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The Top Court has held that promoter of a company cannot move an application for Compromise or arrangement under Section 230 of the Companies Act 2013, while it is under liquidation as that would resemble to a ‘back door entry’,  defeating the true objectives of the IBC proceedings.

A Division Bench of Justice D.Y. Chandrachud and Justice M.R. Shah, while dismissing the appeals held that, “prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC must also attach itself to a scheme of compromise or arrangement under Section 230 of the Act of 2013, when the company is undergoing liquidation under the auspices of the IBC. As such, Regulation 2B of the Liquidation Process Regulations, specifically the proviso to Regulation 2B(1), is also Constitutionally valid.”

Proposing a scheme of compromise or arrangement under Section 230 of the Companies Act 2013, while the company is undergoing liquidation under IBC lies in a similar continuum and therefore the prohibitions should follow unequivocally at both the ends, the Bench remarked.

NCLT allowed an application under Section 230 to Section 232 of the Companies Act, 2013 preferred by Mr. Arun Kumar Jagatramka (Appellant herein), promoter of Gujarat NRE Coke Limited (GNCL).

NCLAT reversed the said decision by its judgment dated 24.10.2019 and allowed the appeal by Jindal Steel and Power Limited (Respondents herein), holding that, a person who is ineligible under Section 29A of the IBC, 2016 to submit a Resolution Plan is also barred from proposing a scheme of Compromise and Arrangement under Section 230 of the Companies Act, 2013.

Mr. Arun Kumar Jagatramka assails the aforementioned order of the NCLAT, inter alia, on the ground that Section 230 of the Act of 2013 does not place any embargo on any person for the purpose of submitting a scheme. In the absence of any statutory disqualification, the NCLAT could not have read the ineligibility under Section 29A IBC into Section 230 Companies Act, 2013 as this would amount to a ‘judicial reframing’ of legislation, which is Impermissible.

Section 29A stipulates the category of persons who ‘shall not be eligible to submit a resolution plan’. The proviso to Section 35(1)(f) incorporates the same norm in the liquidation process, when it stipulates that the liquidator shall not sell the immovable and movable or actionable claims of the corporate debtor in liquidation ‘to any person who is not eligible to be a resolution applicant’.

Proviso to Regulation 2B Liquidation Process Regulations as amended by notification dated 6.01.2020 says, a party ineligible to propose a resolution plan under the IBC, cannot be a party to a compromise or arrangement under Section 230 of the Act of 2013.

Two Issues were framed by the NCLAT while addressing the Appeal:

(i) Whether in a liquidation proceeding under Insolvency and Bankruptcy Code, 2016, the Scheme for Compromise and Arrangement can be made in terms of Sections 230 to 232 of the Companies Act;

(ii) If so permissible, whether the Promoter is eligible to file application for Compromise and Arrangement, while he is ineligible under Section 29A of the I&B to submit a ‘Resolution Plan’

First issue was answered in affirmative by the Tribunal, to which there is no challenge.

On the submission that Section 230 Companies Act, 2013 is a standalone provision and must be understood independently, the Bench through Para 69 of the judgment said, “Undoubtedly, Section 230 of the Act of 2013 is wider in its ambit in the sense that it is not confined only to a company in liquidation or to corporate debtor which is being wound up under Chapter III of the IBC. Obviously, therefore, the rigors of the IBC will not apply to proceedings under Section 230 of the Act of 2013 where the scheme of compromise or arrangement proposed is in relation to an entity which is not the subject of a proceeding under the IBC. But, when, as in the present case, the process of invoking the provisions of Section 230 of the Act of 2013 traces its origin or, as it may be described, the trigger to the liquidation proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony. A harmonious construction between the two statutes would ensure that while on the one hand a scheme of compromise or arrangement under Section 230 is being pursued, this takes place in a manner which is consistent with the underlying principles of the IBC because the scheme is proposed in respect of an entity which is undergoing liquidation under Chapter III of the IBC. As such, the company has to be protected from its management and a corporate death. It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a compromise or arrangement under Section 230 of the Act of 2013.”

On the submission that reading the ineligibilities mentioned under Sections 29A and 35(1)(f) into Section 230 of the Companies Act, 2013, would be violative of Article 14 as the appellant will be ‘deemed ineligible’ to submit a proposal under Section 230 of the Act, Para 70 of the judgment clarified; “Stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages. Proposing a scheme of compromise or arrangement under Section 230 of the Act of 2013, while the company is undergoing liquidation under the provisions of the IBC lies in a similar continuum. Thus, the prohibitions that apply in the former situations must naturally also attach to the latter to ensure that like situations are treated equally.”

On the challenge to Regulation 2B of the Liquidation Process Regulations, Court called it only a clarificatory note stating that, “The object of the scheme of compromise or arrangement is to revive the company. The principle was enunciated in the decision in Meghal Homes while construing the provisions of erstwhile Section 391. The same rationale which permeates the resolution process under Chapter II (by virtue of the provisions of Section 29A) permeates the liquidation process under Chapter III (by virtue of the provisions of Section 35(1)(f)). That being the position, there can be no manner of doubt that the proviso to Regulation 2B is clarificatory in nature. Even absent the proviso, a person who is ineligible under Section 29A would not be permitted to propose a compromise or arrangement under Section 230 of the Act of 2013.”

Case Title: Arun Kumar Jagatramka v. Jindal Steel Ltd. | CIVIL APPEAL NO. 9664 of 2019

Provisions/Statute involved: Sections 29A, 35(1)(f) Insolvency and Bankruptcy Code 2016, Sections 230, 231, 232 Companies Act 2013, Regulation 2B Liquidation Process Regulation as amended in 2020.

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