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of <h1>Supreme Court upholds ineligibility criteria for schemes during liquidation under Insolvency and Bankruptcy Code</h1> The Supreme Court held that the ineligibility criteria under Section 29A and Section 35(1)(f) of the Insolvency and Bankruptcy Code (IBC) must apply to ... Approval of scheme of compromise and arrangement - prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC - Ineligibility during the resolution process and liquidation - Interplay between IBC liquidation and Section 230 of the Act of 2013 - Clean Slate - Constitutional Validity of Regulation 2B - Liquidation Process Regulations - Whether in a liquidation proceeding under Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the 'l&B Code') the Scheme for Compromise and Arrangement can be made in terms of Sections 230 to 232 of the Companies Act? - If so permissible, whether the Promoter is eligible to file application for Compromise and Arrangement, while he is ineligible under Section 29A of the I&B to submit a ‘Resolution Plan’? Ineligibility during the resolution process and liquidation - HELD THAT:- The ineligibility which was engrafted by the amending legislation was incorporated in both the provisions of Chapter II dealing with the CIRP as well as in Chapter III dealing 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 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. The ‘Clean Slate’ - HELD THAT:- The liquidator exercises several functions which are of a quasi-judicial in nature and character. Section 35(1) itself enunciates that the powers and duties which are entrusted to the liquidator are “subject to the directions of the adjudicating authority”. The liquidator, in other words, exercises functions which have been made amenable to the jurisdiction of the NCLT, acting as the Adjudicating Authority. To hold therefore that the ineligibility prescribed under the provisions of Section 35(1)(f) can be disregarded by the Tribunal for the purpose of considering an application for a scheme of compromise or arrangement under Section 230 of the Act of 2013, in respect of a company which is under liquidation under the IBC, would not be a correct construction of the provisions of law. Constitutional validity of Regulation 2B - Liquidation Process Regulations - HELD THAT:- The public comments were invited. The discussion paper is what it professes to be – a matter for discussion in the public realm. This cannot be held to constitute an admission of IBBI that an applicant who is ineligible under Section 29A may submit a scheme of compromise or arrangement under 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. The prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC must also attach itself to a scheme of compromise or arrangement under Section 230 of the Act of 2013, when the company is undergoing liquidation under the auspices of the IBC - As such, Regulation 2B of the Liquidation Process Regulations, specifically the proviso to Regulation 2B(1), is also constitutionally valid. There is no merit in the appeals and the writ petition - Appeal dismissed. Issues Involved:1. Ineligibility during the resolution process and liquidation.2. Interplay between IBC liquidation and Section 230 of the Companies Act, 2013.3. The concept of a 'Clean Slate' in insolvency resolution.4. Constitutional validity of Regulation 2B of the Liquidation Process Regulations.Issue-wise Detailed Analysis:1. Ineligibility during the resolution process and liquidation:Section 29A of the Insolvency and Bankruptcy Code (IBC) was introduced to ensure that persons responsible for the insolvency of a corporate debtor do not participate in the resolution process. This section lists categories of persons who are ineligible to submit a resolution plan. The same ineligibility is extended to the liquidation process through Section 35(1)(f), which prohibits the liquidator from selling the assets of the corporate debtor to any person ineligible under Section 29A. This was to prevent unscrupulous persons from regaining control of the debtor company. The Supreme Court has consistently upheld this interpretation to maintain the integrity of the insolvency process.2. Interplay between IBC liquidation and Section 230 of the Companies Act, 2013:Section 230 of the Companies Act, 2013 allows for a scheme of compromise or arrangement between a company and its creditors or members. This section is applicable even during the liquidation of a company under the IBC. The Supreme Court noted that while Section 230 is broader in scope, when it is invoked in the context of a company undergoing liquidation under the IBC, the ineligibilities under Section 29A and Section 35(1)(f) must apply. This ensures that the same principles preventing ineligible persons from participating in the resolution process are upheld during liquidation.3. The concept of a 'Clean Slate':A resolution plan approved under Section 31 of the IBC results in the corporate debtor starting afresh, free from past liabilities. This 'clean slate' approach ensures that the successful resolution applicant can run the business without being encumbered by past debts. The Supreme Court distinguished this from a mere withdrawal of an insolvency application under Section 12-A, which reverts the company to its previous state without resolving its debts. A scheme under Section 230, while binding on all stakeholders, does not offer the same 'clean slate' benefit as a resolution plan under Section 31.4. Constitutional validity of Regulation 2B of the Liquidation Process Regulations:Regulation 2B, introduced by the Insolvency and Bankruptcy Board of India (IBBI), stipulates that a person ineligible under the IBC to submit a resolution plan cannot be a party to a compromise or arrangement under Section 230. The Supreme Court upheld the validity of this regulation, noting that it is consistent with the IBC and necessary to carry out its provisions. The regulation ensures that the principles of ineligibility under Section 29A extend to schemes of compromise or arrangement during liquidation, thus maintaining the integrity of the insolvency process.Conclusion:The Supreme Court concluded that the ineligibility criteria under Section 29A and Section 35(1)(f) of the IBC must also apply to schemes of compromise or arrangement under Section 230 of the Companies Act, 2013, when the company is undergoing liquidation under the IBC. Regulation 2B of the Liquidation Process Regulations, which enforces this principle, was held to be constitutionally valid. The appeals and writ petition challenging these provisions were dismissed.
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