2022 (8) TMI 425 - AT - Companies Law

Tribunal overturns disqualification order, emphasizes correct application of insolvency laws

The Tribunal allowed the appeal, setting aside the order that dismissed the application challenging the disqualification of an independent Director to ... Disqualification under Section 29A of the Insolvency and Bankruptcy Code, 2016 - independent director as defined under Section 149(6) of the Companies Act, 2013 - Regulation 2B of the Liquidation Process Regulations (pre-amendment) - Scheme of Compromise and Arrangement under Section 230 of the Companies Act, 2013 - applicability of Arcelor Mittal principle to liquidation and compromise proceduresIndependent director as defined under Section 149(6) of the Companies Act, 2013 - disqualification under Section 29A of the Insolvency and Bankruptcy Code, 2016 - Regulation 2B of the Liquidation Process Regulations (pre-amendment) - Scheme of Compromise and Arrangement under Section 230 of the Companies Act, 2013 - applicability of Arcelor Mittal principle to liquidation and compromise procedures - Whether an independent non-executive director is disqualified from submitting a Scheme of Compromise and Arrangement during liquidation under the pre-amendment wording of Regulation 2B read with Section 29A and Section 35(1)(f) of the IBC. - HELD THAT: - The Tribunal found that an independent non-executive director, as characterised by Section 149(6) of the Companies Act, 2013, does not exercise control over management in the sense contemplated by the definitions of 'control' and director-related disqualifications. Applying the reasoning in Arcelor Mittal, which distinguishes de jure and de facto control and confines disqualification to persons who can positively influence management or policy decisions, the Court concluded that the appellant (an independent non-executive director) lacks the control that would attract the disqualification under Section 29A. The Adjudicating Authority had applied the Arun Kumar Jagatramka approach without regard to the date and scope of the amendment to Regulation 2B; it thereby extended disqualification to the appellant under the pre-amendment regime. Having examined the statutory definitions and the Arcelor Mittal interpretation, the Tribunal held that, prior to the amended proviso to Regulation 2B, no disqualification could be attached to an independent non-executive director for proposing a Scheme of Compromise and Arrangement during liquidation, and that the Adjudicating Authority erred in dismissing the application on that ground.The impugned order dismissing the application was set aside and the appellant, an independent non-executive director, is held not disqualified to submit the Scheme of Compromise and Arrangement during liquidation under the pre-amendment Regulation 2B read with Section 29A/Section 35(1)(f).Final Conclusion: The appeal is allowed; the order dated 14th December, 2021 dismissing IA No. 4116/(ND)/2021 in CP(IB) No. 2260(ND)/2019 is set aside and the appellant is permitted to submit the Scheme of Compromise and Arrangement during the liquidation process under the pre-amendment regulatory regime. Issues:1. Disqualification of an independent Director to submit a Compromise or arrangement in a liquidation process.2. Interpretation of Section 29A of the Insolvency and Bankruptcy Code, 2016.3. Application of Regulation 2B of Liquidation Process Regulation to the submission of a Scheme of Compromise and Arrangement.4. Definition and role of an Independent Director as per the Companies Act, 2013.5. Comparison of judgments in Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr. and Arcelor Mittal India Private Limited Vs. Satish Kumar Gupta & Ors.Analysis:1. The judgment dealt with the appeal against the dismissal of an application under Section 61 of the Insolvency and Bankruptcy Code, 2016, challenging the disqualification of an independent Director to submit a Scheme of Compromise and Arrangement during the liquidation process. The appellant, an independent Director of both the Corporate Debtor and the Compromise Applicant, contended that the disqualification was wrongly imposed based on Regulation 2B of Liquidation Process Regulation and Section 29(j)(ii) of the IBC.2. The Adjudicating Authority's decision was challenged on the grounds that the independent Director was not disqualified under Section 29A of the IBC or Regulation 2B of Liquidation Process Regulation. The appellant argued that the Authority failed to consider the definition and role of an Independent Director as per Section 149(6) of the Companies Act, 2013, and erroneously applied the principles from a previous judgment without considering the relevant amendments.3. Both counsels presented detailed written submissions emphasizing that the Adjudicating Authority misinterpreted the relevant provisions of the IBC and Liquidation Process Regulation. They highlighted the applicability of the judgment in Arcelor Mittal India Private Limited Vs. Satish Kumar Gupta & Ors. and requested the setting aside of the impugned order to allow the submission of the Scheme of Compromise and Arrangement by the independent Director.4. The Tribunal analyzed the definitions and provisions of the Companies Act, 2013, regarding Independent Directors and control within a company. Referring to the judgment in Arcelor Mittal India Private Limited, the Tribunal concluded that the independent Non-Executive Director in this case did not have control over the management of the company and, therefore, was not disqualified to propose the Compromise and Arrangement during the liquidation process.5. Ultimately, the Tribunal found that the Adjudicating Authority had erred in dismissing the application based on the previous judgment without considering the relevant amendments and facts of the case. The appeal was allowed, setting aside the order and permitting the independent Director to submit the Scheme of Compromise and Arrangement during the liquidation process. The judgment emphasized the correct interpretation of the provisions of the IBC and the Companies Act, 2013, in such matters.