When the first resolution plan under the Insolvency and Bankruptcy Code (IBC) was approved in August 2017, it sent shockwaves through India’s financial system. A related party regained control of the insolvent company, while creditors absorbed a 94 per cent haircut. The episode exposed a deep vulnerability in the newly minted insolvency framework and raised an uncomfortable question: could the IBC become a mechanism for errant promoters to shed debt and reclaim assets without accountability?
Why Section 29A Was Introduced
The government’s response was swift. Section 29A was inserted into the IBC to bar defaulting promoters and other tainted actors from bidding for their own stressed assets. At the time, India was grappling with the “twin balance-sheet problem” — over-leveraged corporations and stressed banks — and confidence in the insolvency regime was fragile.
Section 29A sought to restore moral discipline by drawing a clear line between resolution and reward. Insolvency, it made clear, could not be a route to debt forgiveness followed by promoter redemption.
How Clause (c) Operates Today
Among the various disqualifications under Section 29A, clause (c) has proved the most contentious. It bars promoters of companies whose accounts have been classified as non-performing assets (NPAs) for at least one year before the commencement of the Corporate Insolvency Resolution Process (CIRP) from submitting resolution plans.
In practice, this produces anomalous outcomes. A promoter controlling several companies with long-standing NPAs may continue in business so long as none of those firms enters CIRP. Conversely, a promoter of a single company with a relatively modest NPA loses control once insolvency proceedings begin. Disqualification thus hinges less on conduct and more on whether creditors choose to trigger CIRP.
Form Over Substance in NPA-Based Disqualification
The distortion runs deeper. Clause (c) treats all NPAs alike, regardless of their scale, duration, or cause, while ignoring large defaults to non-bank creditors altogether. As a result, a promoter with small bank defaults may be disqualified, while another with massive non-bank defaults remains eligible.
By privileging formal classification over economic reality, the provision weakens the principle of equality and severs the link between culpability and consequence.
Ignoring Business Cycles and Sectoral Shocks
NPA classification often reflects systemic or sector-wide stress rather than promoter malfeasance. Entire industries — notably thermal power and steel — faced acute distress in the mid-2010s due to coal block cancellations and global price collapses, factors largely outside promoter control.
In a market economy, business failure is not an aberration but an inevitability. Bankruptcy law that fails to distinguish honest failure from fraud risks chilling entrepreneurship and undermining long-term growth.
Value Destruction Through Exclusion
By barring promoters solely on the basis of NPA duration, clause (c) often excludes the stakeholder with the deepest institutional knowledge of the asset. Strategic buyers may lack the appetite for complex turnarounds, while financial investors may lack operational expertise. The result is frequently a failed CIRP and eventual liquidation — the worst possible outcome for creditors.
The problem is compounded by the breadth of disqualification. Section 29A extends not only to the promoter but also to persons acting in concert and connected persons, casting an exceptionally wide net that can deter genuine “white knights” from participating in rescue efforts.
The MSME Exception and Its Implications
Section 240A exempts micro, small and medium enterprises (MSMEs) from the rigours of clause (c), allowing their promoters to bid for their companies despite NPA status. This carve-out implicitly recognises that NPA classification is not a proxy for moral turpitude.
Yet the logic creates a jurisprudential inconsistency. If MSME promoters deserve a conduct-based assessment, large corporate promoters facing comparable circumstances merit the same treatment. Moral culpability cannot reasonably depend on the size of the balance sheet.
Over-Inclusive and Under-Inclusive at Once
Clause (c) illustrates a broader paradox. Section 29A is simultaneously over-inclusive and under-inclusive. It excludes promoters whose failure is contextual and honest, while clauses dealing with wilful default or avoidance transactions disqualify only after final determination — allowing even suspect actors to participate until culpability is conclusively established.
The regime thus penalises misfortune more swiftly than misconduct.
The Case for Calibration, Not Repeal
This is not an argument for dismantling Section 29A or reviving promoter impunity. Moral hazard remains real, and the law must bar those who have stripped value or acted fraudulently, based on credible forensic evidence.
But in today’s evolved insolvency landscape, the challenge is subtler: preventing abuse without extinguishing value. Section 29A served an essential purpose at a particular moment. Its future relevance depends on recalibration — distinguishing fraud from failure, discipline from over-deterrence, and moral blame from commercial misfortune.
What to Note for Prelims?
- Objective of Section 29A under the IBC.
- Meaning of NPA and CIRP.
- Role of Section 240A for MSMEs.
What to Note for Mains?
- Critically examine the impact of Section 29A on value maximisation under the IBC.
- Discuss whether NPA-based disqualification adequately captures promoter culpability.
- Evaluate the need for recalibrating insolvency law to distinguish fraud from business failure.
