Supreme Court Clarifies Eligibility Under Section 29A(h) of IBC: Bank of Baroda vs. MBL Infrastructures (2022)

Date of the Judgment: January 18, 2022
The Supreme Court of India, in a recent judgment, addressed a critical question regarding the eligibility of resolution applicants under the Insolvency and Bankruptcy Code, 2016 (IBC). Specifically, the court examined whether a person who has given a personal guarantee for a corporate debtor is disqualified from submitting a resolution plan if that guarantee has been invoked by a creditor. This case clarifies the scope and application of Section 29A(h) of the IBC, impacting future insolvency proceedings. The judgment was delivered by a two-judge bench comprising Justice Sanjay Kishan Kaul and Justice M.M. Sundresh, with Justice Sundresh authoring the opinion.

Case Background

M/s. MBL Infrastructures Limited (Respondent No. 1), established by Mr. Anjanee Kumar Lakhotiya (Respondent No. 3) in the early 1990s, obtained loans and credit facilities from a consortium of banks. When MBL Infrastructures failed to meet its repayment obligations, some banks invoked the personal guarantees provided by Mr. Lakhotiya. RBL Bank initiated proceedings under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) after invoking Mr. Lakhotiya’s personal guarantee. Similar actions were taken by Allahabad Bank and State Bank of Bikaner and Jaipur in February and March 2013.

Subsequently, RBL Bank filed an application under Section 7 of the IBC before the National Company Law Tribunal (NCLT), Kolkata, to initiate the Corporate Insolvency Resolution Process (CIRP) against MBL Infrastructures. The NCLT admitted the application on March 30, 2017, appointing an Interim Resolution Professional and imposing a moratorium under Section 14 of the IBC. The CIRP period was later extended by 90 days.

Two resolution plans were received, one of which was submitted by Mr. Lakhotiya on June 29, 2017, before Section 29A of the IBC was introduced.

Timeline

Course of Proceedings

The NCLT, on December 18, 2017, declared Mr. Lakhotiya eligible to submit a resolution plan, despite his personal guarantees being invoked. The NCLT reasoned that the guarantee was not yet crystallized as a debt, and therefore, did not disqualify him under Section 29A(h) of the IBC. This order was challenged by Punjab National Bank before the National Company Law Appellate Tribunal (NCLAT). The NCLAT passed an interim order on December 21, 2017, preventing the NCLT from accepting the resolution plan without its prior approval.

RBL Bank also filed an appeal against the NCLT order. On January 11, 2018, the NCLAT allowed the NCLT to proceed but not to accept the resolution plan without its approval. Mr. Lakhotiya then filed an application seeking to persuade dissenting creditors to support the plan. The resolution plan ultimately garnered 78.50% vote share from the Committee of Creditors (CoC).

On March 23, 2018, the NCLAT allowed the appellants to withdraw their appeals, vacating the interim order. The NCLT approved the resolution plan on April 18, 2018, stating that the issue of eligibility under Section 29A(h) had already been decided and the plan had crossed the required threshold. Bank of Baroda, the appellant before the Supreme Court, challenged this order before the NCLAT, which was dismissed. The NCLAT upheld the NCLT’s decision, stating that the resolution plan had been approved by a majority of the CoC and was backed by a techno-economic report. This decision was then appealed to the Supreme Court.

Legal Framework

The Supreme Court focused on Section 29A of the Insolvency and Bankruptcy Code, 2016, specifically clauses (c) and (h). Section 29A outlines the criteria for persons who are not eligible to submit a resolution plan. The relevant portions of the provision are:

“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.”

The court also considered the amendment to Section 29A(h) which came into effect on January 18, 2018, which stated:

“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.”

Further, the court also took into account the amendment to Section 29A(h) which came into effect from June 6, 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.”

The court also discussed Section 30(4) of the Code, which was amended to reduce the percentage required for approval of a resolution plan by the CoC from 75% to 66%.

Arguments

Appellant’s Submissions:

• The appellant argued that Section 29A should be interpreted holistically to disqualify guarantors who have not fulfilled their liabilities.
• Respondent No. 3, being a promoter, was ineligible under Section 29A(h) as his personal guarantees were invoked before the CIRP commenced.
• The appellant contended that Respondent No. 3 suppressed the fact of guarantee invocation, and the adjudicating authority failed to consider this.
• The law at the time of the application should determine eligibility, and the ineligibility under Section 29A(h) cannot be waived.
• The approval of the resolution plan was made after the 270-day CIRP period, violating Section 12 of the IBC.
• The revised plan was not approved by the adjudicating authority, and the conditional assent by Respondent No. 11 was erroneously accepted.

Respondent’s Submissions:

• The respondents argued that the CoC’s decision, based on commercial wisdom and expert reports, should not be interfered with.
• The revised plan was an improvement, and there was no basis for grievance.
• Section 29A(h) should be interpreted literally, barring only guarantors whose guarantees were invoked by the creditor who initiated the CIRP.
• RBL Bank did not invoke the guarantee at the time of the Section 7 application.
• The invocation of guarantees by Allahabad Bank and State Bank of Bikaner and Jaipur was illegal.
• The object of the IBC is revival, and any interference would be detrimental.
• The issue of extension and exclusion of time had been rightly construed by the lower forums.

The arguments by the parties can be summarised as follows:

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. The interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016, particularly regarding the eligibility of a resolution applicant who has provided a personal guarantee.
2. Whether the ineligibility under Section 29A(h) is applicable only to the creditor who initiated the CIRP or to all creditors.
3. The relevant date for determining the eligibility of a resolution applicant under Section 29A(h).
4. Whether the appellant could raise the issue of eligibility again, despite the earlier appeals being withdrawn.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the resolution plan submitted by Respondent No. 3 was not maintainable due to his ineligibility under Section 29A(h) of the IBC. The court interpreted “such creditor” in Section 29A(h) to include all similarly placed creditors, not just the creditor who initiated the CIRP. The court found that Respondent No. 3’s personal guarantees were invoked before the resolution plan was submitted, making him ineligible.

The court also held that the relevant date for determining eligibility is the date of submission of the resolution plan and continues till approval. If ineligibility arises after submission but before approval, the amended provision would apply. The court also stated that the appellant was not barred from raising the issue of eligibility again, as it was not a party to the earlier proceedings and the appellate tribunal did not decide the matter on merit.

However, despite the ineligibility, the court did not disturb the resolution plan due to the peculiar facts of the case, including the fact that the resolution plan had been approved by a majority of the CoC, the company was an ongoing concern, and the plan had been implemented since April 18, 2018. The court also noted that the interests of dissenting creditors were protected by the resolution plan.

The court’s treatment of submissions and authorities is summarised below:

The court’s view of the authorities is summarised as follows:

Conclusion

The Supreme Court’s judgment in Bank of Baroda vs. MBL Infrastructures clarifies the interpretation of Section 29A(h) of the IBC. The court held that a person who has given a personal guarantee for a corporate debtor is disqualified from submitting a resolution plan if that guarantee has been invoked by any creditor, not just the creditor who initiated the CIRP. The court also clarified that the relevant date for determining eligibility is the date of submission of the resolution plan and continues till approval.

Despite finding Respondent No. 3 ineligible, the court did not disturb the resolution plan due to the peculiar facts of the case, including the fact that the plan was approved by a majority of the CoC, the company was an ongoing concern, and the plan had been implemented since April 18, 2018. The court balanced the need for strict adherence to the eligibility criteria with the objective of revival under the IBC.

The key takeaways from this judgment are:

• Section 29A(h) of the IBC should be interpreted broadly to disqualify guarantors whose guarantees have been invoked by any creditor.
• The relevant date for determining eligibility is the date of submission of the resolution plan and continues till approval.
• The commercial wisdom of the CoC is important but cannot override the statutory ineligibility criteria.
• The courts have the power to balance the objectives of the IBC, including revival and strict adherence to eligibility criteria.

This judgment provides important guidance for future insolvency proceedings and highlights the importance of strict adherence to the eligibility criteria under Section 29A of the IBC.

Flowchart of the Process