NCLAT upholds Section 29A(c) disqualification despite management control transfer being sham transaction to avoid IBC ineligibility

NCLAT dismissed an appeal challenging disqualification under Section 29A(c) of IBC. The appellant argued it was not in management control when corporate debtor's account became NPA in 2013, but tribunal held that ineligibility is determined at resolution plan submission date, not NPA declaration date. Following Supreme Court's Arcelormittal judgment, persons in management control at reasonably proximate time before plan submission who failed to clear debts are also disqualified. NCLAT found appellant controlled corporate debtor through MoU from March 2016 and that subsequent 100% shareholding transfer to subsidiary was a sham transaction to avoid disqualification.

---

---

Issues Involved:
1. Scope and ambit of Section 29A(c) of the Insolvency and Bankruptcy Code (IBC).
2. Whether the Appellant had control and management of the Corporate Debtor as per the MoU dated 23/28.03.2016.
3. Whether the transfer of 100% shareholding by the Appellant in its subsidiary RIPL on 22.09.2017 was a sham transaction.
4. Whether the Adjudicating Authority erred in holding the Appellant disqualified under Section 29A(c) of the IBC.

Summary:

Issue I: Scope and Ambit of Section 29A(c) of the IBC
The Tribunal examined whether Section 29A(c) disqualifies only those in management and control of the Corporate Debtor at the time it was declared NPA or also those in control at the time of submitting the Resolution Plan. The Tribunal concluded that Section 29A(c) disqualifies not only those who were in management and control when the Corporate Debtor was declared NPA but also those in control at the time of submitting the Resolution Plan if they failed to clear the debts. This interpretation aligns with the purpose of the amendment to prevent persons responsible for NPAs from regaining control of the Corporate Debtor.

Issue II: Control and Management as per MoU dated 23/28.03.2016
The Tribunal analyzed the MoU dated 23/28.03.2016 to determine if it transferred control and management of the Corporate Debtor to the Appellant. The Tribunal found that the MoU effectively transferred management and control to the Appellant from the effective date of the MoU, irrespective of the 51% equity investment. Various clauses of the MoU indicated that the Appellant was given affirmative rights and control over the Corporate Debtor's management from the effective date.

Issue III: Sham Transaction of Share Transfer on 22.09.2017
The Tribunal scrutinized the transfer of 100% shareholding by the Appellant in its subsidiary RIPL on 22.09.2017. The Tribunal concluded that the transaction was a sham, executed just six days before the initiation of CIRP, for a nominal consideration of Rs.1 lakh, despite a loan of Rs.328 Crores given to RIPL. The Tribunal noted that the transfer was to individuals connected to the Appellant, reinforcing the conclusion that it was a sham transaction.

Issue IV: Disqualification under Section 29A(c) of the IBC
The Tribunal upheld the Adjudicating Authority's decision that the Appellant was disqualified under Section 29A(c) of the IBC. The Tribunal found that the Appellant had control and management of the Corporate Debtor as per the MoU dated 23/28.03.2016 and failed to clear the debts, thereby meeting the disqualification criteria under Section 29A(c).

Conclusion:
The Tribunal dismissed the Appeal, affirming the Adjudicating Authority's order disqualifying the Appellant under Section 29A(c) of the IBC. The Tribunal also disposed of the Interlocutory Application No.3622 of 2023, directing the Adjudicating Authority to consider and pass appropriate orders in IA No.2230 of 2022 filed by THDC India Limited.

---