Introduction
When Parliament enacted Section 29A through the Insolvency and Bankruptcy Code (Amendment) Act, 2017, the legislative intent was unambiguous: to prevent the very promoters whose mismanagement had driven a company into insolvency from reacquiring it at a steep discount through the resolution process. The provision embodied a moral hazard concern that had dogged Indian corporate finance for decades. If a promoter could run up debts, refuse to repay, wait out the resolution process, and then buy back the distressed asset at a fraction of its value, the entire logic of the Insolvency and Bankruptcy Code (IBC) as a creditor-friendly statute would be undermined.
What has happened in the years since, however, tells a more complicated story. Section 29A’s eligibility criteria have been interpreted with an expanding sweep that now threatens to exclude not just wayward promoters but also private equity funds, foreign strategic investors, and asset reconstruction companies that have entirely legitimate interests in distressed Indian assets. The provision’s bite has proven sharper than its bark, and the resulting contraction in the pool of eligible resolution applicants has had measurable consequences on the quality and feasibility of resolution plans submitted under the IBC.
This article examines the legislative history of Section 29A, the landmark judicial interpretations that have shaped its application, the practical difficulties that have emerged particularly around the “connected persons” concept, and the reforms that are urgently needed to recalibrate the provision without abandoning its core purpose.
Legal Framework
Section 29A of the IBC disqualifies a person from submitting a resolution plan if they fall within any of the enumerated categories. These include, among others, a person who is an undischarged insolvent; who has been convicted of an offence punishable with two or more years of imprisonment; who is a promoter or in management or control of a corporate debtor in which a preferential, undervalued, extortionate credit transaction, or fraudulent transaction has been recorded; or who has an account classified as a non-performing asset (NPA) for more than a year from the date of commencement of resolution proceedings, unless they have made full payment of the outstanding debt, including interest.
The concept of “connected persons” in Section 29A(j) dramatically extends the reach of the disqualification. A person is also disqualified if they act jointly or in concert with a disqualified person, or if they are a related party of a disqualified person. “Related party” is defined by reference to Section 5(24) of the IBC, which in turn borrows heavily from the Companies Act, 2013. The width of this definition, which includes any company in which the disqualified person holds 20% or more of the share capital, or in which a director of the disqualified person is also a director, has proven to be the primary battleground in eligibility disputes.
Section 240A provides a limited exemption from Section 29A for MSMEs (Micro, Small and Medium Enterprises). In MSME insolvencies where the corporate debtor qualifies as an MSME, the promoter is not barred from submitting a resolution plan on the ground of NPA classification or on the ground of being a former promoter of the corporate debtor. This exemption reflects a recognition that the MSME sector has limited access to alternate management or capital, and the policy choice is to allow resolution rather than liquidation even if a promoter is involved.
The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, as amended periodically through 2022 and 2024, have sought to operationalise the Section 29A eligibility check. Resolution professionals are required to verify eligibility and obtain declarations from resolution applicants. The 2022 amendments introduced more structured disclosure requirements for resolution applicants regarding their “connected persons,” and the 2024 amendments clarified certain aspects of the NPA disqualification timeline.
Judicial Developments
The Supreme Court’s judgment in ArcelorMittal India Private Limited v. Satish Kumar Gupta (2018) remains the foundational precedent on Section 29A. The Court held that Section 29A is a disqualification provision and must be construed to advance the remedy that Parliament sought to provide. It rejected the argument that the provision should be read narrowly as a matter of penal construction, holding instead that the disqualification of connected persons must be read broadly to give effect to the legislative purpose of keeping “tainted” persons away from the resolution process.
The Court in ArcelorMittal also addressed the vexed question of the 20% shareholding threshold and the promoter concept in the context of a global steel company with shareholdings across multiple jurisdictions. It held that a person who “had management or control” of a corporate debtor at any time in the two-year period preceding the insolvency commencement date can be disqualified, not merely those in control at the date of application. This retrospective sweep added further uncertainty.
In Essar Steel India Ltd v. Numetal Ltd (2018), the Supreme Court confronted a situation where a bidder had connections to the original promoters of Essar Steel through shareholding structures. The Court required the bidder to cure the disqualification before being allowed to proceed. The judgment introduced the concept of a “cleansing” period, where disqualification arising from NPA accounts could be cured by making full payment of the outstanding amount, including interest and charges, by the date the resolution plan was submitted.
Subsequent NCLT and NCLAT decisions have grappled with the practical boundaries of “acting jointly or in concert.” In the Videocon Industries proceedings before NCLT Mumbai, objections were raised about the connected-person disqualifications affecting multiple bidders, illustrating how a web of corporate relationships in a large industrial group can make it exceedingly difficult to find resolution applicants who are wholly clean under Section 29A’s standards.
Contemporary Issues and Analysis
The most persistent practical problem with Section 29A is its effect on private equity investors and foreign strategic buyers. A global private equity fund that holds, through its portfolio, a 25% stake in some unrelated company that has an NPA account in India can find itself disqualified from bidding for a distressed Indian asset in an entirely different sector. The fund has no management control over the NPA-holding company, no ability to cure the NPA without the cooperation of that company’s management, and no logical connection to the insolvency being resolved. Yet the literal text of Section 29A, combined with broad judicial interpretations, places such a fund in a legally perilous position.
This problem has been extensively documented in the context of large stressed assets. For significant insolvencies such as those involving major steel, telecom, and real estate companies, the pool of potential bidders shrank measurably because sophisticated institutional investors were unwilling to take the legal risk of a Section 29A disqualification challenge, particularly when the NCLT process could result in an approved resolution plan being subsequently challenged and struck down on eligibility grounds.
IBBI’s quarterly reports from 2022 to 2024 reflect an increasing number of cases where no resolution plan was submitted, or only a single plan was received, partly attributed to the eligibility concerns. When competitive tension in resolution proceedings is reduced, the quality of resolution plans for creditors deteriorates and the likelihood of liquidation, with its attendant value destruction, increases.
The IBC’s design assumes that a competitive bidding process among multiple eligible applicants will maximise creditor recovery. Section 29A, as currently interpreted, works against this design in complex cases involving institutionally held companies. Asset reconstruction companies, which are natural buyers of distressed assets, have also faced questions about whether their portfolios of acquired NPAs create disqualifying connections.
A further complication arises from the interaction of Section 29A with the requirement to submit resolution plans within the statutory timeline of 180 days, extendable to 270 days. Eligibility challenges are frequently raised by competing bidders or creditors as a tactical device to eliminate competitors, and the time spent on eligibility litigation often compresses the period available for genuine plan finalisation.
Comparative and International Perspective
A comparison with other jurisdictions illuminates the distinctiveness of India’s approach. In the United States, Chapter 11 of the Bankruptcy Code does not impose eligibility restrictions on who may propose a reorganisation plan. The debtor in possession retains control and may propose the plan; competing plans may be proposed by creditors after the exclusivity period expires. There is no statutory bar on a promoter buying back the company through a plan, though the “absolute priority rule” and cramdown requirements ensure that creditors receive at least as much as they would in liquidation.
The United Kingdom’s administration process similarly imposes no eligibility restrictions on buyers of the business from the administrator. Pre-pack sales, which are sales arranged before appointment of the administrator, have attracted scrutiny over connected-party purchases, but the Insolvency Act 1986 and subsequent regulations handle this through disclosure and creditor approval requirements rather than outright disqualification.
Singapore’s Insolvency, Restructuring and Dissolution Act, 2018 includes judicial management and scheme of arrangement processes that similarly do not have an equivalent of Section 29A’s categorical disqualifications. Promoter buy-backs in restructurings are dealt with through court scrutiny of the fairness of the scheme and creditor voting.
India’s approach is therefore genuinely distinctive in its categorical statutory disqualifications. The rationale of preventing moral hazard is sound, but the instrument chosen has proven to be a blunt tool that does not adequately distinguish between connected persons who share culpability for the insolvency and those who are merely connected by corporate ownership structures in unrelated businesses.
Practical and Policy Implications
The Section 29A framework has created significant uncertainty costs for the resolution process. Legal due diligence on Section 29A eligibility has become a complex, expensive exercise for every potential resolution applicant, requiring mapping of corporate ownership chains across multiple jurisdictions, obtaining representations from portfolio companies, and making legal assessments under Indian law that are themselves uncertain given evolving judicial interpretation.
Banks and financial creditors on committees of creditors have reported frustration at the thinning of bidder pools for large stressed assets. When only one eligible bidder remains after Section 29A filtering, the creditor’s negotiating position is substantially weakened and the resolution plan offered tends to reflect lower recovery rates. The tension between preventing moral hazard and maximising creditor recovery is at its sharpest in these cases.
For MSMEs, the Section 240A exemption provides relief, but its scope is limited to insolvencies where the corporate debtor itself qualifies as an MSME. A promoter of a large company with MSME vendors and suppliers does not benefit from this exemption.
Suggestions and Reforms
Several reforms merit serious consideration. First, a safe harbour provision should be introduced for bona fide arm’s length investors. Where a potential resolution applicant holds shares in a connected entity but has no management control, no board representation, and no ability to influence that entity’s business decisions, they should not be disqualified by virtue of the connection alone. The safe harbour could be structured around a control-based test: disqualification should follow management control, not mere shareholding.
Second, the NPA-based disqualification should be subject to a proportionality requirement. The current rule, which disqualifies anyone with an NPA account for over a year regardless of the amount involved or the circumstances of the classification, is disproportionately broad. A de minimis threshold, combined with a carve-out for NPAs that are genuinely disputed, would be more calibrated.
Third, IBBI should issue comprehensive guidance on what constitutes “acting jointly or in concert” in the context of fund management structures, distinguishing between parallel portfolio investments by funds managed by the same fund manager and actual coordinated action. The current absence of such guidance leaves resolution applicants to navigate uncertain legal terrain.
Fourth, Parliament should consider introducing a competitive assessment by IBBI or a designated authority where only one eligible resolution applicant has been identified, requiring independent verification that the paucity of applicants is not attributable to overbroad Section 29A application rather than genuine market disinterest.
Fifth, the look-back period for disqualification based on management or control should be reduced from the current effectively unlimited retrospective application articulated in ArcelorMittal to a fixed two-year period, in line with the look-back periods used for avoidance transactions under the IBC.
Conclusion
Section 29A represents a genuine and important legislative commitment to preventing the abuse of the insolvency process by those responsible for corporate failures. Its enactment in 2017 was a direct response to documented instances of promoters gaming the earlier debt restructuring frameworks. The provision has succeeded in its core purpose of excluding egregiously dishonest promoters from the resolution process.
However, its expanding judicial interpretation and the breadth of the connected persons concept have created significant collateral damage. Legitimate institutional investors, foreign buyers, and asset reconstruction companies have been chilled in their participation in resolution proceedings. The resulting reduction in competitive tension has, in many high-profile cases, led to poorer outcomes for creditors and, ultimately, for the broader economy.
The path forward requires legislative precision rather than wholesale retreat. A control-based disqualification standard, a de minimis threshold for NPA-related disqualifications, and a statutory safe harbour for demonstrably arm’s length investors would preserve the provision’s core purpose while restoring the competitive dynamics that make the IBC’s resolution architecture work as Parliament intended.
