Person ineligible u/s 29A of IBC to submit resolution plan, barred from proposing scheme of compromise & arrangement

Person ineligible u/s 29A of IBC 2016 to submit a resolution plan, also barred from proposing a scheme of compromise and arrangement u/s 230 of the Companies Act 2013

ABCAUS Case Law Citation
ABCAUS 3473 (2021) (03) SC

Important case law relied referred:
Swiss Ribbons Private Limited vs. Union of India 2019) 4 SCC 17
Y Shivram Prasad vs. S Dhanapal 2019 SCC OnLine NCLAT 172
Brilliant Alloys (P) Ltd. vs. S Rajagopal 2018 SCC OnLine SC 3154
Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta (2020) 8 SCC 531
Meghal Homes Pvt. Ltd.  vs Shree Niwas Girni K. K. Samiti (2007) 7 SCC 753
Chitra Sharma v. Union of India (2018) 18 SCC 575
Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors.

In an appeal filed by an unsecured creditor of the corporate debtor, the National Company Law Appellate Tribunal (NCLAT) 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 appellant had challenged the said order of on the ground that Section 230 of the Companies Act 2013 does not place any embargo on any person for the purpose of submitting the said scheme.

In the instant case, the appellant who was a promoter of the corporate debtor had moved an application u/s 10 of the IBC 2016 before the NCLT for initiating the Corporate Insolvency Resolution Process (CIRP).

However, the IBC was amended by the Insolvency and   Bankruptcy Code (Amendment) Act, 2018 and by virtue of Section 29A, the appellant became ineligible to submit a resolution plan.

In the absence of a resolution plan, the NCLT passed an order of liquidation. The order of the NCLT ordering liquidation was challenged in appeal by the appellant before the NCLAT. The appeal was dismissed by the NCLAT. 

During the pendency of the appeal before NCLAT, the appellant moved an application under Sections 230 to 232 of the Companies Act 2013 before the NCLT proposing a scheme for compromise and arrangement between the erstwhile promoters and creditors.  This application was allowed by the NCLT and a direction was issued for convening of a meeting for approval of the scheme of compromise and arrangement.

However, an operational creditor of the company of the appellant preferred an appeal against the order of the NCLT before the NCLAT.  The NCLAT allowed the appeal by the impugned order holding that promoters who are ineligible to propose a resolution plan under Section 29A of the IBC are not entitled to file an application for compromise and arrangement under Sections 230 to 232 of the Act of 2013.

The Hon’ble Supreme Court stated that primarily, the IBC is a legislation aimed at re-organization and resolution of insolvencies.  Liquidation is a matter of last resort. These objectives can be achieved only through a purposive interpretation which requires courts, while infusing meaning and content to its provisions, to ensure that the problems which beset the earlier regime do not enter through the backdoor through disingenuous stratagems.

The Hon’ble Supreme Court went through its various judgments on the subject and observed that it had been held that Section 29A has been enacted in the larger public interest and to facilitate effective corporate governance.  It was further held that Parliament rectified a loophole in the Act which allowed backdoor entry to erstwhile managements   in the CIRP.

In another case, the Hon’ble Supreme Court had held that the norm underlying Section 29A continues to permeate Section 35(1)(f) when it applies not merely to resolution applicants, but to liquidation also. The plea that Section 35(1)(f) is ultra vires was also rejected.

The Hon’ble Supreme Court further observed that under Sub-section (6) of Section 230, the comprise 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. Upon the sanctioning of the compromise or arrangement by the NCLT, it binds the company, all the creditors or members or a class of them, as may be, or in the case of a company being wound up, the liquidator appointed under the Act of 2013 or the IBC and the contributories.

The Hon’ble Supreme Court further noted that there is no reference in the body of the IBC to a scheme of compromise or arrangement under Section 230 of the Companies Act 2013.  Sub-section (1) of Section 230 was however amended in 2016 to allow for a scheme of compromise or arrangement being proposed on the application of a liquidator who has been appointed under the provisions of the IBC.

The Hon’ble Supreme Court observed that NCLAT in the course  of its one decision observed  that  during  the  liquidation  process  the steps which are required to be taken by the liquidator include a compromise or arrangement in terms of Section 230 of the  Companies Act  2013, so as to ensure the revival and  continuance of the corporate debtor by protecting it from its  management  and  from  “a  death by liquidation”.  The decision by NCLAT took note of the fact that while passing the order under Section 230, the Adjudicating Authority would perform a dual role:  one as the Adjudicating Authority in the matter of liquidation under the IBC and the other as a Tribunal for passing an order under Section 230 of the Act of 2013. Following the decision of NCLAT, an amendment was made in 2019 to the Liquidation Process Regulations by the IBBI so as to refer to the process envisaged under Section 230 of the Act of 2013.

The Hon’ble Supreme Court stated that it is difficult to accept the submission of the appellant that Section 230 of the Companies Act 2013 is a standalone provision which has no connect with the provisions of the IBC. 

The Hon’ble Supreme Court stated that undoubtedly, Section 230 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 Companies Act 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  traces  its  origin  or,  as it may be described, the trigger  to the liquidation proceedings which had 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 Companies Act 2013.

The Hon’ble Supreme Court 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 Companies Act 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), was also held to be constitutionally valid.

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