Supreme Court Clarifies The Restrictions Under Section 29A IBC To Schemes Of Compromise Or Arrangement

In a recent decision Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr. [Civil Appeal No. 9664 of 2019], Arun Kumar Jagatramka v. Union of India [Writ Petition (Civil) 269 of 2020] and Kunwer Sachdev v. Su Kam Power Systems Limited [Civil Appeal No. 2719 of 2020] decided on March 15, 2021, the Supreme Court of India (Supreme Court) held that a person ineligible under Section 29A of the Insolvency and Bankruptcy Code, 2016 (IBC) to submit a resolution plan, shall be considered ineligible from making a compromise or arrangement under Section 230 of the Companies Act, 2013 (Act).

Facts in Civil Appeal 9664 of 2019

Mr. Arun Kumar (Appellant), the promoter of Gujarat NRE Coke Limited (CD) filed an application before the National Company Law Tribunal (NCLT) under Sections 230 to 232 of the Act seeking to make a scheme of arrangement. The NCLT allowed the application, aggrieved by which, Jindal Steel and Power Limited filed an appeal3 before the National Company Law Appellate Tribunal (NCLAT). NCLAT reversed NCLT's decision and held that a person ineligible under Section 29A of the IBC, is barred from proposing a scheme of compromise and arrangement under Section 23 of the Act.

The Appellant filed an appeal before the Supreme Court challenging the decision of NCLAT. The Appellant has also filed a Writ Petition4 assailing the notifications dated 25 July 2019 and 6 January 2020 issued by IBBI, through which Regulation 2B(1) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations) was amended, to include that a party ineligible to propose a resolution plan under the IBC cannot be a party to a compromise or arrangement proposed under Section 230 or the Act. The Appellant contended that Regulation 2B of the Liquidation Regulations is ultra vires the IBC and the Act, and is violative of Articles 14, 19 and 21 of the Constitution of India, 1950.

Facts in Civil Appeal 2719 of 2020

Mr. Kunwer Sachdev (Appellant 2) along with Phoenix ARC Private Limited, submitted a resolution plan for the corporate debtor, Su-Kam Power Systems Limited (CD2). However, the resolution professional of CD2 informed Appellant 2 that he is ineligible under Section 29A(h) of the IBC and annulled his resolution plan. Appellant 2 filed an application before the NCLT, which came to be dismissed. The order of the NCLT was not challenged and due to the absence of any other resolution plan, the NCLT passed an order of liquidation of CD2.

The order of liquidation was challenged before the NCLAT5, which dismissed the challenge, with directions to the liquidator to accept application for schemes of compromise and arrangement under Sections 230-232 of the Act. Appellant 2 was invited to present his plan to the lender of CD2, only to be informed later by the liquidator that he is ineligible due to the bar provided under Section 29A(h) of the IBC. Appellant 2 challenged the decision of the liquidator before the NCLT, which came to be dismissed by the NCLT and later by the NCLAT. Aggrieved by the order of NCLAT, Appellant 2 approached the Supreme Court.

Judgment:

The Supreme Court relying upon the judgments Chitra Sharma v. Union of India and Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors., observed that Section 29A of the IBC has been enacted keeping in mind the larger public interest and to facilitate effective corporate governance. Section 29A rectifies a loophole in the IBC, which allowed backdoor entry to the erstwhile management of corporate debtors into corporate insolvency resolution process. Reference was also made to the judgment in the matter of Swiss Ribbons Private Limited v. Union of India to observe that the object behind introducing Section 29A of the IBC continues to permeate Section 35(1)(f) of the IBC as well, during the liquidation of the corporate debtor.

The Supreme Court relying upon its precedents, held that courts should adopt a purposive interpretation of Section 29A of the IBC, which acts as a vital link in ensuring that the objects of the IBC are not defeated by allowing the management (who have run the company aground) to return to the corporate debtor as resolution applicants. It was observed that Section 35(1)(f) of the IBC is similar to Section 29A of the IBC, but operates at the stage of liquidation of the corporate debtor.

The Supreme Court while analysing the interplay between liquidation under the IBC and Section 230 of the Act, concluded that schemes under Section 230 of the Act being a mode of revival of the corporate debtor, the restrictions imposed under Section 35(1)(f) of the IBC shall be applicable. However, the Supreme Court observed that since the scope of Section 230 of the Act is very wide, the restrictions imposed by Section 35(1)(f) shall only be applicable when the scheme is being submitted for a company which is in liquidation under the IBC and not otherwise.

The Supreme Court held that while withdrawal under Section 12-A pertains to a simpliciter withdrawal of a petition. However, a scheme, in essence a ‘settlement mechanism', once approved by the NCLT under Section 230 of the Act, shall have the status of culmination of the process under the IBC, and result in the successful applicant running the corporate debtor on a ‘fresh slate’; the same having a binding effect on the corporate debtor, its creditors, members, liquidator and the successful applicant.

While deciding the challenge to Regulation 2B(1) of the Liquidation Regulations, the Supreme Court noted that its introduction was only clarificatory in nature. Regulation 2B(1) ensures that the disqualifications enumerated under Section 29A of the IBC are also made applicable to Section 230 of the Act, thereby bringing in alignment the legislative intent behind introducing Section 29A into the IBC.

The Supreme Court observed that the IBC, a well thought out piece of legislation, was introduced to overhaul the insolvency and bankruptcy regime in India. The NCLTs and NCLATs should keep the scope for judicial intervention or innovation at its bare minimum so as to not disturb the foundational principles of the IBC.

The Supreme Court concluded that Regulation 2B(1) of the Liquidation Regulations is constitutionally valid, and the restrictions placed vide Sections 29A and 35(1)(f) of the IBC shall also extend to the scheme of compromise or arrangement under Section 230 of the Act, to a corporate debtor undergoing liquidation.