The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to address issues concerning the resolution of corporate insolvency in India. One of its key goals is to strike a balance between enabling viable companies to restructure their debts and protecting the interests of creditors. A crucial aspect of this process is the submission of a resolution plan by interested entities to revive the financially distressed company. A question that often arises is whether a suspended director of the company, facing insolvency, can submit a resolution plan.
This article examines the eligibility of a suspended director to submit a resolution plan under the IBC, drawing on the relevant statutory provisions, judicial interpretations, and case law precedents.
Understanding Suspension of Directors Under the IBC
When a corporate debtor enters insolvency proceedings under the IBC, one of the key outcomes is the suspension of the powers of its board of directors. Section 17(1) of the IBC clearly states that the management of the affairs of the corporate debtor shall vest with the interim resolution professional (IRP) or resolution professional (RP) during the Corporate Insolvency Resolution Process (CIRP). The suspended directors are stripped of their decision-making authority but continue to serve the company in a limited role, primarily as information providers.
However, suspended directors are often the ones most familiar with the company’s operations, assets, and liabilities. Consequently, they may be interested in submitting a resolution plan for the company’s revival, either individually or as part of a consortium. The key issue, then, is whether the law allows them to participate in the resolution process.
Relevant Legal Provisions: Section 29A of the IBC
The eligibility criteria for submitting a resolution plan are primarily governed by Section 29A of the IBC, which was introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2018. Section 29A provides a list of persons who are ineligible to submit a resolution plan, intending to prevent individuals with questionable financial or legal track records from regaining control of a distressed company.
The relevant portions of Section 29A for our analysis include:
- Section 29A(c): This clause states that a person shall not be eligible to submit a resolution plan if they have an account classified as a non-performing asset (NPA) for more than one year and have failed to make the necessary repayments before submission of the plan.
- Section 29A(d): Under this provision, a person is ineligible if they have been convicted of an offence punishable with imprisonment of two years or more.
- Section 29A(g): This clause disqualifies a person if they are a connected party to someone who has disqualified under other parts of Section 29A.
Suspended Directors and Section 29A
The issue of whether a suspended director can submit a resolution plan hinges on their compliance with Section 29A. The key points to consider are:
- Account as an NPA: If the suspended director has an account classified as an NPA and they meet the conditions laid down under Section 29A(c), they will be disqualified from submitting a resolution plan. However, if the suspended director is not the account holder or has cleared the overdue payments before submitting the resolution plan, they may still be eligible.
- Conviction of Offence: If the suspended director has been convicted of an offence listed under Section 29A(d), they would be barred from submitting a resolution plan. Mere suspension as a director does not amount to a disqualification unless other criteria under Section 29A are met.
- Connected Person: A director may be disqualified if they are a connected person to someone who falls under the categories of ineligibility in Section 29A. The law aims to ensure that the same set of individuals or entities that led to the company’s downfall are not permitted to regain control.
Judicial Interpretations and Case Law
Over time, Indian courts have interpreted and refined the scope of Section 29A, particularly regarding the eligibility of suspended directors to submit a resolution plan. Several key cases help clarify this issue.
1. ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta and Ors. (2018)
In this landmark case, the Supreme Court interpreted Section 29A and laid down important principles regarding the eligibility of resolution applicants. The Court held that Section 29A is a crucial provision aimed at preventing the same individuals who caused financial distress from regaining control of the corporate debtor. The Court emphasized that a resolution applicant must meet the eligibility criteria at the time of submission of the resolution plan and throughout the resolution process.
The judgment also clarified that mere suspension as a director is not a ground for disqualification unless the director meets one of the ineligibility criteria laid out in Section 29A.
2. RBL Bank Ltd. v. MBL Infrastructures Ltd. (2018)
In this case, the National Company Law Appellate Tribunal (NCLAT) considered whether promoters or directors of a corporate debtor could submit a resolution plan. The NCLAT ruled that while suspended directors are not automatically disqualified, their eligibility depends on whether they fall under any of the categories mentioned in Section 29A, particularly concerning NPAs.
3. Chitra Sharma v. Union of India (2017)
In the Jaypee Infratech case, the Supreme Court further elaborated on the intent of Section 29A to bar errant promoters and directors from submitting resolution plans. The Court underscored that the inclusion of Section 29A was designed to prevent individuals responsible for the company’s financial failure from being part of the revival process.
4. Essar Steel India Ltd. v. Satish Kumar Gupta (2019)
This case dealt with the resolution process for Essar Steel, one of India’s largest corporate insolvencies. The Supreme Court reiterated the importance of Section 29A in maintaining the integrity of the insolvency process. The Court held that promoters and directors who are disqualified under Section 29A are not allowed to submit resolution plans, even if they are suspended from the board.
5. Swiss Ribbons Pvt. Ltd. v. Union of India (2019)
In this case, the Supreme Court upheld the constitutionality of the IBC and clarified that Section 29A was inserted to ensure that only genuine applicants with a clean track record are allowed to submit resolution plans. The Court also held that the provisions of Section 29A are not meant to be punitive but preventive in nature.
Analysis: Balancing Interests
The issue of whether suspended directors can submit resolution plans is a delicate one. On one hand, suspended directors often have in-depth knowledge of the company’s operations and may be best placed to propose a feasible revival strategy. On the other hand, allowing errant directors to participate in the resolution process could undermine the integrity of the insolvency framework.
Section 29A strikes a balance by imposing stringent eligibility criteria to ensure that only directors with a clean record, who have not contributed to the company’s financial distress, are allowed to participate in the resolution process. Directors who meet the criteria laid down under Section 29A are not automatically barred simply because they have been suspended.
Conclusion
The eligibility of a suspended director to submit a resolution plan under the IBC depends on their compliance with the criteria set out in Section 29A. While mere suspension from the board does not automatically disqualify a director, other factors—such as the existence of NPAs or criminal convictions—may render them ineligible.
Indian courts have played a crucial role in interpreting Section 29A, and their judgments emphasize the importance of preventing individuals responsible for a company’s downfall from regaining control through the resolution process. Consequently, suspended directors must carefully assess their eligibility under Section 29A before seeking to submit a resolution plan.