Supreme Court Clarifies Ineligibility under Section 29A(h) of IBC for Guarantors: Bank of Baroda vs. MBL Infrastructures Ltd. (2022)

Date of the Judgment: 18 January 2022
Citation: Civil Appeal No. 8411 of 2019
Judges: Sanjay Kishan Kaul, J., M.M. Sundresh, J.
Can a personal guarantor, whose guarantee has been invoked by a creditor, be eligible to submit a resolution plan under the Insolvency and Bankruptcy Code, 2016? The Supreme Court of India addressed this crucial question in a recent judgment, clarifying the scope of Section 29A(h) of the Code. This case revolves around the interpretation of the provision that disqualifies certain individuals from submitting resolution plans, particularly those who have provided guarantees for corporate debtors. The bench, comprising Justices Sanjay Kishan Kaul and M.M. Sundresh, delivered the judgment.

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 meet its repayment obligations, some banks invoked the personal guarantees provided by Mr. Lakhotiya.

RBL Bank initiated action 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. Similar actions followed by Allahabad Bank and State Bank of Bikaner and Jaipur in March 2013. State Bank of Bikaner and Jaipur later merged with State Bank of India.

Subsequently, 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 30 March 2017, appointing an Interim Resolution Professional and imposing a moratorium under Section 14 of the Code. The CIRP period was later extended by 90 days.

Two resolution plans were received, one of which was submitted by Mr. Lakhotiya on 29 June 2017, before the introduction of Section 29A of the Code. The Committee of Creditors (CoC) held several meetings to discuss Mr. Lakhotiya’s plan. A modified plan was submitted on 22 November 2017.

Timeline:

Legal Framework

The core legal provision under consideration is Section 29A of the Insolvency and Bankruptcy Code, 2016, specifically clauses (c) and (h). This section lists the categories of persons who are ineligible to submit a resolution plan. The relevant portions of Section 29A 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, –

(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;

(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 amendment to Section 29A(h) which came into effect from 18.01.2018 states:

“(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.”

The subsequent amendment to Section 29A(h) which came into effect from 06.06.2018 states:

“(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 considered Section 30(4) of the Code, which deals with the approval of a resolution plan by the Committee of Creditors (CoC). Initially, this required a 75% vote share, which was later reduced to 66%.

Arguments

Appellant’s Arguments:

• The appellant argued that Section 29A should be interpreted holistically to exclude undesirable persons, including guarantors who have not fulfilled their obligations.
• Mr. Lakhotiya, being a promoter of the corporate debtor, was ineligible under Section 29A(h) because his personal guarantees had been invoked before the CIRP commenced.
• The appellant contended that there was a suppression of facts by Mr. Lakhotiya and that the adjudicating authority had not considered all relevant information.
• The law prevailing on the date of the application should be considered, and the disqualification under Section 29A(h) should apply from the date of filing.
• 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 appellate tribunal was never approved by the adjudicating authority, and the conditional assent of Respondent No. 11 was erroneously accepted.

Respondent’s Arguments:

• The respondents argued that the CoC’s decision, based on the expert’s report on the viability of the resolution plan, should not be interfered with.
• The object of the Code should be read with Section 29A(h), and the provision should be interpreted literally to mean that a guarantor is barred only when the creditor invoking the jurisdiction has invoked the guarantee.
• No personal guarantee was invoked by RBL Bank at the time of the application under Section 7 of the Code.
• The invocation of the consortium guarantee by Allahabad Bank and State Bank of Bikaner and Jaipur was illegal.
• The first respondent is an ongoing concern, and the resolution plan is under implementation. Any interference would be detrimental to the object of the Code.
• The issue of extension and exclusion has been rightly construed by both forums, and the delay should be excluded due to pending litigation.

Table of Submissions:

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the Respondent No. 3 was ineligible to submit a resolution plan under Section 29A(h) of the Code, given that he had executed personal guarantees that were invoked by creditors.
2. Whether the appellate tribunal was correct in rejecting the appellant’s contentions on the ground that the earlier appeals had been withdrawn without liberty.
3. Whether the delay in the process was rightly condoned and excluded by the adjudicating authority.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 – Discussed the objectives of the IBC and the nature of CIRP as a collective proceeding.
• K.N. Rajkumar v. V.N. Nagarajan 2021 SCC OnLine 732 – (Not specified in source)
• Arcellor Mittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1 – Interpreted Section 29A(c) of the Code.
• Committee of Creditors, Essar Steel India Ltd. v. Satish Kumar Gupta (2020) 8 SCC 531 – (Not specified in source)
• Apollo Joti LLC & Ors. v. Jyoti Structures Ltd. (Company Appeal (AT) (Insolvency) No. 548 of 2018) – (Not specified in source)
• DBS Bank Ltd. vs. Sharad Sanghi (Civil Appeal No. 3434-3436 of 2019) – (Not specified in source)
• Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd. 2021 SCC OnLine SC 707 – Discussed the nature of a Resolution Plan and the binding effect of its approval.
• National Spot Exchange v. Anil Kohli 2021 SCC OnLine SC 716 – (Not specified in source)
• K. Shashidhar vs. Union of India (Order dated 05.02.2019 in Civil Appeal 10673 of 2018) – (Not specified in source)
• Chitra Sharma & Ors. v. Union of India, (2018) 18 SCC 575 – Discussed the purpose of Section 29A of the IBC.
• Arun Kumar Jagatramka v. Jindal Steel & Power Limited, (2021) 7 SCC 474 – (Not specified in source)
• Phoenix Arc (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 – Considered the principle of purposive and creative interpretation.
• Reserve Bank of India v. Peerless General Finance and Investment Company Limited, (1987) 1 SCC 424 – Principle of interpretation based on text and context.
• Union of India v. Elphinstone Spg. and Wvg. Co. Ltd., (2001) 4 SCC 139 – Judges’ role in interpreting statutes.
• Abhay Singh Chautala v. CBI [(2011) 7 SCC 141] – Interpretation of the word “is” in present context.
• R.S. Nayak v. A.R. Antulay[(1984) 2 SCC 183] – Interpretation of statutes to avoid absurdity.
• Ramesh Kymal v. Siemens Gamesa Renewable Power (P) Ltd., (2021) 3 SCC 224 – (Not specified in source)
• Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401 – (Not specified in source)

Legal Provisions:

• Section 29A of the Insolvency and Bankruptcy Code, 2016 – Persons not eligible to be resolution applicants.
• Section 7 of the Insolvency and Bankruptcy Code, 2016 – Initiation of corporate insolvency resolution process by financial creditor.
• Section 12 of the Insolvency and Bankruptcy Code, 2016 – Time limit for completion of corporate insolvency resolution process.
• Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Notice of default.
• Section 14 of the Insolvency and Bankruptcy Code, 2016 – Moratorium.
• Section 30(4) of the Insolvency and Bankruptcy Code, 2016 – Approval of resolution plan by CoC.
• Section 3(23) of the Insolvency and Bankruptcy Code, 2016 – Definition of person.
• Section 60 of the Insolvency and Bankruptcy Code, 2016 – Adjudicating Authority for corporate persons.

Table of Authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17* to emphasize the objectives of the IBC and the nature of CIRP as a collective proceeding.
• The Court referred to Arcellor Mittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1* for the interpretation of Section 29A(c) and adopted a purposive interpretation of Section 29A.
• The Court cited Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd., 2021 SCC OnLine SC 707* to highlight the nature of a Resolution Plan and the binding effect of its approval.
• The Court considered Chitra Sharma & Ors. v. Union of India, (2018) 18 SCC 575* to understand the purpose of Section 29A of the IBC.
• The Court used Phoenix Arc (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475* to support the principle of purposive and creative interpretation.
• The Court quoted Reserve Bank of India v. Peerless General Finance and Investment Company Limited, (1987) 1 SCC 424* to emphasize the principle of interpretation based on text and context.
• The Court referred to Union of India v. Elphinstone Spg. and Wvg. Co. Ltd., (2001) 4 SCC 139* to understand the role of judges in interpreting statutes.
• The Court analyzed Abhay Singh Chautala v. CBI [(2011) 7 SCC 141]* for the interpretation of the word “is” in the present context.
• The Court cited R.S. Nayak v. A.R. Antulay[(1984) 2 SCC 183]* to support its interpretation of statutes to avoid absurdity.

Reasoning:

The Supreme Court held that Section 29A(h) of the Insolvency and Bankruptcy Code, 2016, disqualifies a person from submitting a resolution plan if they have executed a guarantee in favor of a creditor, and that guarantee has been invoked. The Court clarified that the term “such creditor” in Section 29A(h) should be interpreted to include all similarly placed creditors, not just the creditor who initiated the insolvency process. The court emphasized that the ineligibility is related to the resolution process itself and not just to a particular creditor. It further held that if a person becomes ineligible after submitting the plan due to changes in law, the amended law will apply.

The Court noted that while the resolution plan submitted by Respondent No. 3 wasapproved by the NCLT, it was essential to consider the ineligibility criteria under Section 29A. The Court stated that the purpose of Section 29A is to ensure that persons who have contributed to the financial distress of a corporate debtor are excluded from the resolution process. The court also noted that the adjudicating authority was correct in condoning the delay in the process due to the earlier rounds of litigation with interim orders.

Implications:

• The judgment clarifies that personal guarantors whose guarantees have been invoked are ineligible to submit resolution plans under Section 29A(h) of the IBC.
• The interpretation of “such creditor” in Section 29A(h) is broadened to include all creditors who have invoked a guarantee, not just the creditor who initiated the insolvency process.
• The judgment reinforces the importance of the ineligibility criteria under Section 29A to ensure that only eligible persons participate in the resolution process.
• The judgment emphasizes that the provisions of the IBC must be interpreted purposively to achieve the objectives of the Code.
• The judgment highlights that if a person becomes ineligible after submitting the plan due to changes in law, the amended law will apply.

Final Order

The Supreme Court disposed of the appeal, holding that Respondent No. 3 was ineligible to submit a resolution plan under Section 29A(h) of the Code. However, considering that the resolution plan had already been approved, the Court did not disturb the same. The Court clarified that the ineligibility of Respondent No. 3 was declared only for the purpose of future resolution processes.

Flowchart

Ratio of the Judgment

Sentiment Analysis