IBC: Section 29A – The Ghost Of Retrospective Past
For many promoters of insolvent companies the National Company Law Tribunal decision in the Wig Associates case presented a glimmer of hope—that they might be able to bid for their own companies. That glimmer may now have been extinguished by the Supreme Court.
Here’s What Happened...
The Wig Associates order stated that the bidder ineligibility criteria introduced in the insolvency code could only apply prospectively, that is after the criteria were notified. That meant the Ruias could bid for Essar Steel Ltd., the Singhals for Bhushan Power and Steel Ltd., and Manoj Gaur would be eligible to submit a resolution plan for his family-owned Jaypee Infratech Ltd.
The ineligibility criteria were set out in Section 29A that was added to the Insolvency and Bankruptcy Code, 2016 via an ordinance in November 2017. The main criteria disqualified promoters of insolvent companies from bidding for their own companies unless outstanding dues were repaid. That put the likes of the Ruias, Singhals, Gaurs and other such promoters out of the resolution process.
And Then Came The Wig Associates Order...
On June 4, the NCLT held, in the Wig Associates case, that since Section 29A alters already existing substantive and legal rights, it can only apply prospectively, i.e. to insolvency proceedings initiated after Nov. 23.
It is unfair to change the rules of a game once the game has started, till it finishes.NCLT Order In Wig Associates Case
That put many promoters back in the game. Since the NCLT order had the potential of unsettling a few resolution decisions and several ongoing processes, the Insolvency and Bankruptcy Board of India appealed against it at the National Company Law Appellate Tribunal. On Aug. 1 the NCLAT shot down the case on grounds that IBBI, as a regulator, does not have jurisdiction to appeal. The appellate tribunal urged the resolution professional in the Wig case to file an appeal, if so deemed fit by him.
The Supreme Court View...
Meanwhile, recent comments of a three-judge Supreme Court bench in the Jaypee Infratech case may play a significant role in the final determination of this controversy.
In the Jaypee Infratech judgment, issued on Aug. 9, the Supreme Court noted that Section 29A has been enacted in larger public interest and to facilitate corporate governance.
Parliament rectified a loophole in the Act which allowed a backdoor entry to erstwhile managements in the corporate insolvency resolution process.Supreme Court Order In Jaypee Infratech Case
Are Promoters Out Of The Game?
By describing the insertion of Section 29A as ‘plugging a loophole’, the Supreme Court judgment could have a bearing on any appeal in the Wig Associates case, Amir Arsiwala, an advocate at the Bombay High Court, told BloombergQuint. Arsiwala represented the resolution professional in the Wig Associates case.
Previously, courts have permitted amendments to be retrospective if they are meant to ‘cure an acknowledged evil’ or to plug a loophole. In other words, curing a defect is an exception to the rule of prospective construction. If the court rules so, the promoters may not be able to rely on the claim that 29A is inapplicable to their cases.Amir Arsiwala, Advocate, Bombay High Court
Vyapak Desai, the head of the dispute resolution practice at law firm Nishith Desai Associates, said that the Supreme Court’s observation in the Jaypee Infratech case seems to be in line with the legislative intent.
The court has indicated that since the amendment was introduced to plug the loophole it is intended to apply not just prospectively, but to a limited extent, retrospectively to resolution plans that may have been submitted before the ordinance was promulgated but had not been approved.Vyapak Desai, Head, International Litigation and Dispute Resolution Practice
Accordingly, the Wig Associates rationale may not stand since the legislature is clear that it intended the amendment to apply retrospectively, Desai added.
According to lawyers, the Supreme Court will have an opportunity to clarify this position in one of at least 14 other cases challenging Section 29A on constitutional ground.
The hair splitting is because multi-crore assets are at stake and while they’ve tried, in one way or another, promoters remain ineligible to buy back their insolvent assets.