Section 29A of the IBC: The Gatekeeping Rule That Keeps Errant Promoters Out of Resolution

The Statutory Question

Section 29A of the Insolvency and Bankruptcy Code, 2016 was not part of the Code as enacted. It was inserted with effect from 23 November 2017 by ordinance, carried into the statute book by Act 8 of 2018 dated 18 January 2018, then rewritten by Act 26 of 2018, which received assent on 17 August 2018 and took effect retrospectively from 6 June 2018. Ten clauses, (a) to (j), now decide one question: who may bid for a company inside the corporate insolvency resolution process.

The question matters because of what a resolution plan does. Under Section 7 of the Code a financial creditor can pull a company into insolvency on a default of Rs 1 crore or more, a threshold raised from Rs 1 lakh by notification in 2020. A plan approved by 66 per cent of the committee of creditors by voting share, and then by the National Company Law Tribunal, binds every creditor and typically writes off a large slice of the debt. Without Section 29A, the promoter whose management produced the default could buy the company back at that written-down price.

Parliament said so in as many words. The Statement of Objects and Reasons behind the 2017 amendment recorded the concern that persons who "with their misconduct contributed to defaults of companies or are otherwise undesirable" might "gain or regain control of the corporate debtor", and that such a person "would be seen to be rewarded at the expense of the creditors".

Four clauses do most of the work. Clause (c) catches a bidder whose own account, or the account of a corporate debtor it promotes, manages or controls, has been a non performing asset for at least one year. Clause (d) catches a person convicted of an offence punishable with imprisonment of two years or more under an Act listed in the Twelfth Schedule to the Code, or seven years or more under any other law. Clause (g) catches a promoter or person in management or control of a corporate debtor in which a preferential, undervalued, extortionate credit or fraudulent transaction took place and was the subject of an order by the adjudicating authority. Clause (h) catches a person whose guarantee to a creditor of the corporate debtor was invoked and remains unpaid in full or in part.

What the Court Held

The controlling authority is ArcelorMittal India Private Limited v. Satish Kumar Gupta, decided by the Supreme Court of India on 4 October 2018 in Civil Appeal Nos. 9402 to 9405 of 2018, authored by R.F. Nariman J. sitting with Indu Malhotra J. and reported at (2019) 2 SCC 1.

The corporate debtor was Essar Steel India Limited. On 2 August 2017 the National Company Law Tribunal, Ahmedabad Bench, admitted a Section 7 petition brought by State Bank of India and Standard Chartered Bank for financial debts of roughly Rs 45,000 crore. Satish Kumar Gupta was confirmed as resolution professional on 4 September 2017 and invited expressions of interest by 23 October 2017. ArcelorMittal India Private Limited filed on 11 October 2017 and Numetal Limited on 20 October 2017, and the tribunal later extended the process by 90 days beyond the initial 180, to 29 April 2018.

Two group holdings were the problem. ArcelorMittal Netherlands BV held 29.05 per cent of Uttam Galva Steels Limited, whose accounts were declared non performing on 31 March 2016 by Canara Bank and Punjab National Bank against a debt of around Rs 6,000 crore. Separately, Fraseli held 32.22 per cent of KSS Global, which held 100 per cent of KSS Petron, a non performing asset since 30 September 2015. Shares in Uttam Galva bought at Rs 120 each were sold on 7 February 2018 for Re 1 each, when the market price that day was Rs 19.50, and Fraseli divested its KSS Global stake on 9 February 2018, three days before the resolution plan of 12 February 2018.

The Court held both resolution applicants ineligible under Section 29A(c). Once the corporate veil was pierced, the applicant and the Netherlands entity were found to be commonly managed and controlled, and therefore deemed to be acting in concert under Regulation 2(1)(q)(2)(i) of the 2011 takeover regulations. The share sales made days before the plan were held to have been made with the sole object of escaping clause (c). Because the related corporate debtors had not paid off their non performing accounts, the proviso could not rescue either bid.

The Court then did something unusual. Recording that "the law on Section 29A has been laid down for the first time by this judgment", it invoked Article 142 of the Constitution to give both applicants a single further window of two weeks to pay off the non performing accounts of their related corporate debtors in accordance with the proviso to Section 29A(c). If payment was made, the plans dated 2 April 2018 could be resubmitted, and the committee of creditors had 8 weeks to accept the best of the plans before it. Failing that, the Court directed, Essar Steel India Limited would go into liquidation.

Reasoning

"Control" in clause (c) means positive control, not a veto

Section 29A does not define control, so the Court read across to Section 2(27) of the Companies Act, 2013, which defines it in two parts. The first limb, the right to appoint a majority of directors, is de jure control. The second is de facto: so long as a person or persons acting in concert can positively influence management or policy decisions, by shareholding, management rights, shareholders agreements, voting agreements or otherwise, control exists.

From that the Court drew the line that decides most clause (c) disputes: control in Section 29A(c) "denotes only positive control, which means that the mere power to block special resolutions of a company cannot amount to control". A minority investor with blocking rights is reacting, not commanding. On the facts, though, the 32.22 per cent stake in KSS Global carried the right to appoint an equal number of directors alongside two other holders, plus affirmative voting rights on specified matters, which the Court treated as positive control over the company that wholly owned the defaulting borrower.

The disqualification is tested at plan submission, not at CIRP commencement

The opening words of Section 29A are that "a person shall not be eligible to submit a resolution plan". The Court held that ineligibility therefore attaches at the submission of the plan. The date on which the insolvency process commenced matters only for computing whether one year has lapsed since the account was classified as a non performing asset.

The Court anchored this in the tense of the statute. Clause (c) uses "has", which is in praesenti, whereas clauses (d) and (g) use "has been", pointing to an anterior moment. The words "at the time of submission of the resolution plan", added by the 2018 amendment following the Insolvency Law Committee Report of March 2018, were therefore clarificatory rather than new law. The consequence cuts both ways: a bidder who cures a clause (c) disability before submitting is eligible, and one that was clean at the start but acquires a one year old NPA before submission is not.

A see-through provision aimed at persons acting in concert

The 2017 ordinance did not contain the phrase "persons acting in concert". The amendment Act moved the concepts of promoter, management and control into clause (c) and opened the section with wider language "evincing an intention to rope in all persons who may be acting in concert with the person submitting a resolution plan". Those opening lines, the Court said, refer to a de facto rather than a de jure position and are "a typical instance of a see through provision".

That is why divestments timed days before a bid failed. The 29.05 per cent stake sold at Re 1 a share on 7 February 2018 and the 32.22 per cent holding unwound on 9 February 2018 were treated as transactions reasonably proximate to the plan of 12 February 2018 and undertaken to sidestep the proviso. Explanation I extends the same logic outwards, treating as connected persons anyone who is the promoter or in management or control of the resolution applicant, anyone who will hold that position in the corporate debtor during implementation of the plan, and the holding, subsidiary, associate or related party of either.

Practical Takeaways

For promoters and prospective bidders:

• Eligibility is measured on the date the plan is submitted, so run the Section 29A test against the whole group as it stands on that date, not as it stood at the expression of interest stage.
• The only route out of clause (c) is the proviso: pay all overdue amounts with interest and charges relating to the non performing asset accounts before submission. A share sale is not a cure. Two sales inside five days of the plan were struck down on 4 October 2018.
• Clause (d) is time limited. It stops applying two years after release from imprisonment, and its two year trigger covers only offences under an Act listed in the Twelfth Schedule; for any other law the threshold is seven years.
• Clause (h) is the one that catches guarantors who are also would be buyers. If your guarantee to a creditor of the corporate debtor has been invoked and remains unpaid, you cannot bid until you pay.

For lenders and committee of creditors members:

• Section 29A due diligence is a group exercise, not an entity exercise. Explanation I pulls in holding, subsidiary, associate and related party entities of anyone in management or control of the applicant.
• Watch the moratorium clock. Section 12 allows 180 days with a single extension of up to 90 days, and Section 33 sends the company to liquidation if no plan is approved, the outcome the Court held in reserve on 4 October 2018.
• Wilful defaulter status under clause (b) is about to get faster. The Reserve Bank's Amendment Directions of 27 April 2026 (RBI/2026-27/28) require a bank to complete the classification process within six months of the account being classified as a non performing asset, with effect from 1 April 2027.
• A financial entity that is not a related party of the corporate debtor is carved out of clause (c). Explanation II covers scheduled banks, asset reconstruction companies registered under Section 3 of the SARFAESI Act, 2002, alternative investment funds registered with the Securities and Exchange Board of India and registered foreign portfolio investors.

For investors and non resident bidders:

• A corresponding disability in a foreign jurisdiction is imported by clause (i), so an overseas regulatory bar travels with the bidder into an Indian resolution process.
• Non resident bidders structuring through offshore vehicles should note that the Court pierced the veil across Luxembourg and Netherlands entities on 4 October 2018. For the tax and remittance side of an Indian acquisition, the NRI tax calculator and the repatriation calculator set out the mechanics.
• Section 29A governs who may buy the company, not what happens to the people who guaranteed its debts. That is a separate track under Sections 94 to 100, covered in Are You Off the Hook as Personal Guarantor? and Facing a Section 95 Insolvency Petition as a Guarantor?.
• If the debt never reaches the National Company Law Tribunal, recovery runs through the SARFAESI route or the Debts Recovery Tribunal, where Section 29A has no application.

FAQ

Does Section 29A ban every promoter from bidding for their own company?

No. Section 29A bars persons falling within clauses (a) to (j), not promoters as a class. A promoter whose group holds no non performing account of one year or more, no invoked and unpaid guarantee, no qualifying conviction and no avoidance transaction order is eligible. The commonest disqualifier is clause (c), whose proviso allows a cure by paying all overdue amounts with interest and charges before the plan is submitted.

When exactly is eligibility tested?

At the time the resolution plan is submitted. The Supreme Court held on 4 October 2018 that the opening words "shall not be eligible to submit a resolution plan" fix that moment, and that the date of commencement of the insolvency process is relevant only to compute whether one year has lapsed since the account was classified as a non performing asset. The words added by Act 26 of 2018 were treated as clarificatory of that position rather than as new law.

Can I sell my shares in the defaulting company to become eligible?

Not if the sale is a device. On 4 October 2018 the Supreme Court set aside exactly that manoeuvre: a 29.05 per cent stake sold for Re 1 a share against a market price of Rs 19.50 on 7 February 2018, and a 32.22 per cent holding unwound on 9 February 2018, both days before a 12 February 2018 plan. The Court treated them as transactions reasonably proximate to the bid and undertaken solely to escape clause (c).

Does a minority stake with veto rights amount to "control"?

Not by itself. The Court held that control in Section 29A(c) denotes only positive control, so the mere power to block special resolutions is not control. But rights that let a holder command rather than merely resist do count. A one third holding carrying the right to appoint an equal share of directors plus affirmative voting rights on specified matters was held to be positive control over the company that owned the defaulting borrower.

What happens if every bidder is ineligible?

Liquidation. Section 12 gives the process 180 days with one extension of up to 90 days, and Section 33 requires liquidation where that period ends without an approved plan. In the Essar Steel matter the Supreme Court directed on 4 October 2018 that if no plan was found worthy of acceptance by the requisite majority of the committee of creditors within the 8 weeks allowed, the corporate debtor would go into liquidation.

Does Section 29A affect personal guarantors of the company?

Only through clause (h), and only in one direction. If a guarantee given to a creditor of the corporate debtor has been invoked and remains unpaid in full or in part, the guarantor cannot submit a resolution plan for that company. The separate question of whether guarantor liability survives an approved plan is governed by Part III of the Code, principally Sections 94 to 100, and not by Section 29A at all.