Recently, the Supreme Court in the decision of Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr1 ("Arun Kumar Decision") examined the interplay between liquidation proceedings under the Insolvency and Bankruptcy Code, 2016 ("IBC") and Section 230 of the Companies Act, 2013 ("Act"). The issue before the Supreme Court was to decide whether a person ineligible to submit resolution plan under Section 29A of the IBC is barred from proposing a scheme under Section 230 of the Act.
The IBC contains a comprehensive scheme that deals with the revival of a company facing corporate death. Chapter II of the IBC pertains to the initiation of the Corporate Insolvency Resolution Process ("CIRP"). This process may either be initiated at the behest of financial creditor or at the behest of the operational creditor or even the corporate debtor. Chapter II also provides for the appointment of an interim resolution professional, the constitution of a committee of creditors, the submission of a resolution plan and the approval of the same. Whereas the liquidation process under the IBC forms a part of a distinct Chapter, i.e. Chapter III. Liquidation under Chapter III of the IBC requires that the proceedings contemplated under Chapter III are followed. One of the modes of revival for a company facing "corporate death" under liquidation are the provisions under Section 230 of the Act of 2013, to which recourse can be taken by the liquidator appointed under Section 34 of the IBC.
Power to Compromise
Section 230 of the Act pertains to the power of the National Company Law Tribunal ("Tribunal") to allow for a compromise. Under Section 230 of the Act, a compromise or an arrangement may take place between a company and its creditors or any subset of creditors; or between a company and its members or subset of members. Prior to November 15, 2016, an application for compromise or arrangement could be moved before the Tribunal by (i) the company; (ii) a creditor; (iii) a member of the company; and (iv) in the case of a company which is being wound up, by the liquidator. However, with the amendment to Section 230 of the Act which came into effect November 15, 2016, an application under Section 230 of the Act could either presented by a liquidator who has been appointed under the Act of 2013 or under the IBC. A liquidator appointed under the IBC, when invoking the provisions of Section 230 of the Act, attempts a revival of the corporate debtor to save it from the likeliness of a corporate death2.
Retrospective Amendments to the IBC
When the IBC was first introduced, the provisions did not create any restrictions for any person in submitting a resolution plan or participating in the acquisition process of the assets of a company at the time of liquidation. However, certain concerns were raised that individuals could take advantage of the situation and participate in the resolution or liquidation process. As a result, Section 29A was inserted to the IBC to ensure individuals, who by their misconduct contributed to the defaults of the corporate debtor were prevented from gaining or regaining control of the corporate debtor3. Section 29A was inserted with retrospective effect from November 23, 2017 and provided a list of individuals who were ineligible to be resolution applicants. The insertion of Section 29A rectified a loophole in the IBC which allowed a backdoor entry in the CIRP4.
Section 29A and the Impact on Liquidation
Ever since its insertion, Section 29A has played a vital role in ensuring that the objects of the IBC are not defeated by allowing "ineligible persons" to regain control of the corporate debtor. These values of Section 29A "continue to permeate" across to Chapter III of the IBC as the provision applies not only to resolution applicants, but to liquidation process as well5.
The liquidator under Chapter III of the IBC is vested with several powers and duties. The liquidator exercises several functions which are of quasi-judicial in nature. For example, under Section 35(1)(f), the liquidator cannot 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. The liquidator, in other words, exercises functions which have been made amenable to the jurisdiction of the NCLT, acting as the Adjudicating Authority. Therefore, the ineligibility prescribed under the provisions of Section 35(1)(f) cannot be disregarded by the Tribunal for the purpose of considering an application for a scheme of compromise or arrangement under Section 230 of the Act of 2013, in respect of a company which is under liquidation under the IBC.
The Role of Regulation 2B
The Insolvency and Bankruptcy Board of India had issued the Liquidation Process Regulations ("Regulations"). The Regulations were amended on July 25, 2019, pursuant to which Regulation 2B was inserted in the Regulation. Regulation 2B (1) requires a compromise or arrangement proposed under Section 230 of the Act to be completed within 90 days of the order of liquidation issued under the IBC. On January 06, 2020, another amendment was introduced to the Regulations and a proviso was inserted to Regulation 2B (1) whereby it was expressly stated that a party ineligible to propose a resolution plan under the IBC could not be a party to a compromise or arrangement under Section 230 of the Act.
The Interplay
The Supreme Court has, over time, reiterated that the entire purpose behind the scheme of compromise or arrangement is to revive the company. It has emphasized that when a company is in liquidation, its assets are custodia legis, with the liquidator acting as the custodian for the distribution of the liquidation estate6.
The object of the IBC is to serve as a beneficial legislation to put the corporate debtor back on its feet and does not serve merely as a recovery legislation for creditors. The IBC bifurcates the interests of the corporate debtor from that of its promoters or those who are in management. Further, with the insertion of provisions such as Section 29A, ensures a company may achieve a sustainable revival and 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 Supreme Court through the Arun Kumar Decision clarified that even if Regulation 2B did not exist, upon a harmonious interpretation of the IBC and the Act, it would be clear that a scheme of compromise under Section 230 of the Act would take place in accordance of the underlying objects of the IBC. Therefore, the underlying object would then be to protect the company from a corporate death. The Supreme Court highlighted that it would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participate in the sale of assets of the company in liquidation, are somehow permitted to propose a compromise or arrangement under Section 230 of the Act.
Footnotes
1 Civil Appeal No. 9664 of 2019
2 2019 SCC OnLine NCLAT 172
3 The Report of the Insolvency Law Committee dated March 03, 2018. Available at: https://ibbi.gov.in/uploads/resources/ILRReport2603_03042018.pdf
4 (2018) 18 SCC 575
5 (2019) 4 SCC 17
6 (2007) 7 SCC 753
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