Based on the above analysis, we find that the 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 Act of 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), is also constitutionally valid [Para 91]
Arun Kumar Jagatramka Versus Jindal Steel and Power Ltd. & Anr.
[Civil Appeal No. 9664 of 2019]
Decided on March 15, 2021
This case was decided by a Division Bench of the Supreme Court consisting of Justice DY Chandrachud and Justice MR Shah.
The issue in this case is regarding an order of the National Company Law Appellate Tribunal (NCLAT) that a person who is ineligible under Section 29A of the Insolvency and Bankruptcy Code, 2016 (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.
Under the Liquidation Process Regulations, 2016, Regulation 2B was amended in 2020, by which a proviso was added to sub-section (1), which provides that a party ineligible to propose a resolution plan under the IBC cannot be a party to a compromise or arrangement. The Writ Petition filed by the appellant contends that Regulation 2B is ultra vires to the IBC, and also violates Articles 14, 19 and 21 of the Constitution.
Learned Counsel for the appellant, Mr. Sandeep Bajaj submits that the ineligibility under Section 29A of the IBC attaches to the proceedings under the IBC alone, involving the submission of a resolution plan.
On the other hand, Mr. Amit Sibal, learned senior counsel for the respondent, urges that when an order of liquidation has been passed under proceedings in the IBC, Section 230 of the Companies Act expressly contemplates that the liquidator appointed under the IBC may move the NCLT where a compromise or arrangement is proposed. Hence, the proposal for a compromise or arrangement under Section 230, where a company is in liquidation under the IBC, is in continuation of that liquidation process. Hence, according to Mr. Sibal, a person who is ineligible under Section 29A cannot propose a scheme for revival under Section 230 [Para 27].
Mr. Bajaj referred to the decision of the Supreme Court in Swiss Ribbons Private Ltd. V. UOI, wherein it was held that a withdrawal of an application can be permitted between admission of the application and the constitution of the Committee of Creditors. Following this, Regulation 30-A of the IBC Regulations was amended.
The consequence of a withdrawal is that the corporate debtor stands restored to the promoter. As such, Section 29A does not operate as ineligibility on the settlement mechanism. On the withdrawal of the application, the corporate debtor goes back to the same promoter, even if they are ineligible under Section 29A for the submission of the resolution plan.
The rationale behind the ineligibility is that the successful resolution application under Section 31 of the IBC obtains the company on a clean slate, as indicated by the apex court in CoC of Essar Steel India Ltd. V. Satish Kumar Gupta. Section 230 of the 2013 Act is a part of the settlement mechanism. Section 230 envisages a compromise. It forms part of the settlement mechanism, and not the resolution mechanism, to which alone the ineligibility applies. Hence, this ineligibility cannot be engrafted into Section 230.
In the same way, Regulation 2B is violative of Articles 14, 19 and 21, as it seeks to import ineligibility under the IBC to a dissimilar provision of the Companies Act, which is arbitrary.
Mr. Sibal contested these submissions, and argued that to allow a person who is ineligible under Section 29A from submitting a compromise under Section 230 at the liquidation stage is contrary to the letter and spirit of the IBC. The purpose of the disqualification is to ensure a sustainable revival, which means that those responsible for the state of affairs of a company, should be excluded from the process.
Ineligibility was made applicable to both the resolution stage, and the liquidation stage. The purpose and object is that a scheme of revival cannot be proposed by a person who stands disqualified under Section 29A. When a company is in liquidation under the IBC, the submission of a compromise under Section 230 has distinct features of commonality with a resolution plan, namely:
(a) The object is to revive the company, and
(b) Once officially approved, it assumes a binding character.
These elements of revival and binding nature permeate both a resolution plan and a compromise, which is arrived at in the course of liquidation. The ineligibility under Section 29A will only apply when a corporate debtor has come within the purview of the IBC and has been taken into liquidation. It is only where a compromise under Section 230 is proposed for the company undergoing liquidation under the IBC, that Section 29A and 35(1)(f) would be attracted.
In forming the judgment, the bench addressed the underlying purpose of Section 29A, cited in its judgment of Chitra Sharma V. UOI, wherein it was held that, “Section 29A has been enacted in the larger public interest and to facilitate effective corporate governance.” The Court further observed that, “Parliament rectified a loophole in the Act which allowed backdoor entry to erstwhile managements in the CIRP.”
In Arcelormittal India Private Ltd. V. Satish Kumar Gupta & Ors., Justice RF Nariman reiterated the same principle, when he underscored the need to impart a purposive interpretation to Section 29A, “depending both on the text and context in which the provision was enacted.” This decision adverts to the section as a ‘typical instance of a see-through provision’ so that one is able to arrive at persons who are actually in ‘control,’ whether jointly or in concert with other persons.
Swiss Ribbons (supra) held that the norm underlying Section 29A continues applies not merely to resolution applicants, but to liquidation also.
These decisions are significant in adopting a purposive interpretation of Section 29A. It is a crucial link in ensuring that the objects of the IBC are not defeated by allowing ineligible persons, including those in management who have run the company aground, to return in a new avatar of resolution applicants. Erstwhile promoters of a corporate debtor have no vested right to bid for the property of the corporate debtor in liquidation.
The Court also held that the purpose of ineligibility under Section 29A is to achieve a sustainable revival and to ensure that a person who is the cause of the problem cannot be a part of the process of solution. The prohibition has also been incorporated in Section 35(1)(f).
The counsels had argued that both Section 12-A of the IBC and Section 230 of the Companies Act belong to the settlement mechanism, which is different from the resolution mechanism. The corporate debtor will proceed to liquidation if no resolution is possible. Section 29A was designed to prevent a backdoor entry to a class of persons considered to be ineligible to participate in a resolution process. Section35 (1)(f) extends this ineligibility where the liquidator is conducting a sale of the assets of the corporate debtor in liquidation. Where an application for withdrawal under Section 12A is allowed, the company reverts to the promoter [Para 71].
The position in our view can be considered from two perspectives, independent of the provisions of Regulation 2B. We have indicated in the discussion earlier 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. We have come to the conclusion, as noted for the reasons indicated earlier, that in the case of a company which is undergoing liquidation pursuant to the provisions of Chapter III of the IBC, a scheme of compromise or arrangement proposed under Section 230 is a facet of the liquidation process [Para 84]
The Court concluded as follow:
Based on the above analysis, we find that the 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 Act of 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), is also constitutionally valid [Para 91]
Hence, the appeal was dismissed by the Court.
View Judgment on: Arun Kumar Jagatramka Versus Jindal Steel and Power Ltd. & Anr.
Navyaa Shukla
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