Why Section 29A needs calibration

The IBC must not conflate business failure with malfeasance, or an unfortunate entrepreneur with a fraudulent one

- M S SAHOO & RAGHAV PANDEY

The first resolution plan under the Insolvency and Bankruptcy Code (IBC), 2016, approved in August 2017, triggered widespread disquiet. A related party regained control of the company while creditors took a 94 per cent haircut. This outcome appeared commercially imprudent and morally indefensible, exposing the vulnerability of the nascent insolvency regime to abuse. The IBC could not be a route for errant promoters who had run a company into the ground to shed debt and reclaim assets. The government responded swiftly, inserting Section 29A to restore confidence in the regime.

Nearly a decade on, the twin balance-sheet syndrome that motivated early interventions has largely receded. In the changed landscape, Section 29A increasingly risks impeding the IBC’s objective of value-maximising resolution by excluding precisely those actors who may be best placed to revive distressed assets. The question is whether Section 29A in its present form still continues to serve its purpose without imposing disproportionate collateral costs.

Clause (c), for instance, disqualifies a promoter of a company that has a nonperforming asset (NPA) account for at least one year before the commencement of the corporate insolvency resolution process (CIRP) of a company from submitting a resolution plan to take it over. This provision produces anomalous outcomes. A promoter of several companies, each with substantial NPAs for decades, retains control of those companies so long as none of those companies is admitted into CIRP. By contrast, a promoter of a single company with a relatively small NPA for a year loses the company if that company enters insolvency. Disqualification thus turns not on the existence, magnitude, or persistence of NPA, but on the happenstance of admission into CIRP, an outcome often shaped by creditor strategy rather than promoter conduct.