The Supreme Court on Monday held that a person who is ineligible under Section 29A of the Insolvency and Bankruptcy Code (IBC) to submit a resolution plan is barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013.
The top court upheld the vires of Regulation 2B of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 which states that a person who is not eligible under the IBC 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.
“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 of 2013,” the Court said.
The judgment was rendered by a Bench of Justices DY Chandrachud and MR Shah in an appeal against a judgment of the National Company Law Appellate Tribunal (NCLAT) date October 24, 2019.
The NCLAT had held that a person who is ineligible under Section 29A of the IBC to submit a resolution plan, is also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013.
NCLAT judgment was rendered in an appeal filed by Jindal Steel and Power Limited, an unsecured creditor of the corporate debtor,Gujarat NRE Coke Limited.
Arun Kumar Jagatramka, a promoter of GNCL, assailed the NCLAT judgment, inter alia, on the ground that Section 230 of the Companies Act of 2013 does not place any embargo on any person for the purpose of submitting a compromise scheme.
The IBC was amended by the Insolvency and Bankruptcy Code (Amendment) Act, 2018. Section 29A which was inserted with retrospective effect from 23 November 2017 provides a list of persons who are ineligible to be resolution applicants.
Due to the insertion of Section 29A, Mr Arun Kumar Jagmatramka became ineligible to submit a resolution plan.
Meanwhile, Regulation 2B was amended by 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 under Section 230.
The same also came to be challenged before the top court.
The Supreme Court noted that IBC liquidation scheme and the Section 230 scheme is a “statutory continuum”.
There are the three modes in which a revival is contemplated under the provisions of the IBC.
The first of those modes of revival is in the form of the CIRP elucidated in the provisions of Chapter II of the IBC. The second mode is where the corporate debtor or its business is sold as a going concern within the purview of clauses (e) and (f) of Regulation 32. The third is when a revival is contemplated through the modalities provided in Section 230 of the Act of 2013.
The statutory scheme underlying the IBC and the legislative history of its linkage with Section 230 of the Act of 2013, in the context of a company which is in liquidation, has important consequences for the outcome of the controversy in the present case, the Court said.
One of the modes of revival in the course of the liquidation process is envisaged in the enabling provisions of Section 230 of the Act of 2013, to which recourse can be taken by the liquidator appointed under Section 34 of the IBC. This extends to the role of liquidator.
Section 230 of the Act of 2013 is not a standalone provision which has no connect with the provisions of the IBC and when 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, the Court made it clear.
The Supreme Court noted that the “purpose of the ineligibility under Section 29A 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 IBC 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 of 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,” the judgment said.
Such an interpretation would result in defeating the provisions of the IBC and must be eschewed, the Court added.
The Court also held that even in the absence of the Regulation 2B, 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 a liquidation under the IBC.
The proviso to Regulation 2B is clarificatory in nature. Even absent 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.
Hence, the Court turned down the challenge to the validity of Regulation 2B.