The hon'ble Supreme Court, in a recent judgment titled as Arun Kumar Jagatramka vs. Jindal Steel and Power Limited and Another1 (along with two other matters), has held that a prohibition placed by the Parliament under Section 29A and Section 35(1)(f) of the Insolvency and Bankruptcy Code, 2016 (Code) must also attach itself to a scheme of compromise or arrangement under Section 230 of the Companies Act, 2013 (Act), when a company is undergoing liquidation under the auspices of the Code. Hence, a person who is ineligible under Section 29A of the Code to submit a resolution plan, cannot propose a scheme of compromise and arrangement under Section 230 of the Act. It is relevant to note that Section 29A of the Code has emerged as one of the key statutes in determining the eligibility of Resolution Applicants in the Corporate Insolvency Resolution Process (CIRP). Section 29A was inserted with retrospective effect from 23.11.2017. A second amendment to the Code, effective from 06.06.2018, included amendments to Section 29A. Sub-section (g) of Section 29A disqualifies a person from being resolution applicant if they have been the promoter or in the management or in control of a corporate debtor in which a preferential, undervalued, extortionate credit or fraudulent transactions has taken place and in respect of which an order has been made by the National Company Law Tribunal (NCLT) under the Code. Section 230 of the Act is incorporated in Chapter XV which is titled "Compromise, arrangement and amalgamations". As per this section, a compromise or arrangement may take place between a company and its creditors or any subset or creditors or between a company and its members or subset of members. Under Sub-section (6) of Section 230, a compromise or arrangement has to be agreed to by a "majority of persons representing 3/4th in value" of the creditors, members or a class of them.
FACTUAL MATRIX
Civil Appeal No. 9664 of 2019: Gujrat NRE Coke Limited (GNCL) filed an application under Section 10 of the Code for initiating the CIRP and the same got admitted on 07.04.2017. During the CIRP of GNCL, Mr. Arun Kumar Jagatramka i.e., the Promoter of GNCL submitted a Resolution Plan for GNCL on 01.11.2017 before the Committee of Creditors (CoC). In the interregnum, the Code was amended and Section 29A was introduced listing the persons not eligible to be resolution applicants. Due to the said amendment, Mr. Jagatramka became ineligible to submit the resolution plan. Since, no further resolution plan was approved by the CoC, the NCLT passed an order of liquidation of GNCL. The said order of liquidation was challenged by Mr. Jagatramka before the National Company Law Appellate Tribunal (NCLAT). While during the pendency of the appeal before the NCLAT, the said Mr. Jagatramka moved an application under Section 230 to 232 of the Act before the NCLT proposing a scheme for compromise and arrangement between the erstwhile promoters and creditors. The said application was allowed by the NCLT vide its order dated 15.05.2018 with a direction to hold meeting of Shareholders, Secured and Un-Secured Creditors and FCCB Holders for approval of the scheme of compromise and arrangement. Thereafter, one of the operational creditors i.e., Jindal Steel and Power Limited (JSPL) preferred an appeal against the order dated 15.05.2018 before the NCLAT. While allowing the appeal filed by JSPL, NCLAT vide its order dated 24.10.2019 held that promotors who were ineligible to propose a Resolution Plan under Section 29A of the Code are not entitled to file an application for compromise and arrangement under Section 230 to 232 of the Act. Hence, the order dated 24.10.2019 passed by the NCLAT was assailed before the hon'ble Supreme Court vide Civil Appeal No. 9664 of 2019.
Civil Appeal No. 2719 of 2020 – The CIRP of Su-Kam Power Systems Limited (Su-Kam), through a Section 7 petition, was initiated by the NCLT on 05.04.2018. When the Resolution Professional invited applications for resolution plans, Mr. Kunwer Sachdev, the Promoter of Su-Kam, along with Phoenix ARC Private Limited submitted a plan on 15.11.2018. Subsequent to the insertion of Section 29 A in the Code, Mr. Sachdev became ineligible to submit a resolution plan and consequently annulled his resolution plan. Thereafter, due to absence of any other resolution plan, the NCLT passed an order dated 03.04.2019 directing initiating liquidation of Su-Kam and appointment of a liquidator. In an appeal challenging the appointment of the liquidator, the NCLAT while upholding the appointment directed the liquidator to accept applications for schemes of compromise and arrangement under Sections 230 to 232 of the Act. Hence, when the liquidator invited expression of interest for submitting the scheme, Mr. Sachdev expressed his interest. However, the liquidator found Mr. Sachdev ineligible to submit the scheme. Accordingly, Mr. Sachdev challenged the liquidator's decision before the NCLT, which in turn dismissed the application vide order dated 31.10.2019 while relying upon the order dated 24.10.2019 passed in Mr. Jagatramka case. The appeal against the said order dated 31.10.2019 was also dismissed by the NCLAT and the Civil Appeal No. 2719 of 2020 was filed before the Supreme Court.
Writ Petition Civil No. 269 of 2020 – The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulation, 2016 (Liquidation Process Regulation) was amended and Regulation 2B was inserted vide a notification dated 25.07.2019, which provides for compromise and arrangement under Section 230 of the Act under the Liquidation Process. Subsequently, said Regulation 2B was amended vide notification dated 06.01.2020, which provides that a party ineligible to propose a resolution plan under the Code cannot be a party to a compromise or arrangement. Hence, the notifications dated 25.07.2019 and 06.01.2020 were assailed under Article 32 of the Constitution of India (Constitution) before the Supreme Court by Mr. Jagatramka, being ultra vires the Code and also violates Article 14, 19 and 21 of the Constitution.
ISSUE AND CONTENTIONS
The hon'ble Supreme Court framed the following issue:
"Whether a person who is ineligible under Section 29A of the Code is permitted to propose a scheme for revival under Section 230 of the Act at the stage of liquidation either themselves or in concert with others?"
Contentions of the Appellants - It was contended on behalf of the promoters of the respective corporate debtors that the ineligibility under Section 29A of the Code is only during the resolution process. Section 230 of the Act is a part of the settlement mechanism and is at par with the provisions of Section 12-A of the Code (which was inserted in the Code to permit the NCLT to allow withdrawal of an application filed under Section 7, 9 or 10 of the Code) and that the impact of compromise or arrangement is also that company is restored to the promoters with all its liabilities. It was further stated that while Section 12-A of the Code permits withdrawal of an application, Section 230 and 230-A of the Act envisages a compromise or arrangement. Hence, it was contended that they both form part of the settlement mechanism and are not part of the resolution mechanism, to which alone the ineligibility under Section 29A of the Code applies. It was further contended that Regulation 2B of the Liquidation Regulation is violative of Article 14, 19 and 21 of the Constitution as it seeks to import an ineligibility under the provisions of the Code to a dissimilar provision of the Act.
Contentions of the Respondents – It was contended by the Counsels for the Respondent that the basic principle is that the entity which is barred under Section 29 A and 35 (1)(f) of the Code should not be in control of the assets of the Corporate Debtor. The objective is that the defaulting promoters should not be in the driver's seat and should be kept at arm's length and in order to achieve the said objective, the Parliament had enacted amendments of both Section 29-A and Section (1)(f) to maintain a level playing field by comprehensively catering to all situations relating to defaulting or barred promoters. It was further contended that for Section 29A, the promoters would have got back into management after securing a haircut to lenders in the course of the resolution plans. Therefore, Section 29A which applies to the resolution process and Section 35(1)(f) which applies to the liquidation process were intended to plug a loophole.
FINDINGS
The hon'ble Supreme Court, while referring to Chitra Sharma vs. Union of India2 , Arcelormittal India Private Limited vs. Satish Kumar Gupta & Ors.3 , Swiss Ribbons Private Limited vs. Union of India4 , Phoenix ARC Private Limited vs. Spade Financial Services5 , Ramesh Kymal vs. M/s Siemens Gamesa Renewable Power Private Limited6 and Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited7 has held that the purpose of the ineligibility under Section 29A of the Code 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 part of the process of solution. The prohibition which has been enacted under Section 29A has extended to Chapter III while being incorporated in the proviso to Section 35(1)(f) of the Code. The court observed that provisions of the IBC contain a comprehensive scheme in which a revival is contemplated under the Code. The first of those modes is in the form of CIRP. The second mode is where the corporate debtor or its business is sold as a going concern within the purview of Regulation 32 of the Liquidation Regulation. The third is when a revival is contemplated through the modalities provided in Section 230 of the Act. The court further observed that 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. ,
As regards the challenge to the vires of Regulation 2B of the Liquidation Regulation, the hon'ble court has relied upon the principle enunciated in the decision of Meghal Homes Private Limited vs. Shree Niwas Girni K.K. Samiti8 . In the said case, while construing the provisions of erstwhile Section 391, the court has held that where a scheme of compromise and arrangement is proposed in respect of company in liquidation, additional requirements need to be established, namely that the scheme must be for the revival of the company. The impact of a scheme under Section 391 is that the proposers of the scheme enter into the management with a debt having been resolved. Hence, the court while relying upon Meghal (Supra) has held that 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)) and that being the position, there can be no manner of doubt that the proviso to Regulation 2B is clarificatory in nature. Hence, the hon'ble Supreme Court has held that even in the absence of 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.
CONCLUSION
The Supreme Court held that a person who is ineligible under Section 29A of the Code to submit a resolution plan, cannot propose a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013. The Code has made a provision for ineligibility under Section 29A which operates during the course of the CIRP. A similar provision is engrafted in Section 35(1)(f) which forms a part of the liquidation provisions contained in Chapter III as well. In the context of the statutory linkage provided by the provisions of Section 230 of the Act of 2013 with Chapter III of the IBC, where a scheme is proposed for a company which is in liquidation under the IBC, it would be far-fetched to hold that the ineligibilities which attach under Section 35(1)(f) read with Section 29A would not apply when Section 230 is sought to be invoked. Such an interpretation would result in defeating the provisions of the IBC.
Footnotes
1 Civil Appeal No. 9664 of 2019 with Writ Petition Civil No. 269 of 2020 and Civil Appeal No. 2719 of 2020 – Judgment dated 15.02.2021
2 (2018) 18 SCC 575
3 (2019) 2 SCC 1
4 (2019) 4 SCC 17
5 2021 SCC Online SC 51
6 CA No. 4050 of 2020, decided on 09.02.2021
7 (2020) 8 SCC 401
8 (2007) 7 SCC 753
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