LEGAL ISSUE: Interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016 concerning the eligibility of a resolution applicant who has provided a guarantee to a creditor.
CASE TYPE: Insolvency Law
Case Name: Bank of Baroda & Anr. vs. MBL Infrastructures Limited & Ors.
[Judgment Date]: 18 January 2022
Introduction
Date of the Judgment: 18 January 2022
Citation: Not Available
Judges: Sanjay Kishan Kaul, J., M.M. Sundresh, J.
Can a person who has given a personal guarantee for a loan be allowed to submit a resolution plan under the Insolvency and Bankruptcy Code (IBC) if that guarantee has been invoked? The Supreme Court of India recently addressed this question in a case involving Bank of Baroda and MBL Infrastructures Limited. The core issue was whether the promoter of a company, who had given personal guarantees that were invoked by creditors, was eligible to submit a resolution plan for the company under Section 29A(h) of the IBC. The Supreme Court bench comprised Justices Sanjay Kishan Kaul and M.M. Sundresh, with the majority opinion authored by Justice M.M. Sundresh.
Case Background
M/s. MBL Infrastructures Limited (Respondent No.1) was established by Mr. Anjanee Kumar Lakhotiya (Respondent No. 3) in the early 1990s. The company obtained loans and credit facilities from a consortium of banks. When MBL Infrastructures failed to repay the loans, 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) in February 2013, after invoking Mr. Lakhotiya’s personal guarantee. This was followed by similar actions by Allahabad Bank and State Bank of Bikaner and Jaipur in March 2013. Subsequently, State Bank of Bikaner and Jaipur merged with State Bank of India.
In 2017, RBL Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, 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, and appointed an Interim Resolution Professional, which led to a moratorium under Section 14 of the Code. The CIRP period was later extended by 90 days.
Two resolution plans were submitted, one of which was by Mr. Lakhotiya on June 29, 2017, before the introduction of Section 29A of the Code. The Committee of Creditors (CoC) held several meetings to discuss the plan. On November 18, 2017, the CoC asked Mr. Lakhotiya to submit an appropriate resolution plan. He submitted a modified plan on November 22, 2017.
Timeline
| Date | Event |
|---|---|
| Early 1990s | M/s. MBL Infrastructures Limited was set up by Mr. Anjanee Kumar Lakhotiya. |
| February 2013 | RBL Bank invoked personal guarantee of Mr. Lakhotiya and issued notice under Section 13(2) of SARFAESI Act. |
| March 2013 | Allahabad Bank and State Bank of Bikaner and Jaipur initiated similar actions under Section 13(2) of SARFAESI Act. |
| 30 March 2017 | NCLT Kolkata admitted application under Section 7 of IBC filed by RBL Bank, initiating CIRP against MBL Infrastructures. |
| 29 June 2017 | Mr. Lakhotiya submitted a resolution plan. |
| 16 October 2017 to 17 November 2017 | 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. |
| 18 November 2017 | Decision was made in the 9th meeting of the CoC seeking an appropriate resolution plan at the hands of Respondent No.3. |
| 22 November 2017 | Mr. Lakhotiya submitted a modified resolution plan. |
| 23 November 2017 | Section 29A was introduced to the IBC by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017. |
| 1 December 2017 | CoC held a meeting to discuss the impact of the amendment on the eligibility of Mr. Lakhotiya. |
| 18 December 2017 | NCLT held that Mr. Lakhotiya was eligible to submit a resolution plan. |
| 21 December 2017 | NCLAT passed an interim order on appeal by Punjab National Bank, directing the Adjudicating Authority not to accept or reject the plan without its approval. |
| 21-22 December 2017 | Resolution plan submitted by Mr. Lakhotiya 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. |
| 25 December 2017 | The extended 270 day period of CIRP expired. |
| 11 January 2018 | NCLAT passed an order on appeal by RBL Bank, allowing the adjudicating authority to proceed further but not to accept the resolution plan without its prior approval. |
| 12 January 2018 | Mr. Lakhotiya filed an application seeking a direction to dissenting creditors to support the resolution plan. |
| 18 January 2018 | Section 29A(h) was further amended. |
| 31 January 2018 | Bank of Maharashtra sent a letter setting forth its conditions for approval of the resolution plan. |
| 23 March 2018 | NCLAT allowed Punjab National Bank to withdraw its appeal, vacating the interim order. |
| 18 April 2018 | Adjudicating authority approved the resolution plan submitted by Mr. Lakhotiya. |
| 6 June 2018 | Section 29A(h) was further amended by way of ordinance, which subsequently became an Act. |
Course of Proceedings
The NCLT, Kolkata, initially ruled on December 18, 2017, that Mr. Lakhotiya was eligible to submit a resolution plan, despite his personal guarantees being invoked. The NCLT reasoned that since the debt payable by Mr. Lakhotiya was not yet crystallized, he could not be considered a defaulter. This decision was challenged by Punjab National Bank (PNB) before the National Company Law Appellate Tribunal (NCLAT).
On December 21, 2017, the NCLAT issued an interim order directing the NCLT not to accept or reject the resolution plan without its prior approval. RBL Bank also filed an appeal against the NCLT’s order. The NCLAT allowed the NCLT to proceed but not to accept the resolution plan without its approval.
Subsequently, Mr. Lakhotiya filed an application seeking a direction to dissenting creditors to support the resolution plan. Bank of Maharashtra also set conditions for its approval. The resolution plan then gathered a 78.50% vote share.
On March 23, 2018, the NCLAT allowed PNB to withdraw its appeal, vacating the interim order, but left the question of law open. The NCLT then approved the resolution plan on April 18, 2018, stating that the issue of eligibility under Section 29A(h) was already decided and the plan had crossed the 75% approval threshold. This decision was challenged by the appellant before the NCLAT, which confirmed the NCLT’s order.
Legal Framework
The core legal provision in this case is Section 29A of the Insolvency and Bankruptcy Code, 2016, which specifies who is not eligible to be a resolution applicant. Specifically, Section 29A(h) states:
“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 – (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.”
This provision was introduced to prevent persons who contributed to the defaults of companies from misusing the resolution process. The amendment to Section 29A(h), effective from June 6, 2018, added the condition that the guarantee must be invoked by the creditor and remain unpaid, in full or in part.
Arguments
Appellant’s Arguments:
- The appellant argued that Section 29A should be interpreted holistically to disqualify guarantors who have not fulfilled their liability, aligning with the intent of promoting debt primacy.
- Mr. Lakhotiya was ineligible under Section 29A(h) because his personal guarantees were invoked before the start of the CIRP.
- There was a suppression of facts by Mr. Lakhotiya, which was not considered by the NCLT.
- The law prevailing on the date of the application should be considered, and the disqualification should be applied from that date.
- The approval of the resolution plan was made after the mandatory period of 270 days, violating Section 12 of the Code.
- The revised plan before the NCLAT was never approved by the NCLT, and the conditional assent of Respondent No. 11 was erroneously accepted.
- The appellant was not a party in the earlier proceedings and the issue of eligibility was not decided on merits by the NCLAT, hence, it can be questioned.
Respondent’s Arguments:
- The decision of the CoC, based on expert reports on the viability and feasibility of the resolution plan, should not be interfered with.
- The revised plan accepted by the NCLAT was an improvement over the earlier one.
- The appellant is estopped from questioning Mr. Lakhotiya’s eligibility, as it was aware of the NCLT’s initial decision.
- Section 29A(h) should be interpreted literally, barring a guarantor only when the creditor who initiated the CIRP has invoked the guarantee.
- RBL Bank did not invoke the personal guarantee at the time of its application under Section 7 of the Code.
- The invocation of the consortium guarantee by Allahabad Bank and State Bank of Bikaner and Jaipur is illegal.
- MBL Infrastructures is an ongoing concern, and the resolution plan has been implemented since April 18, 2018.
- The object of the Code is the revival of the Corporate Debtor, and any interference will have an adverse effect.
- The NCLT and NCLAT rightly construed the issue of extension and exclusion of time, given the pending litigation.
| Main Submission | Sub-Submissions (Appellant) | Sub-Submissions (Respondent) |
|---|---|---|
| Eligibility under Section 29A(h) |
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| Validity of Resolution Plan |
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| Procedural Issues |
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Issues Framed by the Supreme Court
The Supreme Court framed the following issue for consideration:
- Whether the Respondent No.3 was ineligible to submit a resolution plan under Section 29A(h) of the Insolvency and Bankruptcy Code, 2016.
The court also considered the sub-issue of the date of reckoning qua the provision i.e. the date of submission of resolution plan or the date of adjudication by the authority.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the Respondent No.3 was ineligible to submit a resolution plan under Section 29A(h) of the Insolvency and Bankruptcy Code, 2016. | Yes, the Court held that the plan submitted by the Respondent No.3 ought not to have been entertained. | The Court interpreted Section 29A(h) to mean that if a personal guarantee is invoked by any creditor, the guarantor is ineligible to submit a resolution plan. The Court held that the ineligibility is not limited to the creditor who initiated the CIRP. |
| Date of reckoning qua the provision. | The Court held that if a person becomes ineligible after submitting the resolution plan, the subsequent amended provision would govern the question of eligibility. | The Court reasoned that the amendment is in the nature of providing a better process and is in the interest of the creditors and the debtor. |
Authorities
The Supreme Court relied on several cases and legal provisions to interpret Section 29A(h) of the IBC:
| Authority | Court | How it was used |
|---|---|---|
| Seaford Court Estates Ltd. v. Asher, (1949) 2 KB 481 | Court of Appeal | Cited to emphasize the role of the court in interpreting statutes to give effect to the intention of the legislature, even when defects appear. |
| Reserve Bank of India v. Peerless General Finance and Investment Company Limited, (1987) 1 SCC 424 | Supreme Court of India | Cited to highlight that interpretation must depend on the text and the context, with the best interpretation being one that matches the textual interpretation with the contextual. |
| Union of India v. Elphinstone Spg. and Wvg. Co. Ltd., (2001) 4 SCC 139 | Supreme Court of India | Cited to emphasize that the duty of judges is to expound and not to legislate, and that the true meaning of an enactment is derived by considering the words used in light of the discernible purpose. |
| Arcellor Mittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1 | Supreme Court of India | Cited to highlight the approach of interpreting the Code with its laudable object of facilitating rehabilitation and revival of the corporate debtor. |
| Phoenix Arc (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 | Supreme Court of India | Cited to highlight the approach of interpreting the Code with its laudable object of facilitating rehabilitation and revival of the corporate debtor. |
| Arun Kumar Jagatramka v. Jindal Steel & Power Limited, (2021) 7 SCC 474 | Supreme Court of India | Cited to highlight the approach of interpreting the Code with its laudable object of facilitating rehabilitation and revival of the corporate debtor. |
| Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 | Supreme Court of India | Cited to emphasize that the primary focus of the Code is to ensure revival and continuation of the corporate debtor and that liquidation is a last resort. The Court also highlighted that the proceeding is in rem. |
| Chitra Sharma & Ors. v. Union of India, (2018) 18 SCC 575 | Supreme Court of India | Cited to emphasize the purpose of Section 29A, which is to ensure that persons responsible for the insolvency of the corporate debtor do not participate in the resolution process. |
| Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd., 2021 SCC OnLine 707 | Supreme Court of India | Cited to emphasize that the CoC cannot approve a Resolution Plan proposed by an applicant barred under Section 29A of the IBC. |
| Section 3(23) of the Insolvency and Bankruptcy Code, 2016 | Insolvency and Bankruptcy Code, 2016 | The definition of “person” under this section was discussed to include a promoter or a director. |
| Section 7 of the Insolvency and Bankruptcy Code, 2016 | Insolvency and Bankruptcy Code, 2016 | The court discussed the import of Section 7 of the Code with respect to the rights of the creditors. |
| Section 12(3) of the Insolvency and Bankruptcy Code, 2016 | Insolvency and Bankruptcy Code, 2016 | The court discussed the power to exclude time spent in litigation. |
| Section 30(4) of the Insolvency and Bankruptcy Code, 2016 | Insolvency and Bankruptcy Code, 2016 | The court discussed the amendment to Section 30(4) of the Code which reduced the percentage required for approval of a resolution plan by the CoC from 75% to 66%. |
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| Appellant’s submission that Section 29A should be interpreted holistically to disqualify guarantors who have not fulfilled their liability. | Accepted. The Court held that the objective of Section 29A is to weed out undesirable persons and promote debt primacy. |
| Appellant’s submission that Mr. Lakhotiya was ineligible under Section 29A(h) because his personal guarantees were invoked before the start of the CIRP. | Accepted. The Court held that the rigour of Section 29A(h) is attracted in this case. |
| Appellant’s submission that the law prevailing on the date of the application should be considered. | Partially Accepted. The Court held that if there is a bar at the time of submission of resolution plan, it is not maintainable. However, if the submission of the plan is maintainable and thereafter, a person becomes ineligible, the subsequent amended provision would govern the question of eligibility. |
| Appellant’s submission that the approval of the resolution plan was made after the mandatory period of 270 days. | Rejected. The Court agreed with the NCLT and NCLAT that the delay was rightly condoned and excluded by invoking Section 12(3) of the Code. |
| Appellant’s submission that the revised plan before the NCLAT was never approved by the NCLT. | Not specifically addressed. The Court focussed on the eligibility of the resolution applicant. |
| Appellant’s submission that the appellant was not a party in the earlier proceedings. | Accepted. The Court held that the principle governing res judicata and issue estoppel would not get attracted in such a scenario. |
| Respondent’s submission that the decision of the CoC should not be interfered with. | Partially Accepted. The Court noted the commercial wisdom of the CoC but also emphasized the need to adhere to the provisions of the Code. |
| Respondent’s submission that the appellant is estopped from questioning Mr. Lakhotiya’s eligibility. | Rejected. The Court held that the appellant was not a party to the decision of the adjudicating authority on the first occasion. |
| Respondent’s submission that Section 29A(h) should be interpreted literally. | Rejected. The Court held that the word “such creditor” has to be interpreted to mean similarly placed creditors after the application for insolvency application is admitted by the adjudicating authority. |
| Respondent’s submission that RBL Bank did not invoke the personal guarantee at the time of its application under Section 7 of the Code. | Rejected. The Court held that the ineligibility is not limited to the creditor who initiated the CIRP. |
| Respondent’s submission that the object of the Code is the revival of the Corporate Debtor. | Accepted. The Court acknowledged this object and considered it in its final order. |
| Respondent’s submission that the NCLT and NCLAT rightly construed the issue of extension and exclusion of time. | Accepted. The Court agreed with the NCLT and NCLAT on this point. |
How each authority was viewed by the Court?
The Court used the authorities to interpret Section 29A(h) of the IBC and to emphasize the need for a purposive interpretation of the statute. The court used the authorities to highlight the following points:
- The role of the court in interpreting statutes to give effect to the intention of the legislature, even when defects appear.
- The interpretation must depend on the text and the context.
- The duty of judges is to expound and not to legislate.
- The need to facilitate rehabilitation and revival of the corporate debtor.
- The primary focus of the Code is to ensure revival and continuation of the corporate debtor.
- The purpose of Section 29A, which is to ensure that persons responsible for the insolvency of the corporate debtor do not participate in the resolution process.
- The CoC cannot approve a Resolution Plan proposed by an applicant barred under Section 29A of the IBC.
The Court specifically noted the following:
- 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.
- The ineligibility is not limited to the creditor who initiated the CIRP.
- If a person becomes ineligible after submitting the resolution plan, the subsequent amended provision would govern the question of eligibility.
- The amendment is in the nature of providing a better process and is in the interest of the creditors and the debtor.
The Court held that the plan submitted by the Respondent No.3 ought not to have been entertained. However, the court also considered the fact that much water has flown under the bridge and the resolution plan was already under implementation.
The Court quoted the following from the judgment:
“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.”
“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.”
“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.”
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the need to uphold the integrity of the insolvency resolution process and the specific language of Section 29A(h) of the IBC. The Court emphasized the importance of preventing those who contributed to the financial distress of a company from benefiting from the resolution process. The Court also considered the object of the Code, which is to put the corporate debtor back on the rails. While the Court acknowledged the commercial wisdom of the Committee of Creditors (CoC) and the fact that the resolution plan had been approved by a majority, it prioritized the statutory mandate and the need to ensure a fair and transparent process.
| Sentiment | Percentage |
|---|---|
| Statutory Compliance (Section 29A(h)) | 40% |
| Integrity of Resolution Process | 30% |
| Object of the Code (Revival) | 20% |
| Commercial Wisdom of CoC | 10% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact (consideration of the factual aspects of the case) | 30% |
| Law (consideration of legal aspects) | 70% |
The court’s reasoning was predominantly based on the legal interpretation of Section 29A(h) of the IBC, which is reflected in the high percentage of law-based considerations. The factual aspects of the case, such as the approval of the resolution plan by the CoC and the ongoing nature of the business, were also considered but were secondary to the legal analysis.
Logical Reasoning
Issue: Eligibility of Respondent No. 3 under Section 29A(h) of IBC
Step 1: Did Respondent No. 3 execute a guarantee in favor of a creditor?
Answer: Yes
Step 2: Was an application for insolvency resolution admitted against the corporate debtor?
Answer: Yes
Step 3: Was the guarantee invoked by any creditor?
Answer: Yes
Step 4: Does the guarantee remain unpaid in full or part?
Answer: Yes
Conclusion: Respondent No. 3 is ineligible under Section 29A(h)
Final Order
The Supreme Court set aside the orders of the NCLT and NCLAT and held that the resolution plan submitted by Respondent No. 3 was not maintainable. However, considering the fact that the resolution plan had been implemented for more than 4 years, the Court did not disturb the plan. The Court directed that the order would not be treated as a precedent and would be confined to the facts of the case.
The Court noted that it was not inclined to interfere with the implementation of the plan, as the same had been implemented for more than 4 years. The court also noted that a lot of water had flown under the bridge. The Court also noted the fact that the corporate debtor was an ongoing concern.
The Court held that:
- The Respondent No.3 was ineligible to submit a resolution plan under Section 29A(h) of the Insolvency and Bankruptcy Code, 2016.
- 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.
- The ineligibility is not limited to the creditor who initiated the CIRP.
- If a person becomes ineligible after submitting the resolution plan, the subsequent amended provision would govern the question of eligibility.
- The amendment is in the nature of providing a better process and is in the interest of the creditors and the debtor.
Implications
This judgment has significant implications for the interpretation of Section 29A(h) of the IBC. The Supreme Court’s ruling clarifies that:
- The ineligibility under Section 29A(h) applies to a resolution applicant if any creditor has invoked a guarantee provided by them, and it remains unpaid. It is not limited to the creditor who initiated the CIRP.
- The disqualification of a resolution applicant under Section 29A(h) is to be determined based on the law as it stands at the time of the decision, rather than the date of the application.
- The intent of the law is to prevent those who have contributed to the financial distress of a company from benefiting from the resolution process, thus upholding the integrity of the system.
This ruling ensures that promoters who have given personal guarantees cannot bypass the intent of the IBC by submitting resolution plans through the backdoor. It reinforces the importance of debt primacy and promotes a fair and transparent resolution process.
The decision provides clarity that the ineligibility is not limited to the creditor who initiated the CIRP, but extends to all creditors who have invoked the guarantee. This interpretation is in line with the objective of Section 29A, which is to prevent persons who have contributed to the defaults of companies from misusing the resolution process.
The judgment also highlights that the object of the Code is the revival of the corporate debtor, but the same has to be done within the framework of the Code, which includes Section 29A.