The Insolvency and Bankruptcy Code (IBC), as it stood before the amendments, allowed any person to submit a resolution plan in respect of a company undergoing the corporate insolvency resolution process (CIRP). In this regard, concerns were raised that persons who had contributed to the defaults of a company were able to regain or gain control of such a company. In order to cure this defect, Section 29A was introduced to ensure that persons who were responsible for the default of a company or certain undesirable persons, did not acquire or regain control of a company by participating in the resolution process.
In the words of Justice Nariman in the judgment of ArcelorMittal India Private Limited versus Satish Kumar Gupta & Ors. (Essar’s judgment), “Section 29A(c) is a see-through provision, great care must be taken to ensure that persons who are in charge of the corporate debtor do not come back in some other form to regain control of the company without first paying off its debts.”
For a clear understanding of Section 29A, the Section 29A can be broken into two parts viz. (i) person or any other person acting jointly or in concert with such person who are disqualified under Section 29A (a) to (i) and (ii) having a ‘connected persons’ not eligible under Section 29A (a) to (i) which in turn makes a person ineligible. The first part of Section 29A essentially enumerates the list of persons who became ineligible to submit a resolution plan. It is pertinent to note if a person is acting jointly or in concert with such person who is disqualified under Section 29A (a) to (i), then such person also stands disqualified from submitting a resolution plan.
Coming to the second part viz ‘connected persons’, the ineligibility is not restricted to person mentioned in Section 29A (a) to (i), but engulfs to a ‘connected persons’. The expression ‘connected persons’ appearing in Section 29A has been explained in Explanation I – principally promoters of, or in the management or control of persons listed in Section 29A (a) to (i).
The concept of lifting of corporate veil, in certain circumstances, seeks to lift the curtain of a company in order to look for those who are in control of its operation. Over the years, in various precedents, courts have laid down general scenarios in which the doctrine of corporate veil can be applied. These have been discussed in some depth in the Essar judgment and the SC has observed thus: “…where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the law, the court will disregard the corporate veil. Further, this principle is applied even to group companies.
In the Essar judgment, while analysing Section 29A and in particular the opening lines of Section 29A, the SC observed that Section 29A was “typical of instances of a ‘see though provision’ so that one is able to arrive at persons who are actually in ‘control’ whether jointly or in concert, with other persons.” It further observed that keeping in mind the purpose and context of Section 29A, it would require to lift the corporate veil in order to discover who are real individuals or entities who have set up the corporate vehicle for purpose of submitting the resolution plan.
The SC, while ruling on the eligibility of the resolution plans submitted by ArcelorMittal India Private Limited (AIMPL) and Numetal Limited (Numetal) qua Section 29A, pierced the corporate veil of the respective entities and concluded that the resolution plans submitted by AIMPL and Numetal were not eligible under Section 29A.
In the context of the Section 29A, the expression “management” relates to the de jure (ie in law) management of the corporate debtor. In the Essar judgment, “management’’ is stated to “ordinarily vest in a Board of Directors, and would include, in accord with the definitions of ‘manager’; ‘managing director’ and ‘officer’ in Sections 2(53), 2(54) and 2(59) respectively of the Companies Act, 2013, the persons mentioned therein”. It can be inferred that in the context of management of a corporate debtor (for the purpose of Section 29A), the same would only include persons such as manager, managing director and officer of a company.
In the Essar judgment whilst analysing the definition of ‘control’, the SC has observed that there are two component of the definition. The first part of the definition is stated to mean de jure control and the second part relates to de facto control. Further, it has observed that “the expression ‘control’ in Section 29A(c), denotes only positive control, which means that the mere power to block special resolutions of a company cannot amount to control.” In the context of Section 29A, control would not mean negative control.
Juvekar is partner and Jaisani is senior associate, Rajani Associates