Supreme Court denies back-door entry of defaulting promoters u/s 29A of IBC in CIRP

The Supreme court 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 scheme of arrangement under Section 230 of the Companies Act, 2013.

A Division Bench of the Supreme Court comprising of Justices Dr. D.Y. Chandrachud and M.R. Shah was hearing a case on Monday.

By its judgment dated 24 October 2019, the National Company Law Appellate Tribunal held that a person who is ineligible under Section 29A of the Insolvency Bankruptcy Code, 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.

The judgment was rendered in an appeal filed by Jindal Steel and Power Limited, an unsecured creditor of the corporate debtor, Gujarat NRE Coke Limited. The appeal was preferred against an order passed by the National Company Law Tribunal in an application under Sections 230 to 232 of the Act of 2013, preferred by Mr. Arun Kumar Jagatramka, who is a promoter of GNCL. The NCLT had allowed the application and issued directions for convening a meeting of the shareholders and creditors. In its decision dated 24 October 2019, the NCLAT reversed this decision and allowed the appeal by JSPL. The decision of the NCLAT dated 24 October 2019 is challenged in the appeal before the Supreme Court.

Mr. Arun Kumar Jagatramka, assails the order dated 24 October 2019 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. According to the appellant, in the absence of a disqualification, the NCLAT could not have read the ineligibility under Section 29A of the IBC into Section 230 of the Act of 2013. This would, in the submission, amount to a judicial reframing of legislation by the NCLAT, which is impermissible.

The Supreme Court dismissed a petition filed by ex-promoter of Gujarat NRE Coke Arun Kumar Jagatramka, who had moved the court against an order of National Company Law Appellate Tribunal (NCLAT) making the ex-promoter ineligible for proposing the scheme of compromise or arrangement. under section 29A of IBC.

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.

"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," said the Supreme Court in its order.

The Supreme Court Bench, therefore, maintained that under the scheme of compromise or arrangement, an ineligible applicant barred under IBC should not be allowed to apply.

Click here to view the Judgment