Supreme Court rules a problem maker can't be a solution maker

Supreme Court rules a problem maker can't be a solution maker

The Supreme Court (SC) in the case Arun Kumar Jagatramka (Appellant) v. Jindal Steel and Power Ltd. (Respondents) upheld the decision of the National Company Law Appellate Tribunal (NCLAT). It had u/s 29A of the Insolvency and Bankruptcy Code (IBC) specifically disqualified former promoters from participating in the insolvency process and this disqualification also extended to a proposal for revival under Section 230 of the Companies Act, 2013.

The SC judgment was rendered by a bench comprising of Justices DY Chandrachud and MR Shah that stated, "The purpose of the ineligibility under Section 29A of IBC is sustainable revival and to ensure that a person who is the cause of the problem cannot be a part of the process of the solution."

The litigation background of the case is that the appellant was a promoter of Gujarat NRE Coke Limited [GNCL] and was allowed by the National Company Law Tribunal (NCLT) to negotiate a compromise between the company and its lenders after no bids were received for the company in the mandated 270-day period.

The Tribunal permitted the appellant to convene meetings between shareholders and creditors on the basis that IBC's larger objective was to keep the companies as going concerns.

Against the Tribunal's said order, an appeal was filed by Jindal Steel and Power who was an unsecured creditor of Gujarat NRE Coke, before the NCLAT.

The IBC was amended by the Insolvency and Bankruptcy Code (Amendment) Act, 2018. Section 29A was inserted in the Code with retrospective effect from 23 November 2017 that also provides a list of persons who are ineligible to be resolution applicants.

As per the said amendment to the Code, the appellant became ineligible to submit a resolution plan.

Subsequently, Regulation 2B was amended in 2020 that added a proviso to Regulation 2B 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 under Section 230 of the Companies Act.

The NCLAT held that in the absence of bids a company will go under liquidation and promoters cannot be asked to arrange settlements simply to keep the company a going concern.

It further stated that a person, who was ineligible under Section 29A of IBC to submit a resolution plan, was also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013.

The appellant assailed the National Company Law Appellate Tribunal [NCLAT] judgment, on the ground that Section 230 of the Companies Act of 2013 does not restrict any person to submit a compromise scheme.

The same also came to be challenged before the SC. It 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.

The Top Court clarified in its judgment that "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."

It noted further that the IBC liquidation scheme and Section 230 of the Companies Act scheme is a 'statutory continuum'. The Court added that there are the three modes in which a revival is contemplated under the provisions of the IBC:

• In the form of the Corporate Insolvency Resolution Process (CIRP) elucidated in the provisions of Chapter II of the IBC

• Where the corporate debtor or its business is sold as a going concern within the purview of clauses (e) and (f) of Regulation 32

• When a revival is contemplated through the modalities provided in Section 230 of the Act of 2013.

The Apex Court stated that the statutory scheme underlying the Code and the legislative history of its linkage with Section 230 of the Companies Act regarding the company that is undergoing liquidation leads to many controversial issues in the instant matter.

The Court clarified that Section 230 of the Companies Act is not a separate provision and it is linked to the provision of IBC. Hence, when Section 230 of the Companies Act is invoked it triggers the liquidation proceedings which have been initiated under the IBC. It is important to maintain harmony between the two Statutes and to read both sets of provisions together.

The SC bench further observed 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 judgment reads, "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."

The Top Court said, "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 SC further stated that such an interpretation would defeat the provisions of the IBC and it must be avoided. It held that even in the absence of 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 that is undergoing liquidation under the IBC.

The proviso to Regulation 2B of the IBC provides clarification and even in absence of the same, a person who is ineligible under Section 29A of the IBC would not be permitted to propose a compromise or arrangement under Section 230 of the Companies Act.

The Top Court rejected the petition filed for challenging the validity of Regulation 2B of the Code.