FILING OF SECOND MOTION APPLICATION FOR THE APPROVAL OF THE SCHEME FORMULATED IN LIQUIDATION PROCESS

Scheme of arrangement

Section 230(1) of the Companies Act, 2013 (‘Act’ for short) provides that where a compromise or arrangement is proposed-

• between a company and its creditors or any class of them; or
•  between a company and its members or any class of them,

the National Company Law Tribunal (‘Adjudicating Authority’) 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,

 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 Adjudicating Authority  directs.

Dispensation of meeting of creditors

Section 230(9) of the Act provides that the Adjudicating Authority may dispense with calling of a meeting of creditor or class of creditors where such creditors or class of creditors, having at least ninety per cent value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement.

Issue

The issue to be discussed in this article is whether the Adjudicating Authority can issue directions to the liquidator  to file a second motion of application to approve the scheme of arrangement with reference to decided case law.  The National Company Law Appellate Tribunal (‘NCLAT’ for short) in‘K.G. Somani, Liquidator for delicious COCO Water Private Limited v. Rajnish Gupta and another’ – 2022 (12) TMI 981 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI, set aside the order of Adjudicating Authority directing the liquidator to file a second motion of application.

In the above case,  the Small Industries Development Bank of India initiated corporate insolvency resolution process against the corporate debtor Delicious Coco Water Park Private Limited in Company petition No (IB)-575 (ND)/2017. [ETHENIC AGENCIES PVT. LTD. VERSUS K.G. SOMANI, LIQUIDATOR OF DELICIOUS COCO WATER PVT. LTD. - 2021 (11) TMI 788 - NATIONAL COMPANY LAW TRIBUNAL , NEW DELHI BENCH]  The corporate debtor was ordered to be liquidated by the Adjudicating Authority.  The applicant K.G. Somani has been appointed as Liquidator.  In the liquidation process the corporate debtor proposed a scheme under Section 230 of the Act.  The Adjudicating Authority vide their order dated 04.10.2021 directed the liquidator to submit the scheme of compromise or arrangement before the financial creditor.  The financial creditor approved the scheme and the same is placed by the liquidator in IA 2308 of 2022 before the Adjudicating Authority.  The bank also filed an affidavit before the Adjudicating Authority that-

• The scheme submitted by the promoter under Section 230 of the Act was placed before the competent authority of Small Industries Development Bank of India for their Consent/approval.
• Small Industries Development Bank of India, being the sole secured creditor gave its consent/approval to the scheme submitted by the promoter under Section 230 of Act.
• In terms of Section 230(9) of Act  this  Adjudicating Authority is empowered to dispense with calling of a meeting of a creditor of class of creditors where such creditor having at least 90% value, agree and confirm by way of affidavit, to the scheme of compromise or arrangement.

In the said application, the appellant put forth the following prayers before the Adjudicating Authority-

• Allow the present application and to pass appropriate orders dispensing with holding of any meetings of the creditors and meeting of the shareholders for the approval of scheme in view of affidavit executed by Small Industrial Development Bank of India in terms of Section 230 (9) of Companies Act, 2013;
• Allow the scheme for Arrangement and Compromise proposed by Mr. Rajnish Gupta under Section 230 of Companies Act, 2013 in the liquidation process of Delicious Coco Water Private Limited;
• Pass an order directing that the Liquidator fee to be paid in accordance with Regulation 4 of Insolvency and Bankruptcy Board of India (Liquidation Process Regulations, 2016 as applicable; and
• Pass an order directing the Proposer of the scheme to pay the Liquidation Costs in priority as per Section 53 of the Insolvency and Bankruptcy Code 2016.

The Adjudicating Authority in their order dated 05.12.2022 directed the liquidator to file second motion application to approve the scheme.

The Second Motion Application is required to be filed before Adjudicating Authority after getting dispensation order for calling of Meeting of Creditors or Shareholders or after convening of Meeting of Creditors / Shareholders if dispensation is not directed by the Adjudicating Authority. After filing of Second Motion Application, a date is fixed by the Adjudicating Authority for final hearing of the petition. Thereafter the Company is also required to serve notice of petition to the Regional Director and Official Liquidator under the Companies Act along with the Chartered Accountant (“CA”) appointed by the Liquidator.

The said order was challenged by the liquidator in the present appeal before the NCLAT.  The appellant submitted the following before NCLAT-

• The sole Financial Creditor is Small Industries Development Bank of India who has already filed an Affidavit dated 10^th May, 2022 where Bank has approved the scheme.
• In view of the sole Financial Creditor having approved the scheme, there was no occasion for issuing any notice under Section 230(5) of the Act.
• The Adjudicating Authority had ample jurisdiction to dispense the notice under Section 230(9) of the Act.

The Financial creditor, Small Industries Development Bank of India submitted that the  Bank has already approved the scheme and there was no requirement of issuing notice for Second Motion.

The NCLAT considered the submissions of the liquidator and the Bank and perused the records relating to the present appeal.  The NCLAT analyzed the provisions of Section 230 of the Act. 

The NCLAT held that the sole Financial Creditor having approved the scheme, the condition as provided in Section 230(9) were clearly met and the Adjudicating Authority can very well dispense with the calling of a meeting of creditor or class of creditors. Present is a case where 100% of the Financial Creditor has approved the scheme.  The NCLAT set aside the order of Adjudicating Authority and directed the Adjudicating Authority to consider the dispensation of the second motion notice in view of the facts of the present case as per Section 230(9) of the Act.