DILUTION OF SECTION 29A, IBC: OUTSIDE FUNDING OF THE REAL ESTATE

COMPANIES

Overview

The Insolvency and Bankruptcy Code, 2016 (“IBC/ Code”) is a renaissance when it comes to
the Indian legislations as multiple statistics and figures speak for its success in recovering
strangled assets and improving the overall position of our country in the ‘ease of doing
business’ index.

However, since its enactment, the Code is struggling with regard to the resolution of the Real
Estate Companies and thus they have had a chequered history under the Code. Initially, it was
decided that the only those homebuyers who have assured return plan are financial creditors
of the Real Estate Companies1 but due to the major real estate scams, the Government
included the all the homebuyers as financial creditors by amending Section 5(8)(f) of the
Code2 and the same passed the muster by the Supreme Court 3 (“SC”) as well. Now, owing to
numerous ongoing insolvency proceedings against the Real Estate Companies,4 the
Government recently prescribed a threshold for homebuyers to file insolvency application
under Section 7 of the Code,5 which is currently under challenge before the SC.6

This article analyses one such struggle that came into light by two recent judgments of the
National Company Law Appellate Tribunal (“NCLAT”) wherein the erstwhile promoters
have been allowed to enter into the resolution process and regain control of the corporate
debtor by acting as an external financer contrary to the mandates of Section 29A, IBC.

1
Endnotes

Nikhil Mehta & Sons v. AMR Infrastructure Ltd., Company Appeal (AT) (Insolvency) No. 07 of 2017.
2
Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, No. 26 of 2018, 17.08.2018.
3
Pioneer Urban Land & Infrastructure Ltd. & Anr v. Union of India, (2019) 8 SCC 416.
4
Homebuyers have filed over 1800 cases under insolvency law: Govt, 20.11.2019, LIVE MINT. Source:
<https://www.livemint.com/news/india/homebuyers-have-filed-over-1-800-cases-under-insolvency-law-govt-
11574257028086.html>
5
Insolvency and Bankruptcy Code (Amendment) Act, 2020, No. 1 of 2020, 13.03.2020.
6
Manish Kumar v. Union of India & Anr., 2020 SCC OnLine 384.
Dragnet of Section 29A

Section 29A of the IBC was inserted by an amendment7 to interdict the specified classes of
individuals from submitting a resolution plan under the code. It specifically bars the
promoters of the corporate debtor to be resolution applicants to ensure that they should not
through or by circular means come back in order to regain the company that they themselves
had run to the insolvency.8 There hasave been a catena of precedents on how this provision
should be construed harmoniously with the object sought to be achieved by it, which should
never be stultified or defeated. The SC in Arcelor Mittal v. Satish Kumar Gupta (2018), while
interpreting Section 29A ruled that the provision shall be given a purposive interpretation to
make sure that the disqualified persons, including the erstwhile promoters, shall not regain
the control of corporate debtor under the camouflage of Resolution Applicant.

Specifically, with regard to the Real Estate Companies, SC in the case of Chitra Sharma &
Ors. v. Union of India & Ors. (2018), concerning the Jaypee Infratech Limited disallowed the
plea of the holding company i.e., Jaiprakash Associates Limited (erstwhile promoters) to
participate in the resolution process owing to the mandate of clauses (c) and (g) of Section
29A of the IBC. Furthermore, the NCLAT itself in the matter of Jaypee Greens Krescent
Home Buyers Welfare Association & Ors. v. Jaypee Infratech Ltd ., (2019) ruled in
consonance with the Chitra Sharma supra and disallowed the erstwhile promoter and
connected persons from filing an ‘expression of interest’ or resolution plan for they were
found to be ineligible under the muster of Section 29A of the IBC.

Divergent Opinions by the NCLAT

NCLAT has recently diverted itself from the settled position under the code with regard to
Section 29A. In the case of Flat Buyer’s Association v. Umang Realtech Pvt. Ltd. (2020), it
devised “Reverse Corporate Insolvency Resolution Process” for the case of real estate
companies to explore the possibility of completing the resolution without the approval of a
resolution plan to be submitted by a resolution applicant. Consequently, in exercise of
inherent powers conferred under Rule 11 of the NCLAT Rules, 2016 the NCLAT allowed the

7
Insolvency and Bankruptcy Code (Amendment) Act, 2017, No. 8 of 2018, 18.01.2018.
8
Id., Statement of Objects and Reasons.
erstwhile promoter of the corporate debtor to assume the role of the financial creditor and
fund the project from outside.

The NCLAT yet again in Rajesh Goyal v. Babita Gupta (2020), upheld its observations and
directions given in the Flat Buyer’s (supra) and allowed outside funding by the promoter for
the corporate debtor being a real estate infrastructure company it inter alia also passed
directions as to the timelines for the completion of the project including construction,
furnishing, common areas etc.

Thus, the NCLAT’s ruling in these two specific cases is manifestly providing provides an
indirect backdoor entry to the promoters by helping them regain control of the corporate
debtor which in turn grossly violates the mandate and objective of Section 29A as discussed
hereinabove.

Unwarranted Experiments with the IBC

Whilst it is true that an economic legislation such as the IBC has to show readiness for
needful evolutions and experimentations. However, this domain lies with the legislature
supported by special regulatory bodies established under the statute as also emphasized by
the SC in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. (2019), and not with the
adjudicating authority under the Code.

NCLAT has effectively provided an exception to the Real Estate Companies and the same is
neither provided by the Code nor ever intended much less when there are quite many
amendments with regard to the real estate companies under the Code. The only exception
which was provided with regard to Section 29A is with regard to Micro Small and Medium
Enterprises (“MSMEs”) under Section 240A of the Code on the recommendation of the
Insolvency Committee Report of 2018. Hence, if at all there has to be an exception for the
Real Estate Companies, the same has to be provided by the legislature and NCLAT cannot
enter into the shoes of the legislature.

The rigor of Section 29A is unavoidable and is applicable even at the liquidation stage under
the Code, wherein initially the erstwhile promoters were allowed 9 to enter into a scheme of
9
S.C. Sekaran v. Amit Gupta & Ors., Company Appeal (AT) (Insolvency) No. 495 & 496 of 2018.
arrangement with creditors under by the virtue of Section 230 of the Companies Act. 2013
but later on the legislature amended the Liquidation Process Regulations, 2016 and clarified
that the persons disqualified under Section 29A are not allowed to propose any scheme of
arrangement.10

NCLAT has failed to take note of the non-derogable nature of Section 29A while allowing
the erstwhile promoters a chance to regain control of the company. It can be argued that this
was required considering the peculiar working model of real estate companies but
againhowever, the same has to be look intoexamined by the legislature and the judicial bodies
like NCLAT can at best recommend to bring about such changes.

Conclusion

The Aristotle quote “nothing is so unequal as the equal treatment of unequal people”
becomes relevant for the subject of this article in light of the fact that the approach of the
NCLAT is discriminating amongst the erstwhile promoters themselves. While some of the
real estate companies have been afforded with the exceptions as discussed hereinabove, some
are were/have been denied the same by the SC and NCLAT as well.

It is also essential to note that the interdictions under Section 29A intends to tear the
corporate veil of the entity and get to the real persons who present the resolution plan. Be
that as it may, the NCLAT in the abovementioned decisions overlooked the objectives of the
inclusion of this provision in the IBC by allowing the erstwhile promoter to become an
investor and manager for the corporate debtor rather than going for resolution as per the
scheme of law. Nevertheless, it has opened a floodgate as every other promoter will try to
regain the control over the company by relying on these cases. It is pertinent to mention that
even in cases where the erstwhile promoter was offering a higher bid (twelve thousand
crores) than the concerned resolution applicant, the SC had disallowed the plea.11

Lastly, it shall be borne in mind that the NCLAT is an adjudicatory body constituted under
the Code and not rather a consumer redressal commission trying to settle the disputes
10
Regulation 2(2B), Liquidation Process Regulations, 2016, Inserted by Notification No. IBBI/2019-
20/GN/REG053.
11
Arcelor Mittal v. Satish Kumar Gupta, (2019) 2 SCC 1.
between homebuyers and developers by giving a timeline to complete the strangled projects.
The praxis may be summed up as an exercise of judicial activism with no legal backings.