TMI Blog2021 (3) TMI 611X X X X Extracts X X X X X X X X Extracts X X X X ..... with the liquidation process. Section 29A stipulates the category of persons who shall not be eligible to submit a resolution plan . The proviso to Section 35(1)(f) incorporates the same norm in the liquidation process, when it stipulates that the liquidator shall not sell the immovable and movable or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant . These words in Section 35(1)(f) are clearly referable to the ineligibility which is set up in Section 29A. Interplay between IBC liquidation and Section 230 of the Act of 2013 - HELD THAT:- This Court emphasized that where a company is in liquidation, its assets are custodia legis, the liquidator being the custodian for the distribution of the liquidation estate. A compromise or arrangement in respect of a company in liquidation must foster a revival of the company, this being (as the Court termed it ) the clear statutory intention behind entertaining a proposal under Section 391 in respect of a company in liquidation. IBC liquidation and Section 230 scheme : a statutory continuum - HELD THAT:- Proposing a scheme of compromise or arrangement under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been divided into the following sections to facilitate analysis: A Factual Background A.1 Civil Appeal 9664 of 2019 A.2 Civil Appeal 2719 of 2020 A.3 Liquidation Process Regulations, 2016 A.4 Article 32 Petition B Issues C Submissions D Analysis of the Legal Framework D.1 Ineligibility during the resolution process and liquidation D.2 Interplay : IBC liquidation and Section 230 of the Act of 2013 D.3 The Clean Slate D.4 Constitutional Validity of Regulation 2B - Liquidation Process Regulations E Epilogue F Conclusion A Factual Background A.1 Civil Appeal 9664 of 2019 ( First Appeal ) 1 By its judgment dated 24 October 2019, the National Company Law Appellate Tribunal ( NCLAT ) held that a person who is ineligible under Section 29A of the Insolvency 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 the Act of 2013 . The judgment was rendered in an appeal Company Appeal (AT) No. 221 of 2018 filed by Jindal Steel and Power Limited JSPL , an unsecured creditor of the corporate debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of which an order has been made by the NCLT under the IBC. A second amendment was made to various provisions of IBC, including Section 29A, under the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, effective from 6 June 2018. A proviso was added to sub-Section (g) of Section 29A. Section 29A of the IBC in its present form reads as follows: 29A. Persons not eligible to be resolution applicant: A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person- (a) is an undischarged insolvent; (b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949); (c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial sector regulator issued under any other law for the time bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities markets; (g) has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the Adjudicating Authority under this Code; Provided that this clause shall not apply if a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction; (h) has executed a guarantee in favour of a creditor in respect of a corporate debtor against which an application for insolvency resolution made by such creditor has been admitted under this Code a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulations, 2017 made under the Foreign Exchange Management Act, 1999 (42 of 1999); (d) an asset reconstruction company registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); (e) an Alternate Investment Fund registered with the Securities and Exchange Board of India; (f) such categories of persons as may be notified by the Central Government. (emphasis supplied) Due to the insertion of Section 29A, Mr Arun Kumar Jagmatramka became ineligible to submit a resolution plan. 6 No further resolution plan was approved by the CoC due to the paucity of time. In the absence of a resolution plan, the NCLT passed an order of liquidation on 11 January 2018, after the expiry of 270 days. The order of the NCLT ordering liquidation was challenged in appeal Company Appeal (IB) No. 55-56 of 2018 by Mr Arun Kumar Jagatramka before the NCLAT. The appeal was dismissed by the NCLAT by its order dated 10 July 2018. The dismissal of the appeal by the NCLAT was assailed before this Court, which issued notice to GNCL on 19 July 2019. 7 During the pendency of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified. Provided that the liquidator shall not 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. 12. From the aforesaid provision, it is clear that the Promoter, if ineligible under Section 29A cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or actionable claims of the 'Corporate Debtor'. (emphasis in original) 9 The judgment and order of the NCLAT is the subject of the appeal. A.2 Civil Appeal 2719 of 2020 Second Appeal 10 This appeal has been filed for assailing an order dated 19 December 2019 of the NCLAT in which it relied on the judgment dated 24 October 2019 impugned in the earlier appeal, to hold that an individual ineligible for proposing a resolution plan under Section 29A of the IBC, is also ineligible to propose a scheme of compromise and arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 019 impugned in the earlier appeal, and on the basis of Section 29A and Section 35(1)(f) of the IBC. 17 Mr Kunwar Sachdev then filed an appeal Company Appeal (AT) (Insolvency) No. 1498 of 2019 against this order dated 31 October 2019 before the NCLAT, which dismissed it by an order dated 19 December 2019. Mr Kunwar Sachdev now comes before this Court in appeal. A.3 Liquidation Process Regulations, 2016 18 Before averting to Writ Petition (Civil) No 269 of 2020, it is important to first understand the controversy surrounding the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 Liquidation Process Regulations . 19 The Liquidation Process Regulations have been issued by the Insolvency and Bankruptcy Board of India IBBI , constituted under Part IV of the IBC, in exercise of the powers conferred by Sections 5, 33, 34, 35, 37, 38, 39, 40, 41, 43, 45, 49, 50, 51, 52, 54, 196 and 208 read with Section 240 of the IBC. 20 The Liquidation Process Regulations were amended by the IBBI by a notification Noti. No. IBBI/2019-20/GN/REG047 dated 25 July 2019, which inserted Regulation 2B. Sub-section (1) of Regulation 2B provides tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he First Appeal, assailing the notifications dated 25 July 2019 and 6 January 2020 issued by the IBBI, through which it inserted Regulation 2B into the Liquidation Process Regulations, and subsequently amended it. As the petitioner, he contends that Regulation 2B is ultra vires the IBC and the Act of 2013, and also violates Articles 14, 19 and 21 of the Constitution. The prayer in the writ petition has been extracted below: In the premises set forth above, the Petitioner prays that this Hon'ble Court may be pleased to issue: a. Writ, Order or Direction more particularly in the nature of WRIT OF DECLARATION declaring that the provisions of Notifications dated 25.07.2019 and 06.01.2020 issued by the Insolvency and Bankruptcy Board of India are ultra vires the Insolvency and Bankruptcy Code, 2016 as well as the Companies Act, 2013 and violative of Article 14, 19, 21 of the Constitution of India. B Issues 23 Having detailed the factual background of these petitions, we shall now turn to the issues before this Court and the submissions of counsels. 24 The NCLAT formulated two principal issues in the first of its judgments in appeal: (i) Whether in a liquidati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangement 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. C Submissions 28 Having thus elucidated the battle lines of legal conflict, we proceed to enumerate the submissions. 29 Mr Sandeep Bajaj, learned Counsel appearing on behalf of the appellant in the First Appeal and the Petition under Article 32 submitted that: (i) Chapter II of the IBC indicates that the CIRP can be invoked in three modes: (a) By a financial creditor under Section 7; (b) By an operational creditor under Section 9; and (c) By a corporate debtor under Section 10. (ii) The IBC and its regulations indicate that there is a clear distinction between: (a) the settlement mechanism which allows for a settlement upon which the corporate debtor would stand restored to the promoter together with all its assets and liabilities; and (b) the resolution mechanism under which, upon the acceptance of a resolution plan, the company moves over to the control of the acquirer on a clean slate for a fixed c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uly 2018) allowed for the withdrawal under Section 12-A before the issuance of an invitation for expression of interest under Regulation 36-A. In the decision of this Court in Swiss Ribbons Private Limited v. Union of India (2019) 4 SCC 17; herein, referred to as Swiss Ribbons which was rendered on 25 January 2019, the Court held that a withdrawal of an application can be permitted between admission of the application and the constitution of the CoC. Following up on this, Regulation 30-A was substituted on 25 July 2019 to allow an application for withdrawal under Section 12-A both before and after the constitution of the CoC. However, where the application is made after the constitution of the CoC (under Regulation 30-A(1)(b)), and after the issuance of the invitation for expression of interest, the reasons justifying the withdrawal are required to be stated; (ix) The decision in Brilliant Alloys (P) Ltd. v. S Rajagopal 2018 SCC OnLine SC 3154; hereinafter, referred to as Brilliant Alloys would indicate that a withdrawal can be permitted even after the expression of interest, as a consequence of which Regulation 30-A is directory in nature; (x) The consequence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not exclusive, in view of the principle which was laid down by this Court while construing the corresponding provisions of Section 391 of the Companies Act, 1956 the Act of 1956 ; (xv) The discussion papers circulated by the IBBI in April and November 2019 clearly demonstrate that IBBI was aware of the fact that the ineligibility which attaches to the resolution process under Section 29A will not attach to Section 230 of the Act of 2013. The proviso to Regulation 2B was notified by the IBBI on 6 January 2020 to stipulate 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 to such compromise or arrangement. Regulation 2B is ultra vires the provisions of Section 230 of the Act of 2013. IBBI had no statutory authority to make the Regulation 2B, through which it has effectively provided a disqualification under the Act of 2013, even though the mandate of IBBI is confined only to the IBC; and (xvi) Regulation 2B is violative of Articles 14, 19 and 21 of the Constitution as it seeks to import an ineligibility under the provisions of the IBC to a dissimilar provision in the Act of 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sibal, learned Senior Counsel appearing on behalf of the respondents in the Second Appeal. Learned Senior Counsel submitted that: (i) A proposal under Section 230 of the Act of 2013 need not result in the revival of the company. The proposal may apply only to a class of creditors or shareholders. Even prior to its amendment, this Court had held that additional conditions apply when a plan under the erstwhile provisions of Section 391 of the Act of 1956 is propounded at the time of liquidation of the company; (ii) Section 29A has several ineligibilities apart from those that attach to promoters. To allow a person who is ineligible under Section 29A from submitting a compromise or arrangement under Section 230 at the liquidation stage is contrary to the letter and spirit of the IBC; (iii) The NCLT while dealing with an application for a compromise or arrangement under Section 230 of the Act of 2013, in respect of a company which is being liquidated under the IBC, performs a dual role: firstly, as an Adjudicating Authority under the IBC and as a Tribunal under the Act of 2013. Therefore, it can insist on adherence to additional conditions namely that: (a) The proposed com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f compromise and arrangement is proposed in respect of the company in liquidation, additional requirements need to be established, namely that the scheme must be for the revival of company. The impact of a scheme under Section 391, where the company is in liquidation, is that the proposers of the scheme enter into the management with the debt having been resolved. This makes the scheme of compromise or arrangement under Section 230 qualitatively different from a simpliciter withdrawal of an application under Section 12-A of the IBC. Section 12-A does not incorporate any requirement for the revival of the company; (xiii) The IBC provides for three modes of revival: (a) the CIRP under Chapter II; (b) sale of a company in liquidation as a going concern (read with Regulation 32(e) and (f)); and (c) a scheme of compromise or arrangement under Section 230 of the Act of 2013, following upon an order for liquidation being passed under Chapter III of the IBC; The prohibition or ineligibility which applies in (a) and (b) must necessarily attach to (c) as well. When a plan for compromise or arrangement is proposed at the liquidation stage of IBC under Section 230 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation 2(B) of the Liquidation Process Regulations with effect from 6 January 2020 is only by way of a clarification; (xix) Dehors the provisions of the IBC, the rigors of the IBC will not apply to a proceeding under Section 230 of the Act of 2013. In other words, the ineligibility under Sections 29A and 35(1)(f) applies only to a situation where a corporate debtor has come within the purview of the IBC and has been taken into liquidation under Chapter III. It is only where a compromise or arrangement under Section 230 of the Act of 2013 is proposed in respect of a company which is undergoing liquidation under the IBC that the rigors of Section 29A and 35(1)(f) would stand attracted; (xx) An absurdity will result if persons found to be derelict or guilty of malfeasance, who are barred from: (a) submitting a resolution plan; (b) obtaining a sale of assets in liquidation; and (c) obtaining a sale of the company as a going concern. can still propose a compromise under Section 230 of the Act of 2013. It is a settled principle of law that an interpretation which leads to absurdity must be avoided; (xxi) There is a fallacy in equating the provisions of Section 230 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a company is in liquidation under the IBC, a scheme proposed under Section 230 is a facet of the liquidation process and the same rationale which permeates the liquidation process must also govern it; and (vi) Section 12-A stands on a completely different footing. It provides for a withdrawal at the inception of the CIRP and is not a culmination of a resolution process. Nor does a Section 12-A withdrawal bind all stakeholders. 33 Mr Gopal Jain, learned Senior Counsel appearing for the respondents in the First Appeal, has urged submissions along the same lines as Mr Amit Sibal. His submissions are summarized below: (i) The commencement or the initiation process attracting the IBC is an application under Sections 7, 9 or 10; (ii) In the present case, an application was filed under Section 10 as a consequence of which the case has to be analyzed through the prism of the IBC; (iii) The IBC is an economic legislation and its key objectives are to ensure: (a) good corporate governance; (b) control deviant behavior; (c) protect the integrity of the resolution process; (d) enhance commercial morality; and (e) foster respect for the rule of law. The IBC is pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position is assessed independent of Regulation 2B, the same embargo as contained in Section 29A and Section 35(1)(f) would apply to a compromise or arrangement proposed under Section 230 of the Act of 2013 in respect of a company which is undergoing liquidation under Chapter III of the IBC; (iv) Regulation 2B is essentially clarificatory; (v) The basis of Regulation 2B is the same as Sections 29A and 35(1)(f), which is that a person who is the cause of the problem either by a design or default cannot be a part of the process solution; (vi) The IBC is a beneficial legislation. Prior to the enactment of the IBC: (a) individual creditors had individual remedies; and (b) the debtor would remain in possession of the company and its assets. With the introduction of the IBC, there has been a paradigm shift in that: (a) under the new legal regime there is a collective effort of all creditors even if at the behest of one of them; (b) the creditor is in control instead of the debtor in possession; and (c) revival is the soul of the IBC; (vii) Sections 196 and 240 of the IBC reflect a specific conferment of power on the IBBI to frame regulations subject to the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Some of the key drawbacks of the legal regime, as it existed prior to the enactment of the IBC, were: (i) The absence of a single legislation governing insolvency and bankruptcy; (ii) A multiplicity of laws governing insolvency and bankruptcy of corporate entities; (iii) The existence of multiple fora established to deal with the enforcement of diverse legislative provisions; and (iv) The complexity caused by a maze of statutes resulting in inadequate, ineffective and delayed resolutions, occasioned by the (then) existing framework. These inadequacies were noticed in the Statement of Objects and Reasons accompanying the introduction of the Bill. The IBC reflects a fundamental change in the erstwhile legal regime. A timely resolution of corporate insolvency was conceived as an instrument to support the development of credit markets, encourage entrepreneurship, enhance the ease of doing business and provide an environment conducive to investment, setting the economy on the path to growth and development. In resolving some of the complex issues which arise under the new legal regime envisaged under the IBC, it then becomes necessary to vacuum the cobwebs of the past. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nunciates provisions in regard to the liquidation process. Section 29A stipulates diverse categories of persons who will not be eligible to submit a resolution plan. 42 By the same amending Act through which Section 29A was introduced, Section 35(1)(f) was also amended with the introduction of a proviso. Section 35 specifies the powers of the liquidator as well as their duties, which are subject to the directions of the Adjudicating Authority. Section 35(1)(f) provides as follows: 35. Powers and duties of liquidator.-(1) Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely:- ... (f) subject to section 52, to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified: Provided that the liquidator shall not 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. 43 The Stateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he objective. In order that this provision must apply to all existing cases of resolution which are pending, that is the case for urgency. If we had not done this, then all such defaulters would have rejoiced because they would have merely walked back into these companies by paying only a fraction of these amounts. That is something which besides being commercially imprudent would also be morally unacceptable. That is the real rationale behind this particular Bill:. (emphasis supplied) 45 The Report of the Insolvency Law Committee dated 3 March 2018 states that the intent behind introducing Section 29A was to prevent unscrupulous persons from gaining control over the affairs of the company. These persons included those who by their misconduct have contributed to the defaults of the company or are otherwise undesirable. The Committee observed: 14.1. Section 29A was added to the Code by the Amendment Act. Owing to this provision, persons, who by their misconduct contributed to the defaults of the corporate debtor or are otherwise undesirable, are prevented from gaining or regaining control of the corporate debtor. This provision protects creditors of the company by prevent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person would be seen to be rewarded at the expense of creditors. In addition, in order to check that the undesirable persons who may have submitted their resolution plans in the absence of such a provision, responsibility is also being entrusted on the committee of creditors to give a reasonable period to repay overdue amounts and become eligible. (emphasis supplied) Parliament was evidently concerned over the fact that persons whose misconduct has contributed to defaults on the part of debtor companies misuse the absence of a bar on their participation in the resolution process to gain an entry. Parliament was of the view that to allow such persons to participate in the resolution process would undermine the salutary object and purpose of the Act. It was in this background that Section 29A has now specified a list of persons who are not eligible to be resolution applicants. (emphasis supplied) 48 The Court 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitutionality of certain provisions of the IBC was challenged. Justice Rohinton F Nariman emphasised the object of the IBC in the following observations: 27. As is discernible, the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. Unless such reorganization is effected in a time-bound manner, the value of the assets of such persons will deplete. Therefore, maximization of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme-workers are pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot merely to resolution applicants, but to liquidation also . Rejecting the plea that Section 35(1)(f) is ultra vires, this Court held: 102. According to the learned counsel for the petitioners, when immovable and movable property is sold in liquidation, it ought to be sold to any person, including persons who are not eligible to be resolution applicants as, often, it is the erstwhile promoter who alone may purchase such properties piecemeal by public auction or by private contract. The same rationale that has been provided earlier in this judgment will apply to this proviso as well - there is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable and movable property of the corporate debtor in liquidation. Further, given the categories of persons who are ineligible under Section 29A, which includes persons who are malfeasant, or persons who have fallen foul of the law in some way, and persons who are unable to pay their debts in the grace period allowed, are further, by this proviso, interdicted from purchasing assets of the corporate debtor whose debts they have either willfully not paid or have been unable to pay. The legislative purpose whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebtor. 54 The prohibition which has been enacted under Section 29A has extended, as noted above, to Chapter III while being incorporated in the proviso to Section 35(1)(f). Under the Liquidation Process Regulations, Chapter VI deals with the realization of assets. Regulation 32 is in the following terms: 32. Sale of Assets, etc. The liquidator may sell- (a) an asset on a standalone basis; (b) the assets in a slump sale; (c) a set of assets collectively; (d) the assets in parcels; (e) the corporate debtor as a going concern; or (f) the business(s) of the corporate debtor as a going concern: Provided that where an asset is subject to security interest, it shall not be sold under any of the clauses (a) to (f) unless the security interest therein has been relinquished to the liquidation estate. Clauses (a) to (d) of Regulation 32 deal with the sale of assets on a stand-alone basis in a slump sale collectively or in parcels. Clauses (e) and (f) deal with the sale of the corporate debtor or its business as a going concern. 55 Regulation 32-A(1) then stipulates: 32A. Sale as a going concern. (1) Where the committee of creditors has recommended sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of this sub-section, arrangement includes a reorganization of the company s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods. 58 A compromise or arrangement under Sub-section (1) of Section 230 may take place: (i) between a company and its creditors or any subset of creditors; or (ii) between a company and its members or subset of members. 59 Liquidation is one of the factual situations in which the provisions of Section 230 can be invoked. Section 230(1) can also be invoked in the case of a company which is wound up, as is evident from the statutory provision itself, which contemplates that an application may be submitted to the NCLT, acting as the Tribunal, by the liquidator. 60 Sub-section (1) of Section 230 was amended by Act 31 of 2016 with effect from 15 November 2016. Prior to the amendment, 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. Following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional tests have to be satisfied when the company concerned is in liquidation and a compromise or arrangement in respect of it is proposed . Dealing specifically with a company which has been ordered to be wound up, this Court observed that the Company Court (before whom the jurisdiction under the erstwhile Section 391 was vested at the material time) had necessarily to see whether the scheme contemplates revival of the business of the company . In that context, this Court observed: 47. When a company is ordered to be wound up, the assets of it are put in possession of the Official Liquidator. The assets become custodia legis. The follow-up, in the absence of a revival of the company, is the realisation of the assets of the company by the Official Liquidator and distribution of the proceeds to the creditors, workers and contributories of the company ultimately resulting in the death of the company by an order under Section 481 of the Act, being passed. But, nothing stands in the way of the Company Court, before the ultimate step is taken or before the assets are disposed of, to accept a scheme or proposal for revival of the Company. In that context, the court has necessarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ajaj, learned Counsel for the appellants, is that Section 230 is not regulated by the IBC but is a provision independent of it, though after the amendment of Sub-section (1), a compromise or arrangement can be proposed by the liquidator appointed under the IBC. Aligned to this submission, he urged that the decision in Meghal Homes (supra) recognises that the liquidator is an additional person who may submit an application under Section 391 of the Act of 1956 (corresponding to Section 230 of the Act of 2013). The submission of Mr Bajaj however misses the crucial interface between the provisions of Section 230 of the Act of 2013 in their engagement with a company in respect of which the provisions of the IBC have been invoked, resulting in an order of liquidation under Section 33 of the IBC. Liquidation of the company under the IBC, as emphasized by this Court in its previous decisions, is a matter of last resort. Section 33 requires the NCLT, acting as the Adjudicating Authority, to pass an order for the liquidation of the corporate debtor where: (i) before the expiry of the insolvency resolution process period or the maximum period contemplated for its completion a resolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he context of a company which is in liquidation under the IBC, follows upon an order under Section 33 and the appointment of a liquidator under Section 34. While there is no direct recognition of the provisions of Section 230 of the Act of 2013 in the IBC, a decision was rendered by the NCLAT on 27 February 2019 in Y Shivram Prasad v. S Dhanapal 2019 SCC OnLine NCLAT 172; herein, referred to as Y Shivram Prasad . NCLAT in the course of its 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 Act of 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 on 25 July 2019 to the Liquidation Process Regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony. A harmonious construction between the two statutes G.P. Singh, Principles of Statutory Interpretation (1st edn., Lexis Nexis 2015) which notes that Further, these principles [referring to the principle of harmonious construction] have also been applied in resolving a conflict between two different Acts and providing the following examples Jogendra Lal Saha v. State of Bihar, 1991 Supp (2) SCC 654 (Sections 82 and 83 of the Forest Act, 1927 are special provisions which prevail over the provisions in the Sale of Goods Act ); Jasbir Singh v. Vipin Kumar Jaggi, (2001) 8 SCC 289 (Section 64 of NDPS Act will prevail over section 307 CrPC 1974 as it is a special provision in a Special Act which is also later); P.V. Hemlatha v. Kattam Kandi Puthiya Maliackal Saheeda, (2002) 5 SCC 548 (conflict between section 23 of the Travancore Cochin High Court Act and section 98(3) Civil Procedure Code resolved by holding the latter to be special law); Talchar Municipality v. Talcher Regulated Market Committee, (2004) 6 SCC 178 (Section 4(4) of the Orissa Agricultural Produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages. Proposing a scheme of compromise or arrangement under Section 230 of the Act of 2013, while the company is undergoing liquidation under the provisions of the IBC lies in a similar continuum. Thus, the prohibitions that apply in the former situations must naturally also attach to the latter to ensure that like situations are treated equally. D.3 The Clean Slate 71 A crucial limb of the submissions which have been urged by Mr Sandeep Bajaj and Mr Shiv Shankar Banerjee, learned Counsel appearing for the appellants and the petitioner is that both Section 12-A of the IBC and Section 230 of the Act of 2013 belong to what is described as the settlement mechanism which is distinct from the resolution mechanism . The corporate debtor, it has been urged, will proceed to liquidation if no resolution is possible. Section 29A was designed to prevent a back-door entry to a clas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (v) A resolution plan upon being approved becomes binding on all stakeholders and is attended with all benefits unlike Section 230 of the Act of 2013; (vi) Under Regulation 32 of the Liquidation Process Regulations, two modes are contemplated for the sale of the corporate debtor as a going concern , while four modes are contemplated for the sale of the assets of the corporate debtor. The prohibition under Section 35(1)(f) will apply only to a sale which is governed by Regulation 32, and will have no application to a scheme of compromise or arrangement which is proposed under Section 230; and (vii) There is no mechanism in the IBC for effecting a compromise or arrangement, and since the only provision is contained in Section 230, there is no inconsistency with the IBC. Withdrawal of application 72 Section 12A 12A. Withdrawal of application admitted under section 7, 9 or 10 - The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified. of the IB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat an application for withdrawal may be presented between the period commencing from the admission of the application and the date of the constitution of the CoC. This led to the substitution of the Regulation 30-A 30A. Withdrawal of Application- (1) An application for withdrawal under section 12A may be made to the Adjudicating Authority- (a) before the constitution of the committee, by the applicant through the interim resolution professional; (b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be: Provided that where the application is made under clause (b) after the issue of invitation for expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation. (2) The application under sub-regulation (1) shall be made in Form FA of the Schedule accompanied by a bank guarantee- (a) towards estimated expenses incurred on or by the interim resolution professional for purposes of regulation 33, till the date of filing of the application under clause (a) of sub-regulation ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issuance of invitation of expression of interest. In Swiss Ribbons (supra), the provisions of Section 12-A were upheld against the challenge that they violated Article 14 of the Constitution. Justice Rohinton F Nariman, while adverting to the decision in Brilliant Alloys (supra), noted that Regulation 30-A(1) has been held not to be mandatory but directory because in a given case an application for withdrawal may be allowed for exceptional reasons even after issuance of an invitation for expression of interest under Section 36-A. Dealing with the provisions of Section 12-A, this Court observed: 82. It is clear that once the Code gets triggered by admission of a creditor's petition under Sections 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a Committee of Creditors is constituted (as per the timelines that are specified, a Committee of Creditors can be appointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess. Rule 8 of the Adjudicating Authority Rules, as we have seen earlier, contemplates a withdrawal before admission. Section 12-A subjects a withdrawal of an application, which has been admitted under Sections 7, 9 and 10, to the requirement of an approval of ninety per cent voting shares of the CoC. The decision of this Court in Swiss Ribbons (para 82 extracted above) stipulates that where the CoC has not yet been constituted, the NCLT, functioning as the Adjudicating Authority, may be moved directly for withdrawal which, in the exercise of its inherent powers under Rule 11 of the Adjudicating Authority Rules, may allow or disallow the application for withdrawal or settlement after hearing the parties and considering the relevant factors on the facts of each case. A withdrawal in other words is by the applicant. The withdrawal leads to a status quo ante in respect of the liabilities of the corporate debtor. A withdrawal under Section 12-A is in the nature of settlement, which has to be distinguished both from a resolution plan which is approved under Section 31 and a scheme which is sanctioned under Section 230 of the Act of 2013. A resolution plan upon approval under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, NCLAT judgment must also be set aside on this count. 75 The benefit under Section 31, following upon the approval of the resolution plan, is that the successful resolution applicant starts running the business of the corporate deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... July 2019 provides that where a compromise or arrangement is proposed under Section 230 of the Act of 2013, it shall be completed within ninety days of the order of liquidation under subSections (1) and (4) of Section 33. The proviso to Regulation 2B has been inserted with effect from 6 January 2020 to stipulate 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. IBBI discussion papers 78 IBBI initially brought out a discussion paper on 27 April 2019. Para 3.1 of the discussion paper noted thus: 3.1 Compromise or arrangement under Section 230 of the Companies Act 2013. If there is a proposal for a compromise or arrangement, a member, a creditor or the Liquidator may make an application to the NCLT under the Compromise Act 2013 (Act) (not the Adjudicating Authority under the Code) and then proceed in the manner directed by the NCTL in accordance with the Act. While compromise or arrangement under Section 230 of the Act is proposed, it must be utilize first and only on its closure/ failure, liquidation under the Code may commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal. Further, section 29A of the Code has several exceptions, while section 230 of the Act deals with all kinds of companies in all situations. There will be practical difficulties in implementation of ineligibility for the purposes of section 230 of the Act. Therefore, it is proposed that the ineligibility norms under section 29A of the Code may not apply to compromise or arrangement under section 230 of the Act. Be that as it may, the IBBI solicited public comments on its proposals. The IBBI evolved its view on the issue of whether Section 29-A should be made applicable to Section 230 of the Act of 2013 in its subsequent discussion paper. 80 The discussion paper brought out on 3 November 2019 by IBBI discussed the applicability of Section 29A of the IBC to a compromise and arrangement under Section 230 of the Act of 2013. The discussion paper notes that there were many instances where the NCLAT had allowed the application under Section 230 of the Act of 2013. In that context, the discussion paper notes thus: 21. Section 29 A of the Code prohibits certain persons from becoming a resolution applicant/ submitting a resolution plan in a CIRP. Proviso to section 35(1)(f) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 230 of the Act of 2013. The validity of the provisions of Regulation 2B, more specifically the proviso, has to be considered on their own footing. Section 196 of the IBC 83 The powers and functions entrusted to IBBI are specified in Section 196 of the IBC. Section 196(1)(t) provides IBBI with the power to frame regulations, as follows: (t) make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under this Code, including mechanism for time bound disposal of the assets of the corporate debtor or debtor; and Clause (t) empowers IBBI to make regulations and guidelines on matters relating to insolvency and bankruptcy, as may be required under the IBC. Section 240 Section 240(1) empowers IBBI with the power to make regulations in the following terms: (1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code. Under Sub-Section (1) of Section 240, the power to frame regulations is conditioned by two requirements: first, the regulations have to be consistent with the provisions of the IBC and the rules framed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aragraph 24 of our judgment, we noted the two issues which had been framed by the NCLAT in the impugned judgment in the first of the appeals. The first issue was Whether in a liquidation proceeding under [IBC] the Scheme for Compromise and Arrangement can be made in terms of Sections 230 to 232 of the [Act of 2013] . While we noted in paragraph 25, that no challenge has been made by the appellant in regard to the finding of the NCLAT on this issue, it is imperative for us to make some remarks in relation to this issue and the larger issue of judicial intervention by the NCLT and NCLAT while adjudicating disputes under the IBC. 86 To begin with, we would like to take note of the observations made by the Insolvency Law Committee in its Report of February 2020 Available at https://ibbi.gov.in/uploads/resources/c6cb71c9f69f66858830630da08e45b4.pdf accessed on 10 March 2021 . The Committee began by acknowledging that the floating of schemes of compromise or arrangement under Sections 230 to 232 of the Act, even for companies undergoing liquidation, was not part of the framework under the IBC. This, the Committee noted, had led to a multiplicity of issues including, but not lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 2B was a step in this direction which sought to clarify the position with respect to the applicability of the disqualifications set out in Section 29A of the IBC to Section 230 of the Act of 2013 in tandem with the legislative intendment. 89 At this juncture, it is important to remember that the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through the judicial intervention of the NCLAT in Y Shivram Prasad (supra). Since the efficacy of this arrangement is not challenged before us in this case, we cannot comment on its merits. However, we do take this opportunity to offer a note of caution for the NCLT and NCLAT, functioning as the Adjudicatory Authority and Appellate Authority under the IBC respectively, from judicially interfering in the framework envisaged under the IBC. As we have noted earlier in the judgment, the IBC was introduced in order to overhaul the insolvency and bankruptcy regime in India. As such, it is a carefully considered and well thought out piece of legislation which sought to shed away the practices of the past. The legislature has also been working hard to ensure that the efficacy of this legi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
