Persons Not Eligible to be Resolution Applicant under Section 29A IBC

Section 29A of the Insolvency and Bankruptcy Code (IBC), 2016, is one of the most significant and debated provisions in India’s insolvency framework. It determines who is not eligible to submit a resolution plan for a corporate debtor undergoing insolvency proceedings. The provision acts as a safeguard to ensure that individuals responsible for a company’s downfall do not regain control of it through the backdoor.

When the IBC was first enacted in 2016, it was designed to provide a time-bound resolution process to revive companies in financial distress. However, it did not initially contain strong restrictions on who could act as a resolution applicant. This gap allowed defaulting promoters and managements to submit resolution plans and attempt to take back control of their companies, undermining the very purpose of the Code. To address this loophole, Section 29A was inserted through the Insolvency and Bankruptcy Code (Amendment) Act, 2017, bringing in clear and strict disqualification criteria.

The purpose of Section 29A is to promote good governance, maintain transparency, and prevent any moral hazard in the insolvency process. It ensures that persons who contributed to the company’s financial distress are not allowed to take advantage of the resolution mechanism intended for its revival.

Rationale Behind Section 29A

Before the 2017 amendment, promoters of defaulting companies could regain control by submitting resolution plans at discounted values. This raised concerns among creditors and the public, as it appeared that those responsible for the default were benefitting from their own mismanagement.

The legislature, therefore, introduced Section 29A to eliminate this conflict of interest and restore the credibility of the Corporate Insolvency Resolution Process (CIRP). The Supreme Court, in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd., explained this intent clearly by observing that a person who has contributed to the problem cannot be allowed to participate in its solution. This principle forms the moral and legal foundation of Section 29A.

Overview of Section 29A: Persons Not Eligible to be Resolution Applicant

Section 29A lays down a detailed list of persons who are disqualified from being resolution applicants. The disqualification applies not only to the person submitting the resolution plan but also to anyone acting jointly or in concert with such a person. The provision covers individuals, companies, promoters, and connected parties to ensure that the restriction cannot be easily bypassed through indirect means.

Detailed Breakdown of Ineligibility Criteria to be a Resolution Applicant

Section 29A sets out several categories of disqualified persons. Each clause addresses a specific situation that may undermine the integrity of the insolvency process.

Undischarged Insolvent

Any person who has been declared insolvent and has not yet been discharged from insolvency proceedings is disqualified. This ensures that individuals already unable to meet their debts cannot control another distressed business.

Wilful Defaulter

A person who has been classified as a wilful defaulter under the guidelines issued by the Reserve Bank of India (RBI) is ineligible. A wilful defaulter is one who deliberately avoids repaying loans despite having the capacity to do so or who diverts or siphons off borrowed funds.

Non-Performing Asset (NPA) Holder

If a person is a promoter or in management or control of a company whose account has been classified as a Non-Performing Asset (NPA) for one year or more, they are disqualified.

Exception: This disqualification can be removed if such a person pays all overdue amounts along with interest and charges before submitting the resolution plan. This provision encourages promoters to clear their dues before participating in the process.

However, this clause does not apply to financial entities such as banks or asset reconstruction companies that are not related parties to the corporate debtor.

Convicted for Certain Offences

A person convicted for an offence punishable with imprisonment of two years or more under any law specified in the Twelfth Schedule, or seven years or more under any law in force, is not eligible. However, the disqualification is temporary and ceases to apply after two years from the date of release from imprisonment.

Disqualified to Act as a Director

Any person disqualified from acting as a director under the Companies Act, 2013 cannot submit a resolution plan. This ensures that individuals who have failed in fulfilling their statutory obligations are kept out of the resolution process.

Prohibited by SEBI

Any individual or entity prohibited by the Securities and Exchange Board of India (SEBI) from trading in securities or accessing the securities markets is disqualified. This prevents persons with a record of market misconduct from taking control of corporate entities.

Involvement in Fraudulent Transactions

A person who has been a promoter or in management or control of a corporate debtor where a preferential, undervalued, extortionate credit, or fraudulent transaction has taken place, and in respect of which an order has been passed by the adjudicating authority, is barred from participating.

Guarantor of Defaulting Corporate Debtor

If a person has executed a guarantee in favour of a creditor for a corporate debtor against whom insolvency proceedings have been initiated, and the guarantee has been invoked and remains unpaid, such a person is ineligible. The Supreme Court in Bank of Baroda v. MBL Infrastructures Ltd. clarified that the mere existence of an invoked and unpaid guarantee makes a person ineligible under Section 29A(h).

Subject to Similar Disabilities Abroad

A person who suffers from any disability corresponding to the above disqualifications under the laws of another country is also disqualified.

Connected Person

If a person has a connected person who is ineligible under any of the above clauses, they too become disqualified. This broadens the scope of Section 29A to prevent misuse through related entities or individuals.

Meaning of “Connected Person”

The term connected person is defined broadly to include:

• Any person who is a promoter or in the management or control of the resolution applicant.
• Any person who will become a promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan.
• The holding company, subsidiary, associate company, or related party of such a person.

This wide definition ensures that the law captures indirect control or influence that may be exercised by ineligible persons through related entities.

Judicial Interpretation of Section 29A

Over time, several landmark judgments have clarified the scope and application of Section 29A.

Bank of Baroda & Anr. v. MBL Infrastructures Ltd. & Ors. (2019)

This case involved a promoter who had executed personal guarantees on behalf of the corporate debtor. The Supreme Court held that once a guarantee has been invoked and remains unpaid, the person becomes ineligible under Section 29A(h). The Court further clarified that even if only one creditor invokes the guarantee, the disqualification applies, regardless of which creditor filed the insolvency petition.

Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. (2019)

In this case, the Supreme Court upheld the constitutional validity of Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, and held that the bar under Section 29A extends to schemes of compromise or arrangement under Section 230 of the Companies Act, 2013.

The Court reasoned that allowing ineligible persons to propose such schemes during liquidation would defeat the purpose of Section 29A. Thus, even in liquidation, persons barred under Section 29A cannot attempt to regain control of the company through alternative legal routes.

Chitra Sharma v. Union of India (2018)

The Supreme Court observed that Section 29A was enacted in the larger public interest to ensure that persons responsible for the insolvency of a company do not participate in its resolution. The Court emphasised that the provision upholds corporate governance and accountability by closing the door to defaulting managements seeking re-entry into the company.

Swiss Ribbons Pvt. Ltd. v. Union of India (2019)

In this case, the Supreme Court examined the constitutionality of various provisions of the IBC, including Section 29A. The Court upheld its validity and clarified that the disqualification extends to persons who are connected with the resolution applicant in the context of business activities. It held that only those relatives or related parties who have a genuine connection with the applicant’s business are covered by the disqualification under Section 29A(j).

The Four-Layered Framework of Disqualification

Section 29A creates a multi-layered restriction system to prevent circumvention of its provisions. The four layers are:

1. The Resolution Applicant – the primary individual or entity submitting the plan.
2. Connected Persons – those directly associated with the applicant’s management or ownership.
3. Related Parties – entities or individuals having a business or family connection with the applicant or connected person.
4. Persons Acting in Concert – anyone acting jointly or in coordination with an ineligible applicant or connected person.

This framework ensures that even indirect or coordinated attempts by ineligible persons to gain control are blocked.

Role of the Resolution Professional and the Committee of Creditors

The Resolution Professional (RP) plays a vital role in implementing Section 29A. The RP must perform detailed due diligence on each prospective resolution applicant to confirm eligibility.

The RP must examine not only the affidavit submitted by the applicant but also verify facts independently from reliable sources. After verifying eligibility, the RP submits a due diligence report to the Committee of Creditors (CoC).

The CoC, while evaluating and voting on the resolution plan, relies on this report to ensure that the applicant meets the criteria set out under Section 29A. The CoC’s approval of a plan that violates Section 29A could be struck down by the Adjudicating Authority (NCLT) on appeal.

Conclusion

Section 29A of the Insolvency and Bankruptcy Code is a cornerstone provision that preserves the integrity of India’s insolvency resolution framework. It ensures that individuals responsible for financial distress cannot manipulate the resolution process for personal gain.

By setting out clear disqualification criteria and extending the restrictions to connected and related persons, Section 29A acts as a strong deterrent against misuse. Judicial interpretations have further clarified its application, reinforcing its purpose as a safeguard for creditor confidence and public trust.