The Insolvency and Bankruptcy Code (IBC), 2016, is a law in India designed to help resolve financial troubles of struggling companies while protecting the interests of those who lent them money (creditors). When the IBC was first introduced, it didn’t have rules to stop promoters or related parties who caused a company’s financial problems from trying to take back control of the company at a low price during the insolvency process. This could harm creditors by reducing their chances of recovering their money.
To fix this issue, the government introduced Section 29A through the Insolvency and Bankruptcy Code (Amendment) Ordinance in November 2017, which was later made official by the Insolvency and Bankruptcy Code (Amendment) Act in 2018. Additional changes were made effective from June 6, 2018. The main goal of Section 29A is to ensure the insolvency process is fair and trustworthy by preventing certain people from participating as resolution applicants (those who propose plans to rescue or manage the company).
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What is Section 29A of the IBC, 2016?
Section 29A of the IBC, 2016, is an important rule that lists who cannot submit a plan to resolve a company’s financial troubles under the Corporate Insolvency Resolution Process (CIRP).
The CIRP is the process where a company facing financial difficulties is evaluated to see if it can be saved or liquidated.
Before Section 29A was added, anyone, including the promoters or directors who might have caused problems in the company, could bid to take control of the company during insolvency which raised concerns because those responsible for the company’s financial distress could potentially buy it back at a discounted price, which was not fair to creditors. To address this, Section 29A was introduced to set clear eligibility rules for who can submit a resolution plan.
The 2017 Ordinance and 2018 Act created this section, and the 2018 amendment fine-tuned specific parts (like clauses c, d, g, h, i, and j) to include exceptions, such as allowing a three-year grace period for applicants who acquired companies with bad loans (NPAs) and clarifying rules about criminal convictions.
Who Cannot Submit a Resolution Plan Under Section 29A of IBC?
Section 29A of IBC, 2016 lists specific categories of people or entities who are not allowed to submit a resolution plan. These rules are detailed and cover various situations to ensure fairness. Below is a simplified explanation of each category:
1. Undischarged Insolvent (Clause a): If someone is officially declared bankrupt and has not cleared their bankruptcy status, they cannot submit a resolution plan.
2. Wilful Defaulter (Clause b): If the Reserve Bank of India (RBI) has labeled someone a "wilful defaulter" for deliberately not repaying loans, they are not allowed to apply.
3. Non-Performing Asset (NPA) Holder (Clause c): If you, or a company you manage or promote, have a loan classified as a Non-Performing Asset (NPA, or bad loan) for one year or more, you’re ineligible.
Exceptions: You can become eligible if you pay all overdue amounts plus interest before submitting your plan. Financial entities (like banks or investment firms) that are not connected to the distressed company are exempt.
Notes: Related parties are also ineligible unless they are unrelated financial entities. If you acquired a company with an NPA through a previous resolution plan, you get a three-year grace period to fix it.
4. Convicted Persons (Clause d) If you’ve been convicted of a crime and sentenced to 2 or more years in prison for specific laws listed in the IBC’s Twelfth Schedule, or 7 or more years for any other law, you cannot submit a resolution plan.
Exceptions: You become eligible 2 years after completing your sentence. People connected to you (like business partners) may sometimes be exempt.
5. Disqualified Director (Clause e): If you’re banned from being a company director under the Companies Act, 2013, you’re ineligible. The exception is that connected persons may be exempt in some cases.
6. SEBI Ban (Clause f): If the Securities and Exchange Board of India (SEBI) has banned you from trading securities or accessing financial markets, you cannot apply.
7. Fraudulent Transactions (Clause g): If you were a promoter or manager of a company involved in fraudulent or unfair transactions (as determined by authorities), you’re ineligible.
Exceptions: You can apply if the fraudulent transactions happened before you acquired the company through an approved resolution plan, and you didn’t contribute to those transactions.
8. Unpaid Guarantee (Clause h): If you guaranteed a loan for someone else, the lender called in the guarantee, you didn’t pay it, and the lender’s insolvency case has been admitted, you’re ineligible.
9. Foreign Disqualifications (Clause i): If you face similar bans or restrictions (like those in clauses a to h) under foreign laws, you cannot submit a plan.
10. Connected Persons (Clause j): If someone closely connected to you (like business partners, promoters, or management) is ineligible under any of the above clauses, you’re also ineligible.
Notes: Connected persons include those who manage or control the applicant or the distressed company, or related companies/parties. Financial entities (like banks or investment firms) that are not related to the distressed company are exempt.
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How Courts Have Interpreted Section 29A of IBC
These court decisions highlight that Section 29A is complex and sometimes controversial. Some people argue it’s too strict because it might exclude honest applicants who could help save a company. Others say it’s necessary to protect creditors and ensure fairness. Critics suggest allowing promoters to bid with strict safeguards, while supporters believe it’s critical to prevent misuse of the insolvency process.
Arcelormittal India Pvt. Ltd. v. Satish Kumar Gupta (2018): This case explained what “connected persons” means under Section 29A. It emphasized that the section is designed to stop ineligible people from gaining indirect control of a company, such as through their relatives or business associates.
Bank of Baroda & Anr. v. MBL Infrastructures Ltd. (2022): This case clarified clause (h). It ruled that if a personal guarantor’s guarantee is invoked and remains unpaid, they are disqualified from submitting a resolution plan for any creditor, affecting whether plans can be approved.
Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. (2021): This case decided that promoters who are ineligible under Section 29A cannot propose alternative arrangements under Section 230 of the Companies Act, 2013.
Learn more about Corporate Insolvency Resolution
Summary
Section 29A of the IBC, 2016 prevents promoters or others who caused a company’s financial problems from regaining control during the insolvency process. Introduced through amendments in 2017 and 2018, it sets clear rules to ensure fairness but has sparked debates about whether it’s too restrictive or slows down the resolution process. Court cases continue to shape how this section is applied, and no major changes have been reported after June 6, 2018. Section 29A remains a vital but debated part of the IBC, balancing the need to protect creditors with allowing eligible applicants to participate.
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Section 29A of IBC, 2016: FAQs
Q1. What is Section 29A of the IBC?
Section 29A of the Insolvency and Bankruptcy Code, 2016, lists who is not allowed to submit plans to resolve a company’s financial troubles, ensuring that defaulting promoters cannot regain control.
Q2. What do court cases say about Section 29A?
Cases like Arcelormittal India v. Satish Kumar Gupta (2018) clarify who is ineligible and define “connected persons,” ensuring fair and transparent insolvency resolutions.
Q3. Is there a Section 29A in the Banking Regulation Act?
No, the Banking Regulation Act, 1949, does not have a Section 29A. The IBC’s Section 29A refers to wilful defaulters based on RBI guidelines under that Act.
Q4. Is there a Section 29A in the Companies Act?
No, the Companies Act, 2013, does not have a Section 29A. The IBC’s Section 29A mentions disqualified directors under the Companies Act as ineligible applicants.
Q5. What does Section 29A cover?
Section 29A of the IBC, 2016, outlines who cannot submit resolution plans, including undischarged insolvents, wilful defaulters, and others, to ensure a fair insolvency process.
