NCLT RULING ON NON-DEFAULTING PROMOTER/GUARANTOR IN INSOLVENCY PROCESS

In a recent case of RBL Bank Limited vs. MBL Infrastructures Limited 2017, the National Company Law Tribunal (NCLT) Kolkata Bench has passed on Order with regard to non-defaulting promoters/guarantors who endeavor to save their companies. Herein, the RBL Bank (Creditor) had initiated a corporate insolvency resolution process against the corporate debtor, MBL Infrastructures under Section 7 of the Insolvency and Bankruptcy Code 2016, which was admitted by NCLT. Thereafter, a Resolution Applicant (Applicant), personal guarantor of the Corporate Debtor, submitted a Resolution Plan (Plan) in the meetings of Committee of Creditors (Meetings). After several deliberations and discussions about the Plan in the Meetings, the Applicant incorporated their feedback in the Plan and submitted it to the Resolution Professional, appointed by the NCLT to conduct the corporate insolvency resolution process, who in turn would submit the Plan to the Committee of Creditors for their voting.

Meanwhile, the Government of India had passed an Ordinance dated 23.11.2017 to amend the Code, and also introduced Section 29A that makes certain persons ineligible to be a resolution applicant including willful defaulters [Clause (b)], persons who have their accounts classified as non-performing assets [Clause (c)], promoters or those in management of control of the defaulting company, [Clause (g)], those who have an enforceable guarantee in favor of a creditor in respect of a corporate debtor under insolvency resolution process [Clause (h)], etc. Accordingly, such persons become ineligible to submit a resolution plan (specifying the details of restructuring a defaulter’s debt) as it may be considered undesirable to let them take charge of the company.

Consequently, the Applicant, claimed that the Guarantee it executed in favor of the Creditor in respect of the Corporate Debtor under Insolvency Resolution Process was not invoked by the Creditor, so as a result, it is not a defaulter under the Guarantee as given under Section 29A (h) and therefore, not ineligible to submit the Resolution Plan. On the other hand, the Committee of Creditors claimed that they had invoked the guarantee of the Applicant after the commencement of insolvency proceedings, which has not been satisfied by the Applicant, so disqualified under Section 29A (h) from submitting the Resolution Plan.

The NCLT passed the following Order:

1. Firstly, the object behind introducing Section 29A by way of Ordinance was not to disqualify the promoters/guarantors of the corporate debtor as a class from submitting a resolution plan. In fact, they are the most natural persons who are likely to submit a resolution plan during insolvency proceedings, unless the insolvency is caused due to their act or omission, fraud, deceit, etc. Rather, the intent of the Legislature was to exclude those classes of persons from offering a resolution plan, who on account of their antecedents may adversely affect the credibility of the processes under the Code. Moreover, if the entire class of promoters/guarantors, etc would be disqualified, then the provision would amount to be discriminatory and violative of Article 14 of the Constitution of India.
2. Secondly, after commencement of Insolvency Proceedings, the NCLT passed an order declaring moratorium for prohibiting the institution of any suit, proceeding, etc against the Corporate Debtor, the transfer of property of the Corporate Debtor, etc. The NCLT held that during the moratorium period, no guarantee can be invoked, thus, the Applicant cannot be held as a defaulter under the Guarantee and so, his case is not covered under the Clauses (c) and (h) of Section 29A and is eligible to submit the Resolution Plan.

Therefore, the NCLT held that Section 29A does not exclude all promoters/guarantors of a corporate debtor, etc as a class from submitting a resolution plan for the corporate debtor, but excludes only those, who on account of their antecedents may adversely affect the credibility or reliability of the insolvency process initiated under the Code such as willful defaulters, disqualified directors, etc.

Harini Daliparthy

Legal Associate