The Fund with an NPA in Its Portfolio
Orion Textiles Ltd is in CIRP. Meridian Capital Partners (MCP), a private equity fund, submits a resolution plan offering ₹80 crore to financial creditors. MCP holds 74% of Sunrise Spinning Mills and has nominated two of Sunrise’s four directors. Sunrise’s term loan was classified as NPA by its bank on 1 March 2024 and remains unpaid. MCP’s director, Mr. Rao, was a director of Orion until 2022 and had given a personal guarantee for Orion’s loan; the guarantee has been invoked by Bank P and remains unpaid. MCP argues that (i) Sunrise is not the corporate debtor in this CIRP, (ii) MCP is only an investor, not a promoter of Sunrise, and (iii) Mr. Rao has resigned from MCP’s board with effect from the date of plan submission. The CoC, which wants a high recovery, asks the RP whether the plan can be placed for voting.
1. Is MCP eligible under section 29A? Analyse clause (c) and the connected-person route.
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MCP is likely ineligible, principally under s.29A(c). That clause disqualifies a person who, at the time of submitting the plan, has an account - or an account of a corporate debtor under that person’s management or control, or of which that person is a promoter - classified as NPA for at least one year and unpaid. Sunrise is a corporate debtor; MCP holds 74% and two of four nominee directors, so Sunrise is under MCP’s management/control on these facts. The NPA classification dates from 1 March 2024, more than a year before the plan submission, and is unpaid.
The argument that Sunrise is not the corporate debtor in this CIRP misses the point: s.29A(c) deliberately reaches accounts of other corporate debtors controlled by the applicant. MCP’s “investor only” label is also not decisive; control is factual. Separately, Mr. Rao’s guarantee for Orion is an enforceable guarantee in favour of a creditor of a corporate debtor in CIRP, attracting s.29A(h); if he is a director or connected person of MCP, s.29A(j) may also be triggered. A resignation on the date of submission may not cure the position because eligibility is tested at submission and the guarantee remains outstanding. The RP should reject the plan unless the disqualification is genuinely removed.
2. Can the CoC waive the disqualification by a 100% vote, and what should the RP do?
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No. Section 29A is a statutory eligibility filter, not a commercial term that the CoC can waive. The CoC’s power under s.30(4) is to approve or reject a plan that is otherwise compliant; it cannot confer eligibility on a person whom the Code disqualifies. If the RP places an ineligible plan before the CoC and it is approved, the Adjudicating Authority can reject it under s.31 for contravening the Code.
The RP should record the verification findings, give MCP a limited opportunity to cure (for example, by demonstrating that Sunrise is not under its management or control, or that the guarantee is not enforceable), and if the disqualification persists, decline to include the plan in the CoC’s voting list. High recovery does not override eligibility.
3. If MCP’s plan is the only plan and liquidation would yield only 20%, is there any discretion to accept it?
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No. The Code seeks to maximise value, but it does so within the s.29A framework. An ineligible applicant cannot be approved merely because the alternative is a low-recovery liquidation. The CoC may explore other options - inviting fresh plans, negotiating with eligible applicants, or proceeding to liquidation - but it cannot approve a plan that fails a mandatory eligibility condition. The Adjudicating Authority would also be acting contrary to s.31 if it approved such a plan. The RP’s duty is to apply the statute, not to trade eligibility for recovery.