Can Defaulting Promoter, Disqualified From Submitting Resolution Plan, Propose Scheme For Compromise? Supreme Court To Examine

Mehal Jain

3 Feb 2021 4:18 PM GMT

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Can Defaulting Promoter, Disqualified From Submitting Resolution Plan, Propose Scheme For Compromise? Supreme Court To Examine

'Whether the Promoter is eligible to file an application for Compromise and Arrangement under section 230 of the Companies Act, while he is ineligible under Section 29A of the I&B Code to submit a 'Resolution Plan'?, the Supreme Court on Wednesday agreed to examine.Section 230 of the Companies Act, 2013 provides for a scheme of compromise or arrangement (including a reorganisation of...

Section 230 of the Companies Act, 2013 provides for a scheme of compromise or arrangement (including a reorganisation 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) between the company and its creditors or class of creditors or members or class of members.

Section 29A of the IBC is directed to oust the former management from taking control of a falling entity which they could not prosper/run.

The bench headed by Justice D. Y. Chandrachud was hearing an appeal arising out of the October 24, 2019 order of the NCLAT in Jindal Steel and Power Limited v. Arun Kumar Jagatramka & Gujarat NRE Coke Limited, where the NCLAT held that while a scheme under section 230 is maintainable for companies in liquidation under the Code, the same is not maintainable at the instance of a person ineligible under section 29A of the Code. The NCLAT relied on the observation of the Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation.

Given the recent NCLAT ruling in Arun Kumar Jagatramka, at present the position is that a creditor/member who is otherwise ineligible under section 29A is not qualified to be a proposer of a scheme. The rationale seems to be that the schemes under section 230 cannot become a "surrogate" route for the defaulting promoters to acquire the corporate debtor after a failed resolution.

The logic, as is understood, is the design of the Code and the intent of section 29A which the Apex Court had explained in Swiss Ribbons. As such, allowing the persons to take recourse to a scheme will defeat this objective.

"The issue is whether a member of a company can propose a scheme under section 230 once he has incurred disqualification under section 29A? Whether he can be a purchaser in liquidation?", the bench was told.

The bench, also comprising Justice M. R. Shah, was also seized of a writ petition by the present appellant challenging the relevant statutory regulations.

"The appellants have lost before the NCLAT on the same ground which has triggered the challenge to the regulations", SG Tushar Mehta told the bench.

The bench required an advance copy of the petition to be served on SG Mehta, for the Union of India. The bench allowed the SG to file a counter affidavit on the validity of the regulations in 2 weeks.

"Please assist us on the interplay between section 29A of the IBC and section 230 of the Companies Act", Justice Chandrachud told the SG.

At a request for de-tagging the writ petition from the appeals, Justice Chandrachud observed, "If you succeed in the appeal, then you can say that the regulations are coming in your way...there is an inter-linking between the two"

Section 230 provides that where a compromise or arrangement is proposed—

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them,

the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.

According to Section 29A, a person suffering from the disqualifications as mentioned hereunder shall not be eligible to submit a resolution plan. Further, any other person acting jointly or in concert with the prospective resolution applicant shall not be covered under the following disqualifications –

(i) the person is an undischarged insolvent;

(ii) the person is a wilful defaulter in terms of the RBI Guidelines issued under the Banking Regulation Act, 1949;

(iii) the person 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 RBI Guidelines issued under the Banking Regulation Act, 1949 and at least a period of 1 (One) year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor.

(iv) the person has been convicted for any offence punishable with imprisonment for 2 (Two) years or more;

(v) the person is disqualified to act as a director under the Companies Act, 2013;

(vi) the person is prohibited by SEBI from trading in securities or accessing the securities markets;

(vii) the person 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 an order has been made by the adjudicating authority under the provisions of the Code;

(viii) a person who has executed an enforceable 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 the Code;

(ix) a person who has been subject to the above listed disabilities under any law in a jurisdiction outside India;

(x) connected persons, i.e. persons connected to the person disqualified under any of the aforementioned points, such as those who are promoters or in management of control of the resolution applicant, or will be promoters or in management of control of the business of the corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party of the above referred persons.

Can Defaulting Promoter, Disqualified From Submitting Resolution Plan, Propose Scheme For Compromise? Supreme Court To Examine

Mehal Jain

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