Section 29A(c) of the IBC and the Trouble with Subhkam: A Purposive Reading of Control

[Vedant is a student at National Law School of India University.]

In ArcelorMittal India Private Limited v. Satish Kumar Gupta (ArcelorMittal), the Supreme Court read the phrase “management or control” in Section 29A(c) of the Insolvency and Bankruptcy Code 2016 (IBC) to mean only positive or proactive control. It did so by borrowing the reasoning of the Securities Appellate Tribunal (SAT) in Subhkam Ventures (I) Private Limited v. SEBI (Subhkam), where control under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (SAST) was construed the same way. That transplant now shapes the central resolution plan disqualification mechanism under the IBC and has made it easier for promoters holding only negative or protective rights over a defaulting corporate debtor to escape the bar.

This piece argues that the Subhkam transplant is unsound when applied to Section 29A(c), and that the provision instead demands a purposive construction. It has two strands: that Subhkam ought never to have been transplanted, and that, even if ArcelorMittal can stand without it, the Supreme Court, the National Company Law Appellate Tribunal (NCLAT) the National Company Law Tribunal have already moved towards a purposive method that Section 29A(c) accommodates and its policy demands.

Why Subhkam Should Not Have Been Transplanted

The SAST and the IBC regimes pull in opposite directions. SAST, framed on the recommendations of the Bhagwati and Achuthan Committees, is a public-shareholder protection device whose aim is to give non-controlling shareholders a fair exit when control of a listed target changes hands under the open-offer triggers in Regulations 3 and 4. An over-broad reading of control there creates real mischief, trapping minority financial investors who negotiate veto covenants only to protect their investment into mandatory open offers and stalling capital formation. Subhkam was therefore a minority-investor protective doctrine designed to narrow the regulatory net.

Section 29A(c) was inserted by the 2017 Ordinance against the opposite anxiety. The Statement of Objects and Reasons, the Insolvency Law Committee Report of March 2018, and the Supreme Court in Chitra Sharma v. Union of India describe it as an anti-circumvention gatekeeping device meant to keep errant promoters of defaulting corporate debtors from buying back their own companies through the resolution process at a discount. A narrow reading of control defeats that object, while a broad reading vindicates it. The question SAST asks, whether an acquirer has crossed a threshold that entitles public shareholders to an exit, cannot mechanically supply the answer to the very different question Section 29A(c) asks, whether an applicant had sufficient nexus with a defaulting entity to be an unsuitable rescuer of another distressed company.

The SAT order in Subhkam was also denuded of precedential value by a three-judge bench of the Supreme Court in SEBI v. Subhkam Ventures (I) Private Limited on 16 November 2011, which disposed of the appeal while clarifying that the order would not be treated as a precedent. Under Article 141, that direction binds every court and tribunal in India, leaving the SAT order with persuasive weight at most. ArcelorMittal nowhere engages with the 2011 order. It invokes the Subhkam reasoning to import a positive-control test into Section 29A(c) without citing the order that had stripped it of binding force. The SAT later relied on ArcelorMittal's approval of Subhkam to revive the latter's precedential status in Vishvapradhan Commercial Private Limited v. SEBI, completing a circular revival.

Even on its own terms, the reading sits uneasily with the text. The court's reliance on noscitur a sociis, by which management and control take colour from one another and both denote positive control, reads the disjunctive “or” out of the provision. Section 29A(c) speaks of an account under the management or control of the applicant, or of whom such person is a promoter. The disjunction requires each term to operate independently. A promoter under Section 2(69) of the Companies Act 2013 may hold nothing more than veto rights in a shareholders agreement, a purely negative position, and still fall within the bar.

Parliament has, moreover, already calibrated Section 29A(c) with several safety nets: the one-year NPA window excludes fresh defaults, the first proviso allows a cure through payment of overdue amounts, the second proviso carves out unrelated financial entities, and Explanation I gives a three-year grace period for entities that acquired NPAs through earlier resolution processes. Layering a judicial positive-control test on top produces double under-inclusion: the statutory nets already moderate over-breadth, and the transplant then strips out a further class of defaulter-promoters Parliament intended to capture. Defaults are caused as often by obstructive negative control as by positive control. A promoter who vetoes equity infusion, asset disposal or executive appointments can starve a company of capital and renewal. The SAT itself recognised this in Rhodia SA v. SEBI, holding that contractual veto rights over fundamental matters could amount to control in substance, a decision ArcelorMittal did not address.

The Post-ArcelorMittal Purposive Turn

Even granting that ArcelorMittal stands independently of Subhkam, the courts and tribunals have moved towards a purposive method incompatible with a rigid positive-control test. Five decisions show this.

Phoenix ARC Private Limited v. Spade Financial Services Limited concerned the exclusion of related parties from the committee of creditors under Section 21(2). The Supreme Court looked through corporate veils and examined overlapping personnel, family ties and collusive transactions to find a deep entanglement between the debtor's promoter and the alleged creditors. That web-of-entanglements method is the antithesis of ArcelorMittal's formalism. If the IBC's anti-circumvention philosophy demands a purposive look-through under Section 21(2), it demands the same under Section 29A(c), which uses even broader language.

In Arun Kumar Jagatramka v. Jindal Steel and Power Limited, the court extended the Section 29A bar to schemes of compromise or arrangement under Section 230 of the Companies Act 2013 when the debtor is in liquidation, though a bare reading would have confined the section to resolution plans under the IBC. It held that the disqualification permeates Regulation 2B of the liquidation process regulations and Section 230 schemes, reasoning that a person who is the cause of the problem cannot be part of the solution. If the court will expand the reach of Section 29A purposively, it is incoherent to narrow its substantive trigger by formalism.

Bank of Baroda v. MBL Infrastructures Limited is the most significant. The court held that the words such creditor in Section 29A(h) must mean similarly placed creditors once a resolution process has begun, because that process is a proceeding in rem. The disqualifying nexus was found in the substance of the guarantor relationship, not its form, and the court expressly invoked the need for a purposive interpretation drawn from the same Statement of Objects and Reasons that animates Section 29A(c).

Avantha Holdings Limited v. Abhilash Lall challenged NTPC's eligibility under Section 29A(c). NTPC's joint-venture entities had been classified as NPAs with effect from a backdated date that, if used, would have crossed the one-year window and made NTPC ineligible. The NCLAT refused to let the formal classification mechanism defeat the policy of the provision, since accepting backdated NPA dates would let financial institutions sidestep the statutory prescription at will. The same purposive method that resisted an over-formalistic reading of the one-year filter would, applied symmetrically, resist an under-formalistic reading of the control trigger.

Navayuga Engineering Co Limited v. Umesh Garg is the clearest case of an elastic, substance-driven trigger. Navayuga argued that because it acquired management rights through a 2016 memorandum of understanding, after the debtor's NPA classification in 2013, it fell outside Section 29A(c). The NCLAT disagreed, holding that the provision disqualifies not only those in management when the account was classified but also those in control in close proximity of time, before submission of the resolution plan, who failed to clear the debtor's debts. The decisive test was a factual assessment of de facto control proximate to plan submission.

Read together, these decisions show that the operative Section 29A(c) test is, in practice, a substance-over-form inquiry into the applicant's nexus with the defaulting entity. Tribunals invoke ArcelorMittal for the positive-control test while deciding on functional indicia of nexus.

Conclusion

In sum, Subhkam should never have been transplanted: SAST and the IBC pursue divergent objectives, the SAT order was non-precedential by direct Supreme Court fiat, and the positive-control reading under-includes the negative-control defaulter-promoters Parliament meant to capture. Even if ArcelorMittal stands on independent textual grounds, the courts have already embraced a purposive method incompatible with rigid formalism.

The case is therefore for a functional reading of Section 29A(c), on which management or control reaches those who, through veto rights, beneficial ownership, group structures, board nominees or close proximity in time and influence, held a meaningful nexus with the NPA classification. The statutory filters, the one-year window, the cure proviso, the financial-entity carve-out and Explanation I, already perform the calibration that Subhkam's minority-investor concern was meant to address, which makes the transplant redundant. Subhkam asks whether public shareholders deserve an exit when the steering wheel changes hands. Section 29A(c) asks whether the previous driver should be allowed to drive a different car. Using one answer for both invites inconsistency, and keeping them distinct is the simplest way to be true to both regimes.