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Supreme Court denies back-door entry of defaulting promoters in CIRP under section 29A of IBC
A Division Bench of the Hon’ble Supreme Court comprising Justices Dr. Dhananjaya Y. Chandrachud and M. R. Shah in the case of Arun Kumar Jagatramka v Jindal Steel and Power Limited and Another, REED 2021 SC 03546 observed that a promoter, who is barred under section 29A of IBC from bidding for his company undergoing insolvency proceeding, cannot also take control of the company back by using the provision of the scheme of arrangement under section 230 of the Companies Act, 2013. The salient facts of the case leading to the controversy, the issues involved and the judgment pronounced by the Supreme Court have been discussed below.
The National Company Law Tribunal (NCLT) admitted an application moved by Gujarat NRE Coke Ltd. (Corporate Debtor) under section 10 of the IBC for initiating the Corporate Insolvency Resolution Process (CIRP). Mr. Arun Kumar Jagatramka (Appellant) who is a promoter of the Corporate Debtor submitted a resolution plan, which was presented by the Resolution Professional (RP) before the Committee of Creditors (CoC). However, in the meantime, section 29A was inserted in IBC with the retrospective effect which, inter-alia, barred the promoter of Corporate Debtor from being the resolution applicants, thereby making the Appellant ineligible to submit Resolution Plan. In the absence of a resolution plan, the NCLT passed an order of liquidation.
Thereafter, the Appellant moved an application under sections 230 to 232 of the Companies Act before the NCLT proposing a scheme for compromise and arrangement between the erstwhile promoters and creditors, which was allowed by NCLT. Aggrieved, Jindal Steel and Power Ltd, (Respondent) who is the Operational Creditor of Corporate Debtor preferred an appeal before the NCLAT which vide judgment dated 24 October 2019 reversed the NCLT’s verdict and held that a person who is ineligible under section 29A of the IBC to submit a resolution plan cannot make an application for a scheme of compromise and arrangement under section 230 of the Companies Act, 2013. This decision of the NCLAT was challenged in the appeal before the Supreme Court.
Furthermore, the Liquidation Process Regulations, 2016 were amended by the Insolvency and Bankruptcy Board of India (IBBI) by a notification dated 25 July 2019, which inserted Regulation 2B and later through a notification dated 6 January 2020, by which a proviso was added to Sub-section (1) of Regulation 2B, which provides that a party ineligible to propose a resolution plan under the IBC cannot be a party to a compromise or arrangement. The Appellant also filed a writ petition under Article 32 of the Constitution challenging the above notifications.
The issues before the Supreme Court for its consideration were as follows:
(i) Whether a person who is ineligible under section 29A of IBC can propose a scheme for compromise and arrangement under section 230 of the Companies Act, 2013?
(ii) Whether Regulation 2B of the Liquidation Process Regulations, 2016 is ultra vires the IBC as well as the Companies Act and violative of Articles 14, 19, 21 of the Constitution?
Section 29A of IBC stipulates the category of persons who shall not be eligible to submit a resolution plan which includes the promoter of the Corporate Debtor. The underlying purpose of the ineligibility under section 29A, as lucidly elucidated in ArcelorMittal India Private Limited v. Satish Kumar Gupta and Others, REED 2018 SC 10541 and Swiss Ribbons Private Limited and Another v. Union of India and Others, REED 2019 SC 01504, is to achieve a sustainable revival and to ensure that a person who is the cause of the problem either by a design or a default cannot be a part of the process of solution. 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. Further, the liquidator appointed under section 34 of the IBC can take recourse to section 230 of the Companies Act, 2013 for compromise and arrangement between the erstwhile promoters of Corporate Debtor and creditors.
Thus, as in the present case, where the process of invoking the provisions of Section 230 of the Companies Act traces its origin to the liquidation proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony. Accordingly, 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 that 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 corporate death. Hence, the ineligibilities attach under section 35(1)(f) read with section 29A of IBC would apply when section 230 of Companies Act, 2013 is sought to be invoked when the company is undergoing liquidation under the auspices of the IBC.
"The rigours 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," said the Supreme Court in its order.
A "scheme of compromise or arrangement" under section 230 of the Companies Act, 2013 allows a defaulting company to enter into a compromise with the creditors. The same provision was incorporated in the liquidation regulations under the Insolvency and Bankruptcy Code, 2016. The Apex Court in its order held that section 230 of the Companies Act is not an independent provision when used in cases of liquidation under IBC.
As regards the legal validity of Regulation 2B of the Liquidation Process Regulations, the Supreme Court noted that even in the absence of this provision, a person ineligible under section 29A read with Section 35(1)(f) is not permitted to propose a scheme for revival under section 230, in the case of a company which is undergoing liquidation under the IBC. That being the position, the proviso to Regulation 2B is merely clarificatory in nature which was issued by IBBI in the exercise of its power conferred under IBC and consequently, it is constitutionally valid. In view of the foregoing reasons, the appeals along with the writ petition were accordingly dismissed. The Supreme Court, therefore, maintained that under the scheme of compromise or arrangement, an ineligible applicant barred under IBC should not be allowed to apply.