The Insolvency and Bankruptcy Code, 2016 has emerged as one of the key statutes under Section 29A that determines the eligibility of Resolution Applicant during the Insolvency Resolution Process. The Code, when originally formed, had not incorporated any provisions regarding the prevention of any defaulting promoters from buying-back a corporate debtor that would occur potentially at discounts. Subsequently, by an amendment in the Code, Section 29A was inserted with retrospective effect from 23 Nov 2017. Thereafter, the second amendment to the Code, effective from 6 June 2018, included amendments to Section 29A.
Eligibility of Resolution Applicant
Definitions Section (5) of Code defines the meaning of resolution applicant which states that:- “resolution applicant” is a person, who individually or jointly with any of the other person, submits the resolution plan to a resolution professional pursuant to the invitation made under in clause (h) of sub-section (2) of section 25
As per Clause (h) of Section 25(2) of the Code, the Resolution Professional must invite resolution applicant who fulfill the criteria as may be laid down by him with an approval of the committee of creditors. This has to be with regard to the complexity and scale of operations of the business of a corporate debtor and with other conditions as may be prescribed by the Board, to submit a resolution plan. The minimum eligibility criteria as approved by the committee of creditors are as below:
(A) To Companies and Strategic Investors including Limited Liability Partnerships (LLPs), Partnership Firms and Individuals
- Minimum Net Worth/ Net Owned Funds (NOF) of Rs.50 Crores at the Group Level in accordance with immediately preceding financial year.
- Net Worth will be computed as an aggregate value of paid-up share capital. All the reserves created out of profits and securities premium account, after deducting an aggregate value of the accumulated losses, miscellaneous expenditure and deferred expenditure not written off, and also does not includes reserve created out of revaluation of assets, back of depreciation.
- Group can comprise of entities either controlling by or under common control with the applicant. Control means at least 26% of ownership. The entities remain part of the Group must be for at least 3 years.
(B) Financial Investors – Funds / NBFCs / Banks / ARC / others
- Financial Investors includes Mutual Funds, Private Equity, Venture Capital Funds, Foreign Investment Institutions, Asset Reconstruction Companies, Non-Banking Finance Companies, Banks and other similar entities.
- All this needs to be duly registered under mentioned regulations in India, and it needs to provide valid registration certificate copies along with all applicable constitutional documents, as a part of the response to this Request for Proposal.
- Minimum Asset Under Management (AUM) or funds deployed of Rs.200 Crores in the immediately preceding completed financial year, or
- Committed funds are available for investment and deployment in Indian companies or assets of Rs. 200 Crores in the immediately preceding completed financial year.
(C) Proposals by the Consortium of Investors
- Proposals can be made with the support of a consortium of investors.
- In the consortium cases, the proposal required to be made by a nominated lead applicant who must meet Net worth Criteria of a minimum of 51% of the total requirement.
- Each member of a consortium requires to have positive Net Worth
- The Net Worth criteria shall continue to be applicable on an aggregate basis for the consortium.
Other following Conditions
Along with the “Expression of Interest”, the prospective Resolution Applicant must deposit Rs. 10 lakhs as an Earnest Money Deposit which is refundable, by way of demand draft. The applicants are requested to provide the following documents along with the format of submission of Expression of Interest:
- Copy of PAN of a Resolution Applicant
- Copy of KYC of a Resolution Applicant or authorized representative.
- Copy of Address Proof of a Resolution Applicant
- Copies of Last 3 Years the Audited Financial Statements
- Copy of Board Resolution authorizes to participate in the process of ‘expression of interest’ and submission of the Resolution Plan for a Corporate Debtor.
It must also provide a duly stamped and signed confidentiality undertaking according to the requirements provided under Regulation 36(4) of the Insolvency Resolution Process for Corporate Persons (IBBI). Regulations, 2016 (CIRP Regulations) has the condition for receiving an information memorandum and other relevant information with relation to the Corporate Debtor. The interested Resolution Applicant must provide an undertaking along with the application for ‘expression of interest’ as needed under Regulation 36A (7).
All Potential Resolution Applicants have to read, understand and comply with all requirements under IBC, 2016 and CIRP Regulations or any other applicable regulations as mentioned under the IBC, 2016 which are in force for the time being or that may come into force afterwards, for Resolution Plan or plans and all matters thereunder in pursuance to or in relation to this invitation.
Who is Not eligible to be resolution applicant?
Section-29A– A person will not be eligible to submit a resolution plan, if that particular person, or any other person acting jointly with that person—
(a) Who is an un-discharged insolvent person
(b) Who is a willful defaulter according to the guidelines of the (RBI) Reserve Bank of India that is issued under the Banking Regulation Act, 1949
(c) at a time of submission of the resolution, the plan has an account of a corporate debtor under a management or control of a person or of whose such person is the promoter, will be classified as a non-performing asset according to the guidelines of the (RBI) Reserve Bank of India which is issued under the Banking Regulation Act or in the guidelines of a financial sector regulator which is issued under other law enforced for the time being. It must be at least a period of 1 year from the date of such classification till the date of commencement of a corporate insolvency resolution process of the corporate debtor:
Provided that the person has to be eligible to submit the resolution plan in case that person makes payment of all overdue amounts with interest and charges relating to non-performing asset accounts before submission of that resolution plan
It is provided further that nothing in this clause, will apply to a resolution applicant, when such applicant is the financial entity and is not a related party to a corporate debtor.
Explanation I– For purposes of the above proviso, the expression “related party” will not include any financial entity, which is regulated by a financial sector regulator. And also if it is the financial creditor of a corporate debtor and is a related party of a corporate debtor on account of a conversion or a substitution of debt into equity shares or instruments convertible into the equity shares, or completion of transactions as may be specified, before the date of commencement of insolvency.
Explanation II— For purposes of the above clause, when a resolution applicant has an account, or has an account of the corporate debtor under a management or control of that person or of whom such person is a promoter, will be classified as non-performing asset. In case such account was acquired pursuant to a prior resolution plan approved under this Code then the provisions of the above clause must not apply to resolution applicant for the period of 3 years from the date of approval of that resolution plan by the Adjudicating Authority under the Code.
(d) Has been convicted for the offence punishable with imprisonment –
- for the term of two years or more under any Act mentioned under the Twelfth Schedule; or
- for the term of seven years or more under any law for the time being in force:
Provided that this clause will not apply to any person after the expiry of a period of 2 years from imprisonment from the date of his release
Provided further that the above clause will not apply in relation to a connected person referred in the clause of the Explanation I
(e) Is disqualified to act as the director under Companies Act
Provided that this clause will not apply in relation to a connected person referred to in clause of Explanation I
(f) Is prohibited by (SEBI) Securities and Exchange Board of India from trading in securities or accessing these securities markets
(g) Has been the promoter or in a management or in control of the corporate debtor in which a preferential transaction, undervalued transaction, fraudulent transaction or extortionate credit transaction has taken place and in respect to an order which has been made by Adjudicating Authority under the Code
Provided that above clause will not apply if a preferential transaction, extortionate credit transaction, undervalued transaction or fraudulent transaction has been taken place before the acquisition of a corporate debtor by a resolution applicant pursuant to the resolution plan approved under the Code or plan approved by a financial sector regulator or a court. And that resolution applicant has been not otherwise contributed to the preferential transaction, extortionate credit transaction, undervalued transaction or fraudulent transaction has been executed a guarantee in favour of the creditor in respect of corporate debtor against which an application for the insolvency resolution made by that creditor. It has admitted under the Code and guarantee has been invoked by a creditor and remains unpaid in full or part thereof
(i) Who is subject to any disability, in correspondence to clauses (a) to (h), under any other law in a jurisdiction outside India; or
(j) Who has a connected person that is not eligible under clauses (a) to (i)
Explanation I— For the purposes of the above clause, the expression “connected person” means that—
- a person, who is a promoter, or in management or control of the resolution applicant; or
- any person who will be a promoter or in management or control of the business of the corporate debtor while implementation of the resolution plan; or
- the holding company, associate company, subsidiary company or related party of a person referred to in clauses (i) and (ii):
Provided that nothing in the clause of Explanation I will apply to a resolution applicant when such applicant is the financial entity and is not a related party of to a corporate debtor
Provided further that the expression “related party” must not include a financial entity that is regulated by the financial sector regulator. In case if it is the financial creditor of a corporate debtor and also a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be specified, before the date of commencement of insolvency.
Explanation II—For purposes of this section, “financial entity” means the following entities that meet the criteria or conditions as the Central Government may notify in this behalf, after consultation with the financial sector regulator, namely—
- a scheduled bank
- Any entity that is regulated by a foreign central bank or a securities market regulator or any other financial sector regulator has jurisdiction outside India that jurisdiction must compliant with the Financial Action Task Force Standards. It has to be a signatory to the International Organization of Securities Commissions Multilateral Memorandum of Understanding
- Any investment vehicle. It must be registered as a foreign institutional investor, registered as foreign portfolio investor or as foreign venture capital investor, where the terms must have the meaning assigned to them in Regulation 2 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 that is made under (FEMA) Foreign Exchange Management Act, 1999
- the asset reconstruction company registered with the (RBI) Reserve Bank of India under section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- the Alternate Investment Fund registered with (SEBI) Securities and Exchange Board of India
- Such categories of persons as may be notified by Central Government.
It is necessary to note that section 29A has laid down a multiple layered and comprehensive standard of disqualification which will exclude bona fide resolution applicant. The application of the section might also disqualify the crucial stakeholders from bidding the revival of the company. Therefore, a certain amount of leniency is made by the courts in deciding the issue regarding the disqualifications, which is need of the hour to maximize the objectives of this Code.