Respondent No.3 has executed personal guarantees which were invoked by three of the financial creditors even prior to the application filed. The rigor of Section 29A(h) of the Code obviously gets attracted. The eligibility can never be restricted to the aforesaid three creditors, but also to other financial creditors in view of the import of Section 7 of the Code. In the case at hand, in pursuance to the invocation, an application invoking Section 7 indeed was filed by one such creditor. It was invoked even at the time of submitting a resolution plan by the Respondent No.3. Thus, in the touchstone of our interpretation of Section 29A(h), we hold that the plan submitted by the Respondent No.3 ought not to have been entertained.
# 59. The adjudicating authority and the appellate tribunal were not right in rejecting the contentions of the appellant on the ground that the earlier appeals having been withdrawn without liberty, the issue qua eligibility cannot be raised for the second time. Admittedly, the appellant was not a party to the decision of the adjudicating authority on the first occasion, in the appeal the appellant merely filed an application for impleadment. The appellate authority did not decide the matter on merit. In fact, the question of law is left open. The principle governing res judicata and issue estoppel would never get attracted in such a scenario. Thus, the reasoning rendered by the appellate tribunal to that extent cannot be sustained in law.
# 60. On the question of limitation, we are in agreement with the views expressed by the adjudicating authority as confirmed by the appellate tribunal. There were earlier rounds of litigation with the interim orders. The delay of 106 days has been rightly condoned and excluded by the adjudicating authority by invoking Section 12(3) of the Code. It was done only on one occasion. The adjudicating authority was right in holding that there is a marked difference between extension and exclusion. Exclusion would come into play when the decision is challenged before a higher forum. Extension is one which is to be exercised by the authority constituted.
# 61. Having held so, we would like to come to the last part of our order. Though the very resolution plan submitted by the Respondent No. 3, being ineligible is not maintainable, much water has flown under the bridge. The requisite percentage of voting share has been achieved. We may also note that the percentage has been brought down from 75% to 66% by way of an amendment to Section 30(4) of the Code.
# 62. Secondly, majority of the creditors have given their approval to the resolution plan. The adjudicating authority has rightly noted that it was accordingly approved after taking into consideration, the techno-economic report pertaining to the viability and feasibility of the plan. The plan is also put into operation since 18.04.2018, and as of now the Respondent No. 1 is an on-going concern. Though, the Respondent No.11 has taken up the plea that its offer was conditional, it has got a very minor share which may not be sufficient to impact by adding it with that of the appellant and Respondent No.7. The Respondent No.7 and the Respondent No.11 did not choose to challenge the order of the appellate tribunal.
# 63. We need to take note of the interest of over 23,000 shareholders and thousands of employees of the Respondent No.1. Now, about Rs. 300 crores has also been approved by the shareholders to be raised by the Respondent No.1. It is stated that about Rs. 63 crores has been infused into the Respondent No.1 to make it functional. There are many on-going projects of public importance undertaken by the Respondent No.1 in the nature of construction activities which are at different stages.
# 64. We remind ourselves of the ultimate object of the Code, which is to put the corporate debtor back on the rails. Incidentally, we also note that no prejudice would be caused to the dissenting creditors as their interests would otherwise be secured by the resolution plan itself, which permits them to get back the liquidation value of their respective credit limits. Thus, on the peculiar facts of the present case, we do not wish to disturb the resolution plan leading to the on-going operation of the Respondent No.1.
65.The appeal stands disposed of. Accordingly, all applications stand disposed of.
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