Supreme Court Clarifies The Ineligibility Of Resolution Applicants Under The Insolvency And Bankruptcy Code

In a recent ruling, the Supreme Court bench comprising Justice Dinesh Maheshwari and Justice Vikram Nath in M.K. Rajagopalan v Dr. Periasamy Palani Gounder & Anr. has provided clarification regarding the eligibility of resolution applicants under the Insolvency and Bankruptcy Code, 2016 (IBC). The court held that a resolution applicant cannot be rendered ineligible to submit a resolution plan solely based on an assumed disqualification under Section 164(2)(b) of the Companies Act, 2013, unless a specific order disqualifying them as a director of any company is passed by the competent authority.

The case involved a petition filed by the Tourism Finance Corporation of India Limited under Section 7 of the IBC, seeking the initiation of a Corporate Insolvency Resolution Process (CIRP) against Appu Hotels Limited (the Corporate Debtor). The National Company Law Tribunal (NCLT) admitted the Corporate Debtor into CIRP in May 2020, and a resolution plan submitted by Mr. M.K. Rajagopalan (the Successful Resolution Applicant/SRA) was subsequently approved by the Committee of Creditors (CoC) and the NCLT.

However, the approval of the resolution plan was challenged before the National Company Law Appellate Tribunal (NCLAT), which rejected the plan on various grounds. The NCLAT declared the SRA ineligible based on their alleged disqualification under Section 164(2)(b) of the Companies Act, 2013, and Section 88 of the Indian Trusts Act, 1882.

The Supreme Court addressed the issue of whether the SRA was indeed ineligible to submit a resolution plan under Section 29-A(e) of the IBC due to their disqualification as a director under Section 164(2)(b) of the Companies Act, 2013.

Regarding the disqualification under Section 164(2)(b), which pertains to a director of a company that has failed to fulfill financial obligations, the court emphasized that unless a categorical order of disqualification is passed by the competent authority, the disqualification cannot be assumed. The court stated that the matter of disqualification should be considered by the registrar of companies, and only upon a specific order of disqualification can it be presumed that a resolution applicant is ineligible to act as a director and submit a resolution plan.

The court further clarified that there is no concept of “deemed disqualification” under Section 164(2)(b) of the Companies Act, 2013. It highlighted that the status of the SRA’s Director Identification Number (DIN) was “active compliant,” indicating their eligibility to act as a director. The declaration made by the NCLAT disqualifying the resolution applicant based on Section 164(2)(b) was deemed unwarranted and overstretched.

While the Supreme Court held that the SRA could not be declared ineligible under Section 164(2)(b), it also ruled that the resolution plan could not have been approved by the NCLT due to other reasons. Firstly, the Successful Resolution Applicant was found ineligible under Section 88 of the Indian Trusts Act. Secondly, the resolution applicant failed to present the revised resolution plan to the CoC before seeking approval from the NCLT. Therefore, the NCLAT’s order was set aside for the remaining issues.

The Supreme Court’s ruling in the M.K. Rajagopalan case provides important clarification regarding the eligibility of resolution applicants under the IBC. The court emphasized that a resolution applicant cannot be deemed ineligible solely based on an assumed disqualification under Section 164(2)(b) of the Companies Act, 2013, unless there is a specific order of disqualification issued by the competent authority. This decision reaffirms the significance of due process and the need for a clear and categorical finding before disqualifying a resolution applicant.