SUPREME COURT HOLDS PROMOTER INELIGIBLE TO PROPOSE COMPROMISE OR ARRANGEMENT DURING LIQUIDATION OF COMPANY

The #SupremeCourt has in a recent case of Arun Kumar Jagatramka vs Jindal Steel and Power Ltd. & Anr. passed a Judgment dated 15-03-2021 and decided upon the issue whether a person who is #ineligible to submit a #resolutionplan under Section 29A of the #InsolvencyandBankruptcy Code 2016 (the Code) is also barred from proposing a scheme of #compromise and #arrangement under Section 230 of the #CompaniesAct 2013.

 

In this case, Gujarat NRE Coke Limited (GNCL), the Corporate Debtor, itself filed an Application under Section 10 of the Code to initiate Corporate Insolvency Resolution Process (CIRP) before the National Company Law Tribunal (NCLT), which was admitted on 07-04-2017.

 

Thereafter, Mr. Arun Kumar Jagatramka, the Promoter of the Corporate Debtor, (the Appellant herein) submitted a Resolution Plan on 01-11-2017 to the Resolution Professional (RP) that was put forth before the Committee of Creditors (CoC). The Plan was put to vote in a meeting of the CoC on 23-11-2017 to 24-11-2017.

 

Meanwhile, the Code was amended on 18-01-2018, wherein, Section 29A was introduced with retrospective effect from 23-11-2017. This provision lists out the persons who are ineligible to be resolution applicants. For instance, person who is an undischarged insolvent, or wilful defaulter, or has been convicted for any offence punishable with imprisonment for two years or more, or is disqualified to act as a director under the Companies Act, 2013, or has been a promoter or in the management or control of a corporate debtor in which a preferential/fraudulent transaction has taken place, etc.

 

As a result of the introduction of Section 29A of the Code, the Appellant became ineligible to submit Resolution Plan for the Corporate Debtor. Therefore, in absence of any resolution plan and upon expiry of 270 days of CIRP proceedings, the NCLT passed an Order of Liquidation dated 11-01-2018.

 

Aggrieved by the NCLT Order of Liquidation dated 11-01-2018, the Appellant filed an Appeal before the National Company Law Appellate Tribunal (NCLAT), which was dismissed vide Order dated 10-07-2018.

 

During the pendency of the Appeal before NCLAT, the Appellant-Promoter moved an Application under Sections 230-232 of the Companies Act, 2013 (the Act) before the NCLT proposing a Scheme for Compromise and Arrangement between the erstwhile Promoters and Creditors of the Corporate Debtor.

 

The NCLT allowed the said Application vide Order dated 15-05-2018 and directed the shareholders and creditors of the Corporate Debtor to convene a meeting for approval of the Scheme of Compromise and Arrangement.

 

Aggrieved by the said NCLT Order dated 15-05-2018, Jindal Steel and Power Limited, one of the Operational Creditors of the Corporate Debtor, filed an Appeal before the NCLAT, which was allowed. The NCLAT passed a Judgment dated 24-10-2019 and held that as the Appellant-Promoter is ineligible to submit a Resolution Plan under Section 29A of the Code, hence, he is barred from filing an Application under Sections 230 to 232 of the Act for Compromise and Arrangement on the following grounds:

 

1) That the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. Hence, the Corporate Debtor has to be saved from its own management.

 

2) Further, the Proviso to Section 35 (1) (f) of the Code provides that the liquidator shall not sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant.

 

3) Therefore, a promoter, who is ineligible under Section 29A of the Code to submit a resolution plan, cannot make an application under Sections 230 to 232 of the Act for compromise and arrangement for taking back the immovable and movable property or actionable claims of the corporate debtor.

 

Aggrieved by the NCLAT Judgment dated 24-10-2019, the Appellant-Promoter filed an Appeal before the Supreme Court on the ground that Section 230 of the Act does not place any embargo on any person for the purpose of submitting a scheme. The Apex Court made the following observations:

 

(1) That Section 230 of the Act provides that, in case of a company that is being wound up under the Code or otherwise and an application for compromise or arrangement has been proposed by a liquidator appointed under the Code or otherwise, the NCLT may order for a meeting of the creditors of such company and also sanction such compromise or arrangement for the purpose of reconstruction of the company. This shows that the object of both Section 230 of the Act and the provisions of the Code is re-organization and resolution of insolvencies; liquidation is a matter of last resort.

 

(2) However, Regulation 2B of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Regulations) provides that a person who is considered ineligible as per the provisions of the Code, cannot be a party to any compromise or arrangement proposed under Section 230 of the Act. Regulation 2B is reproduced below:

Where a compromise or arrangement is proposed under section 230 of the Companies Act, 2013 (18 of 2013), it shall be completed within ninety days of the order of liquidation under sub-sections (1) and (4) of section 33.

Provided that a person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to such compromise or arrangement.

 

(3) That the Code ensures that the interests of corporate enterprises are not conflated/combined with the interests of their promoters. The object behind introducing Section 29A of the Code was to prevent unscrupulous persons from gaining control over the affairs of the company, including those who by their misconduct have contributed to the defaults of the company. Hence, 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.

 

(4) That in the 2018 Amendment to the Code, where Section 29A of the Code was introduced, it stipulates the category of persons who “shall not be eligible to submit a resolution plan”. Further, in the same 2018 Amendment, the Proviso to Section 35 (1) (f) was added, which also provides for the same norm 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”. Thus, the norm underlying Section 29A pertaining to ineligibility of resolution applicants is also applicable to liquidation under Section 35 (1)(f).

 

The aforesaid grounds establish a connection between Section 230 of the Act and the provisions of liquidation under the Code and the Regulations. Therefore, the ineligibilities, prohibitions and disqualifications set out in Sections 29A and 35 of the Code will also attach to a scheme of compromise or arrangement proposed under Section 230 of the Act, when the company is undergoing liquidation proceedings under the Code.

 

Thus, the Apex Court held that as the Promoter-Appellant is ineligible under Section 29A of the Code to submit a resolution plan and be a part of the liquidation process of the Corporate Debtor under Section 35 of the Code, thus, he cannot be permitted to propose a compromise and arrangement under Sections 230 to 232 of the Act.

 

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer