Introduction
In India IBC1 was enacted to streamline the resolution of corporate insolvency in a time-bound manner, fostering a new era of business restructuring. At its core, the IBC seeks to balance the interests of all stakeholders, primarily creditors, while providing a “clean slate” for distressed assets. However, a critical challenge has persisted since its inception: how to prevent unscrupulous promoters and related parties, who caused the corporate debtor’s downfall, from regaining control through indirect means? This is where the concept of beneficial ownership has emerged as a cornerstone of the IBC’s integrity.
The Problem of Proxies and Hidden Control
The IBC’s framework, particularly through the Corporate Insolvency Resolution Process (CIRP), is designed to attract genuine, eligible resolution applicants. But what happens when the applicant isn’t who they seem to be? Early on, it became evident that some individuals were using complex ownership structures—shell companies, cross-border entities, and layered trusts—to hide their true identity. The ultimate beneficial owner—the natural person who truly owns, controls, or benefits from the company—remained hidden. This practice allowed disqualified promoters to make a backdoor entry, essentially buying back their own company at a significant discount and undermining the very purpose of the Code. This wasn’t merely a procedural loophole; it was a fundamental threat to the fairness and credibility of the entire insolvency process.
The Judiciary’s Stand: Piercing the Veil
The judiciary, in its role as the ultimate guardian of the law’s intent, has consistently and forcefully condemned these attempts at subterfuge. In a series of landmark judgments, the Supreme Court has made it clear that the spirit of the IBC must prevail over technicalities.
One of the most pivotal cases was Arun Kumar Jagatramka v. Jindal Steel and Power Ltd2. The Supreme Court, in this judgment, gave a purposive interpretation to Section 29A of the IBC, which outlines the ineligibility criteria for resolution applicants. The Court emphasized that this section was specifically enacted to prevent “undesirable” persons from regaining control. It held that to fulfill this legislative intent, it is necessary to “lift the corporate veil” and identify the real controlling individuals behind a facade.
This principle was further solidified in Swiss Ribbons (P) Ltd. v. Union of India3, where the Supreme Court upheld the constitutionality of Section 29A. The Court’s reasoning was unambiguous: the provision was a necessary safeguard to “take out the corporate debtor from the clutches of those who brought it to insolvency.”
Perhaps the most significant clarification came in the Essar Steel case4. The Court explicitly stated that the eligibility criteria under Section 29A required an examination of both de jure (by law) and de facto (in practice) control. It extended the principles of “acting in concert” to a wider array of group companies and related parties, ensuring that layered ownership structures could not be used to bypass the law. The judiciary has also consistently applied this substance-over-form approach when dealing with avoidable transactions under the IBC, a clear signal that it will not tolerate any attempts to manipulate the process.
This unwavering judicial stance has been a critical deterrent, but the onus now falls on regulators to embed these principles more formally within the regulatory framework.
The IBBI’s Proactive Response: A Call for Greater Transparency
Recognizing these judicial precedents and the need for a more robust framework, the Insolvency and IBBI5 has issued a discussion paper proposing measures to enhance the integrity of the CIRP. The paper is a direct response to the challenges posed by complex ownership structures and the potential misuse of key IBC provisions, particularly Section 29A and Section 32A (which provides immunity to the corporate debtor after a successful resolution).
The IBBI’s proposals are designed to formalize and strengthen the due diligence process, making it harder for ineligible persons to participate. One of the key proposals is to mandate that the CoC6 formally deliberate and record its discussion on the resolution applicant’s eligibility under Section 29A. While the CoC is already expected to exercise commercial wisdom, making this a formal requirement will significantly enhance transparency and accountability.
What does this mean in practice? It means the RP7 will not only conduct due diligence but will also present their findings and the resolution applicant’s affidavit to the CoC in a dedicated session. CoC members will be encouraged to engage more deeply, ask for clarifications, and scrutinize the due diligence report. This explicit record will not only strengthen the integrity of the process but also serve as a powerful defense against potential litigation on eligibility-related issues. It moves the responsibility of ensuring eligibility from an implied duty to an explicit, recorded action.
A New Era of Disclosures: Beyond the Surface
The IBBI’s discussion paper also tackles the issue head-on by proposing to mandate enhanced disclosures in resolution plans regarding beneficial ownership.
How does this change the game? Currently, there is no stand-alone regulation in the CIRP specifically dedicated to beneficial ownership disclosures. While the RP’s due diligence and the applicant’s affidavit indirectly touch upon this, the proposed amendment would require a formal Statement of Beneficial Ownership as part of the resolution plan. This statement would detail all natural persons who ultimately own or control the applicant, including the entire shareholding structure and the jurisdiction of each intermediate entity. It would also be accompanied by a specific affidavit on eligibility for Section 32A immunity, a provision that gives the corporate debtor a “clean slate” but must not be misused by its past promoters.
This approach would bring the IBC’s disclosure requirements in line with other major laws like the Companies Act, 2013 and the PMLA8. The objective is clear: by demanding a structured and comprehensive disclosure, the IBBI aims to prevent conflicted or ineligible bidders from using layered corporate structures to hide their identity.
Conclusion
The proposed regulatory amendments, driven by a deep understanding of judicial pronouncements, represent a pivotal step in the IBC’s maturation. By formally embedding the judiciary’s “purposive interpretation” into the fabric of the CIRP, the IBBI is creating a powerful synergy between legal precedent and regulatory practice. The future ramifications are clear: a more robust, transparent, and credible insolvency ecosystem. This move will not only embolden genuine investors, assuring them that they are competing on a level playing field, but also significantly raise the bar for the due diligence process. The Resolution Professional’s role will evolve from a procedural verifier to a more comprehensive custodian of integrity, armed with a clear mandate to ensure the CoC’s deliberations are both rigorous and well-documented.
Yet, as with any sophisticated regulatory framework, a new question inevitably rises on the horizon: how will this enhanced due diligence fare against ever more intricate and multi-jurisdictional ownership structures? While the new mandates provide a clear framework for domestic scrutiny, the globalized nature of corporate finance means beneficial ownership can be layered across jurisdictions with vastly different disclosure laws. This raises a new challenge for the IBC: will the new regulations be sufficient to penetrate complex foreign trusts, nominee arrangements, or obscure private investment vehicles? The success of this new era of transparency will ultimately be judged by its ability to close these potential loopholes before they can be exploited.
The IBC’s journey is a testament to its adaptive nature, a continuous cycle of refining rules to outpace those who seek to circumvent them. The shift from a reactive, court-led response to a proactive, regulatory stance is a powerful signal that the system is committed to preserving its core principles. These measures are not just about adding new clauses to a rulebook; they are about fortifying the very foundation of the Code. The ultimate goal remains to ensure that the “clean slate” promised to distressed corporate debtors is a privilege earned by bona fide resolution applicants, never a backdoor reward for those who contributed to the downfall in the first place. This ongoing evolution is not just a necessity—it is the very essence of a fair and just insolvency regime.
Citations
- Insolvency and Bankruptcy Code, 2016
- Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. (2021) 7 SCC 474
- Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17
- Committee of Creditors of Essar Steel India Limited (through Authorized Signatory) v. Satish Kumar Gupta & Ors., (2020) 8 SCC 531
- Bankruptcy Board of India
- Committee of Creditors
- Resolution Professional
- Prevention of Money Laundering Act, 2002
Expositor(s): Adv. Anuja Pandit
