TaxTMI 
TaxTMI 
2021 (3) TMI 611
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....t dated 24 October 2019, the National Company Law Appellate Tribunal ("NCLAT") held that a person who is ineligible under Section 29A of the Insolvency Bankruptcy Code, 2016 ("IBC") to submit a resolution plan, is also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013 the "Act of 2013". The judgment was rendered in an appeal Company Appeal (AT) No. 221 of 2018 filed by Jindal Steel and Power Limited "JSPL", an unsecured creditor of the corporate debtor, Gujarat NRE Coke Limited "GNCL". The appeal was preferred against an order passed by the National Company Law Tribunal "NCLT" in an application C.A. (CAA) No. 198/KB/2018 under Sections 230 to 232 of the Act of 2013, preferred by Mr Arun Kumar Jagatramka, who is a promoter of GNCL. The NCLT had allowed the application and issued directions for convening a meeting of the shareholders and creditors. In its decision dated 24 October 2019, the NCLAT reversed this decision and allowed the appeal by JSPL. The decision of the NCLAT dated 24 October 2019 is challenged in the appeal before this Court. 2 Mr Arun Kumar Jagatramka, assails the order dated 24 October 2019 of the NCLAT, i....
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....India issued under the Banking Regulation Act, 1949 (10 of 1949); (c) at the time of submission of the resolution plan 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 the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of 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: Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to nonperforming asset accounts before submission of resolution plan; Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor. Explanation I.-- For the purposes of this provi....
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....lace prior to the acquisition of the corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction; (h) has executed a 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 this Code and such guarantee has been invoked by the creditor and remains unpaid in full or part; (i) is subject to any disability, corresponding to clauses (a) to (h), under any law in a jurisdiction outside India; or (j) has a connected person not eligible under clauses (a) to (i). Explanation I -- For the purposes of this clause, the expression "connected person" means- (i) any person who is the promoter or in the management or control of the resolution applicant; or (ii) any person who shall be the promoter or in management or control of the business....
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....ed) Due to the insertion of Section 29A, Mr Arun Kumar Jagmatramka became ineligible to submit a resolution plan. 6 No further resolution plan was approved by the CoC due to the paucity of time. In the absence of a resolution plan, the NCLT passed an order of liquidation on 11 January 2018, after the expiry of 270 days. The order of the NCLT ordering liquidation was challenged in appeal Company Appeal (IB) No. 55-56 of 2018 by Mr Arun Kumar Jagatramka before the NCLAT. The appeal was dismissed by the NCLAT by its order dated 10 July 2018. The dismissal of the appeal by the NCLAT was assailed before this Court, which issued notice to GNCL on 19 July 2019. 7 During the pendency of the appeal before NCLAT, where the order of liquidation passed by the NCLT was assailed, Mr Arun Kumar Jagatramka moved an application under Sections 230 to 232 of the Act of 2013 before the NCLT proposing a scheme for compromise and arrangement between the erstwhile promoters and creditors. This application was allowed by the NCLT through its order dated 15 May 2018, and a direction was issued for convening of a meeting of shareholders, secured creditors, unsecured creditors and FCCB holders for a....
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.... provision, it is clear that the Promoter, if ineligible under Section 29A cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or actionable claims of the 'Corporate Debtor'." (emphasis in original) 9 The judgment and order of the NCLAT is the subject of the appeal. A.2 Civil Appeal 2719 of 2020 "Second Appeal" 10 This appeal has been filed for assailing an order dated 19 December 2019 of the NCLAT in which it relied on the judgment dated 24 October 2019 impugned in the earlier appeal, to hold that an individual ineligible for proposing a resolution plan under Section 29A of the IBC, is also ineligible to propose a scheme of compromise and arrangement under Section 230 of the Act of 2013. 11 The appellant - Mr Kunwer Sachdev - was the promoter and director (since suspended) of Su-Kam Power Systems Limited "Su-Kam". An application CP (IB)/540 (PB)/2017) under Section 7 of the IBC was filed by one of the financial creditors of Su-Kam, which was admitted by the NCLT through its order dated 5 April 2018. The CIRP was initiated against Su-Kam. 12 When the RP invited applications for resolution plans....
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....important to first understand the controversy surrounding the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 "Liquidation Process Regulations". 19 The Liquidation Process Regulations have been issued by the Insolvency and Bankruptcy Board of India "IBBI", constituted under Part IV of the IBC, in exercise of the powers conferred by Sections 5, 33, 34, 35, 37, 38, 39, 40, 41, 43, 45, 49, 50, 51, 52, 54, 196 and 208 read with Section 240 of the IBC. 20 The Liquidation Process Regulations were amended by the IBBI by a notification Noti. No. IBBI/2019-20/GN/REG047 dated 25 July 2019, which inserted Regulation 2B. Sub-section (1) of Regulation 2B provides that a compromise or arrangement proposed under Section 230 of the Act of 2013 shall have to be completed within 90 days of the order of liquidation issued under sub-sections (1) and (4) of Section 33 of the IBC. Further, Sub-section (2) provides that the time taken in a compromise or arrangement, not exceeding 90 days, shall not be included within the liquidation period. Finally, Sub-section (3) provides that any cost which is incurred by the Liquidator in relation to the compromise or arrangemen....
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.... the Petitioner prays that this Hon'ble Court may be pleased to issue: a. Writ, Order or Direction more particularly in the nature of WRIT OF DECLARATION declaring that the provisions of Notifications dated 25.07.2019 and 06.01.2020 issued by the Insolvency and Bankruptcy Board of India are ultra vires the Insolvency and Bankruptcy Code, 2016 as well as the Companies Act, 2013 and violative of Article 14, 19, 21 of the Constitution of India." B Issues 23 Having detailed the factual background of these petitions, we shall now turn to the issues before this Court and the submissions of counsels. 24 The NCLAT formulated two principal issues in the first of its judgments in appeal: "(i) 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; (ii) 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'." 25 The first of the abov....
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....of the appellant in the First Appeal and the Petition under Article 32 submitted that: (i) Chapter II of the IBC indicates that the CIRP can be invoked in three modes: (a) By a financial creditor under Section 7; (b) By an operational creditor under Section 9; and (c) By a corporate debtor under Section 10. (ii) The IBC and its regulations indicate that there is a clear distinction between: (a) the settlement mechanism which allows for a settlement upon which the corporate debtor would stand restored to the promoter together with all its assets and liabilities; and (b) the resolution mechanism under which, upon the acceptance of a resolution plan, the company moves over to the control of the acquirer on a clean slate for a fixed consideration, consequent to the provisions of Section 31; (iii) Section 29A is a part of the resolution mechanism, the object and purpose of which is to prevent a back-door entry to the promoter who should not be allowed to have advantage of their own wrong; (iv) Though the appellant falls in the prohibited category under Section 29A, the purpose of the prohibition is to prevent the pr....
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....can be permitted between admission of the application and the constitution of the CoC. Following up on this, Regulation 30-A was substituted on 25 July 2019 to allow an application for withdrawal under Section 12-A both before and after the constitution of the CoC. However, where the application is made after the constitution of the CoC (under Regulation 30-A(1)(b)), and after the issuance of the invitation for expression of interest, the reasons justifying the withdrawal are required to be stated; (ix) The decision in Brilliant Alloys (P) Ltd. v. S Rajagopal 2018 SCC OnLine SC 3154; hereinafter, referred to as "Brilliant Alloys" would indicate that a withdrawal can be permitted even after the expression of interest, as a consequence of which Regulation 30-A is directory in nature; (x) The consequence of a withdrawal of the application under Sections 7, 9 or 10 is that the corporate debtor stands restored to the promoter. As such, Section 29A does not operate as an ineligibility on the settlement mechanism. On the withdrawal of the application the corporate debtor goes back to the same promoter, even if they are ineligible under Section 29A for the submis....
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....y which attaches to the resolution process under Section 29A will not attach to Section 230 of the Act of 2013. The proviso to Regulation 2B was notified by the IBBI on 6 January 2020 to stipulate 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 to such compromise or arrangement. Regulation 2B is ultra vires the provisions of Section 230 of the Act of 2013. IBBI had no statutory authority to make the Regulation 2B, through which it has effectively provided a disqualification under the Act of 2013, even though the mandate of IBBI is confined only to the IBC; and (xvi) Regulation 2B is violative of Articles 14, 19 and 21 of the Constitution as it seeks to import an ineligibility under the provisions of the IBC to a dissimilar provision in the Act of 2013. Moreover, when ineligibility is not attracted under Section 12-A of the IBC, imposing this ineligibility under Section 230 of the Act of 2013 is arbitrary. 30 Adopting the submissions which were urged by Mr Sandeep Bajaj, Mr Shiv Shankar Banerjee, learned Counsel appearing on behalf of the appellant in the Second Appeal, sub....
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.... or shareholders. Even prior to its amendment, this Court had held that additional conditions apply when a plan under the erstwhile provisions of Section 391 of the Act of 1956 is propounded at the time of liquidation of the company; (ii) Section 29A has several ineligibilities apart from those that attach to promoters. To allow a person who is ineligible under Section 29A from submitting a compromise or arrangement under Section 230 at the liquidation stage is contrary to the letter and spirit of the IBC; (iii) The NCLT while dealing with an application for a compromise or arrangement under Section 230 of the Act of 2013, in respect of a company which is being liquidated under the IBC, performs a dual role: firstly, as an Adjudicating Authority under the IBC and as a Tribunal under the Act of 2013. Therefore, it can insist on adherence to additional conditions namely that: (a) The proposed compromise or arrangement must result in a revival of the company; and (b) The compromise or arrangement cannot be proposed by a person who is barred under Section 29A; (iv) When the IBC was originally enacted there was no bar of the nature found in S....
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....of company. The impact of a scheme under Section 391, where the company is in liquidation, is that the proposers of the scheme enter into the management with the debt having been resolved. This makes the scheme of compromise or arrangement under Section 230 qualitatively different from a simpliciter withdrawal of an application under Section 12-A of the IBC. Section 12-A does not incorporate any requirement for the revival of the company; (xiii) The IBC provides for three modes of revival: (a) the CIRP under Chapter II; (b) sale of a company in liquidation as a going concern (read with Regulation 32(e) and (f)); and (c) a scheme of compromise or arrangement under Section 230 of the Act of 2013, following upon an order for liquidation being passed under Chapter III of the IBC; The prohibition or ineligibility which applies in (a) and (b) must necessarily attach to (c) as well. When a plan for compromise or arrangement is proposed at the liquidation stage of IBC under Section 230 of the Act of 2013, it must satisfy the rigors of the IBC. Hence, a person who is ineligible under Section 29A cannot submit a plan under Section 230 of ....
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....nuary 2020 is only by way of a clarification; (xix) Dehors the provisions of the IBC, the rigors of the IBC will not apply to a proceeding under Section 230 of the Act of 2013. In other words, the ineligibility under Sections 29A and 35(1)(f) applies only to a situation where a corporate debtor has come within the purview of the IBC and has been taken into liquidation under Chapter III. It is only where a compromise or arrangement under Section 230 of the Act of 2013 is proposed in respect of a company which is undergoing liquidation under the IBC that the rigors of Section 29A and 35(1)(f) would stand attracted; (xx) An absurdity will result if persons found to be derelict or guilty of malfeasance, who are barred from: (a) submitting a resolution plan; (b) obtaining a sale of assets in liquidation; and (c) obtaining a sale of the company as a going concern. can still propose a compromise under Section 230 of the Act of 2013. It is a settled principle of law that an interpretation which leads to absurdity must be avoided; (xxi) There is a fallacy in equating the provisions of Section 230 of the Act of 2013 with an application fo....
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.... which was sought to be obviated; (v) When a company is in liquidation under the IBC, a scheme proposed under Section 230 is a facet of the liquidation process and the same rationale which permeates the liquidation process must also govern it; and (vi) Section 12-A stands on a completely different footing. It provides for a withdrawal at the inception of the CIRP and is not a culmination of a resolution process. Nor does a Section 12-A withdrawal bind all stakeholders. 33 Mr Gopal Jain, learned Senior Counsel appearing for the respondents in the First Appeal, has urged submissions along the same lines as Mr Amit Sibal. His submissions are summarized below: (i) The commencement or the initiation process attracting the IBC is an application under Sections 7, 9 or 10; (ii) In the present case, an application was filed under Section 10 as a consequence of which the case has to be analyzed through the prism of the IBC; (iii) The IBC is an economic legislation and its key objectives are to ensure: (a) good corporate governance; (b) control deviant behavior; (c) protect the integrity of the resolution process; ....
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....nal period of ninety days for a compromise under Section 230 of the Act of 2013 because the entire process is time specific; (iii) Even if the legal position is assessed independent of Regulation 2B, the same embargo as contained in Section 29A and Section 35(1)(f) would apply to a compromise or arrangement proposed under Section 230 of the Act of 2013 in respect of a company which is undergoing liquidation under Chapter III of the IBC; (iv) Regulation 2B is essentially clarificatory; (v) The basis of Regulation 2B is the same as Sections 29A and 35(1)(f), which is that a person who is the cause of the problem either by a design or default cannot be a part of the process solution; (vi) The IBC is a beneficial legislation. Prior to the enactment of the IBC: (a) individual creditors had individual remedies; and (b) the debtor would remain in possession of the company and its assets. With the introduction of the IBC, there has been a paradigm shift in that: (a) under the new legal regime there is a collective effort of all creditors even if at the behest of one of them; (b) the creditor is in control inst....
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.... (i) A time bound process of re-organization and insolvency resolution; (ii) Maximization of the value of assets; (iii) Promoting entrepreneurship; (iv) Facilitating the availability of credit; and (v) Balancing the interests of all stakeholders. 39 Some of the key drawbacks of the legal regime, as it existed prior to the enactment of the IBC, were: (i) The absence of a single legislation governing insolvency and bankruptcy; (ii) A multiplicity of laws governing insolvency and bankruptcy of corporate entities; (iii) The existence of multiple fora established to deal with the enforcement of diverse legislative provisions; and (iv) The complexity caused by a maze of statutes resulting in inadequate, ineffective and delayed resolutions, occasioned by the (then) existing framework. These inadequacies were noticed in the Statement of Objects and Reasons accompanying the introduction of the Bill. The IBC reflects a fundamental change in the erstwhile legal regime. A timely resolution of corporate insolvency was conceived as an instrument to support the development of credit markets, encourage entrepreneurship, ....
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.... 41 On 23 November 2017, Parliament intervened through its amending power to introduce Section 29A into the provisions of Chapter II and Section 35(1)(f) into the provisions of Chapter III. Chapter II of the IBC ,which enunciates provisions for the CIRP, has evolved over the previous four years. Chapter III enunciates provisions in regard to the liquidation process. Section 29A stipulates diverse categories of persons who will not be eligible to submit a resolution plan. 42 By the same amending Act through which Section 29A was introduced, Section 35(1)(f) was also amended with the introduction of a proviso. Section 35 specifies the powers of the liquidator as well as their duties, which are subject to the directions of the Adjudicating Authority. Section 35(1)(f) provides as follows: "35. Powers and duties of liquidator.-(1) Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely:- ... (f) subject to section 52, to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such prop....
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....aircut and the man who created the insolvency pays a fraction of the amount and comes back into management. Should we allow that to continue? The overwhelming view, as expressed by the Members, is that it should not be allowed. This was a gap which was there in the original Bill and by bringing in 29(a) we have tried to fill in that gap. That is the objective. In order that this provision must apply to all existing cases of resolution which are pending, that is the case for urgency. If we had not done this, then all such defaulters would have rejoiced because they would have merely walked back into these companies by paying only a fraction of these amounts. That is something which besides being commercially imprudent would also be morally unacceptable. That is the real rationale behind this particular Bill:." (emphasis supplied) 45 The Report of the Insolvency Law Committee dated 3 March 2018 states that the intent behind introducing Section 29A was to prevent unscrupulous persons from gaining control over the affairs of the company. These persons included those who by their misconduct have contributed to the defaults of the company or are otherwise undesirable. The Com....
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....een raised that persons who, with their misconduct contributed to defaults of companies or are otherwise undesirable, may misuse this situation due to lack of prohibition or restrictions to participate in the resolution or liquidation process, and gain or regain control of the corporate debtor. This may undermine the processes laid down in the Code as the unscrupulous person would be seen to be rewarded at the expense of creditors. In addition, in order to check that the undesirable persons who may have submitted their resolution plans in the absence of such a provision, responsibility is also being entrusted on the committee of creditors to give a reasonable period to repay overdue amounts and become eligible." (emphasis supplied) Parliament was evidently concerned over the fact that persons whose misconduct has contributed to defaults on the part of debtor companies misuse the absence of a bar on their participation in the resolution process to gain an entry. Parliament was of the view that to allow such persons to participate in the resolution process would undermine the salutary object and purpose of the Act. It was in this background that Section 29A has now ....
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..... A. Salomon & Co. Ltd. [Salomon v. A. Salomon & Co. Ltd., 1897 AC 22 (HL)] will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan.". Swiss Ribbons 50 In Swiss Ribbons (supra), the constitutionality of certain provisions of the IBC was challenged. Justice Rohinton F Nariman emphasised the object of the IBC in the following observations: "27. As is discernible, the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. Unless such reorganization is effected in a time-bound manner, the value of the assets of such persons will deplete. Therefore, maximization of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution....
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....ther management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends." 51 While adverting to the earlier decision in Chitra Sharma and Arcelormittal (supra), which had elucidated the object underlying Section 29A, this Court in Swiss Ribbons (supra) held that the norm underlying Section 29A "continues to permeate" Section 35(1)(f) "when it applies not merely to resolution applicants, but to liquidation also". Rejecting the plea that Section 35(1)(f) is ultra vires, this Court held: "102. According to the learned counsel for the petitioners, when immovable and movable property is sold in liquidation, it ought to be sold to any person, including persons who are not eligible to be resolution applicants as, often, it is the erstwhile promoter who alone may purchase such properties piecemeal by public auction or by private contract. The same rationale that has been provided earlier in this judgment will apply to this proviso as well - there is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable and movable property of the corporate debtor in liquidation. Further, given the categories of person....
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....uct in relation to the corporate debtor but in relation to other companies as well. This is evident from clause (c) ("an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as a non-performing asset"), and clauses (e), (f), (g), (h) and (i) which have widened the net beyond the conduct in relation to the corporate debtor. 54 The prohibition which has been enacted under Section 29A has extended, as noted above, to Chapter III while being incorporated in the proviso to Section 35(1)(f). Under the Liquidation Process Regulations, Chapter VI deals with the realization of assets. Regulation 32 is in the following terms: "32. Sale of Assets, etc. The liquidator may sell- (a) an asset on a standalone basis; (b) the assets in a slump sale; (c) a set of assets collectively; (d) the assets in parcels; (e) the corporate debtor as a going concern; or (f) the business(s) of the corporate debtor as a going concern: Provided that where an asset is subject to security interest, it shall not be sold under any of the clauses (a) to (f) unless the securi....
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....ny 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, 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. Explanation.-For the purposes of this sub-section, arrangement includes a reorganization 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." 58 A compromise or arrangement under Sub-section (1) of Section 230 may take place: (i) between a company and its creditors or any subset of creditors; or (ii) between a company and its members or subset of members. 59 Liquidation is one of the factual situations in which the provisions of Section 230 can be invoked. Section 230(1) can also be invoked in the case of a company which is wound up, as is evident from the statutory....
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....a). Justice PK Balasubramanyan, speaking for the two judge Bench of this Court, adverted to the earlier decision in Miheer H Mafatlal v. Mafatlal Industries Ltd. (1997) 1 SCC 579 which had dealt with the jurisdiction of the Company Court (or the Company Law Board as it then was) while sanctioning a scheme of merger or amalgamation of two companies. The earlier decision, as this Court noted, did not involve either a transferor or transferee in liquidation. Hence, this Court did not have occasion to consider whether "any additional tests have to be satisfied when the company concerned is in liquidation and a compromise or arrangement in respect of it is proposed". Dealing specifically with a company which has been ordered to be wound up, this Court observed that the Company Court (before whom the jurisdiction under the erstwhile Section 391 was vested at the material time) had "necessarily to see whether the scheme contemplates revival of the business of the company". In that context, this Court observed: "47. When a company is ordered to be wound up, the assets of it are put in possession of the Official Liquidator. The assets become custodia legis. The follow-up, in the....
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....n respect of a company in liquidation. IBC liquidation and Section 230 scheme : a statutory continuum 64 Now, there is no reference in the body of the IBC to a scheme of compromise or arrangement under Section 230 of the Act of 2013. Sub-section (1) of Section 230 was however amended with effect from 15 November 2016 so as to allow for a scheme of compromise or arrangement being proposed on the application of a liquidator who has been appointed under the provisions of the IBC. The substratum of the submission of Mr Sandeep Bajaj, learned Counsel for the appellants, is that Section 230 is not regulated by the IBC but is a provision independent of it, though after the amendment of Sub-section (1), a compromise or arrangement can be proposed by the liquidator appointed under the IBC. Aligned to this submission, he urged that the decision in Meghal Homes (supra) recognises that the liquidator is an additional person who may submit an application under Section 391 of the Act of 1956 (corresponding to Section 230 of the Act of 2013). The submission of Mr Bajaj however misses the crucial interface between the provisions of Section 230 of the Act of 2013 in their engagement with a....
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.... above discussion the three modes in which a revival is contemplated under the provisions of the IBC. The first of those modes of revival is in the form of the CIRP elucidated in the provisions of Chapter II of the IBC. The second mode is where the corporate debtor or its business is sold as a going concern within the purview of clauses (e) and (f) of Regulation 32. The third is when a revival is contemplated through the modalities provided in Section 230 of the Act of 2013. A scheme of compromise or arrangement under Section 230, in the context of a company which is in liquidation under the IBC, follows upon an order under Section 33 and the appointment of a liquidator under Section 34. While there is no direct recognition of the provisions of Section 230 of the Act of 2013 in the IBC, a decision was rendered by the NCLAT on 27 February 2019 in Y Shivram Prasad v. S Dhanapal 2019 SCC OnLine NCLAT 172; herein, referred to as "Y Shivram Prasad". NCLAT in the course of its decision observed that during the liquidation process the steps which are required to be taken by the liquidator include a compromise or arrangement in terms of Section 230 of the Act of 2013, so as to ensure....
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....only to a company in liquidation or to corporate debtor which is being wound up under Chapter III of the IBC. Obviously, therefore, the rigors of the IBC will not apply to proceedings under Section 230 of the Act of 2013 where the scheme of compromise or arrangement proposed is in relation to an entity which is not the subject of a proceeding under the IBC. But, when, as in the present case, the process of invoking the provisions of Section 230 of the Act of 2013 traces its origin or, as it may be described, the trigger to the liquidation proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony. A harmonious construction between the two statutes G.P. Singh, Principles of Statutory Interpretation (1st edn., Lexis Nexis 2015) which notes that "Further, these principles [referring to the principle of harmonious construction] have also been applied in resolving a conflict between two different Acts" and providing the following examples - "Jogendra Lal Saha v. State of Bihar, 1991 Supp (2) SCC 654 (Sections 82 and 83 of the Forest Act, 1927 are special provisions which prevail over the provisions in the Sale of Goods Act ); Jas....
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.... provisions of the IBC and must be eschewed. 70 An argument has also been advanced by the appellants and the petitioners that attaching the ineligibilities under Section 29A and Section 35(1)(f) of the IBC to a scheme of compromise and arrangement under Section 230 of the Act of 2013 would be violative of Article 14 of the Constitution as the appellant would be "deemed ineligible" to submit a proposal under Section 230 of the Act of 2013. We find no merit in this contention. As explained above, the stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages. 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. D.3 The....
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.... to examine whether the resolution plan provides for the payment of the debt of operational creditors which shall not be less than the amount which is payable to them in the event of liquidation. On the other hand, the provisions of Section 230 of the Act of 2013 are far more stringent in that they require a voting share of 75 per cent and, where the company is in liquidation, a settlement with all creditors including the operational creditors; (iv) Section 35(1)(f) applies to the liquidator but does not apply to the NCLT, acting as either the Adjudicating Authority or as the Tribunal; (v) A resolution plan upon being approved becomes binding on all stakeholders and is attended with all benefits unlike Section 230 of the Act of 2013; (vi) Under Regulation 32 of the Liquidation Process Regulations, two modes are contemplated for the sale of the corporate debtor as a 'going concern', while four modes are contemplated for the sale of the assets of the corporate debtor. The prohibition under Section 35(1)(f) will apply only to a sale which is governed by Regulation 32, and will have no application to a scheme of compromise or arrangement which is proposed und....
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....ting share, the resolution professional shall submit the application under sub-regulation (1) to the Adjudicating Authority on behalf of the applicant, within three days of such approval. (5) The Adjudicating Authority may, by order, approve the application submitted under sub-regulation (4).", as it originally stood, an application for withdrawal under Section 12-A was required to be submitted before the issuance of an invitation for the expression of interest under Regulation 36-A. In the decision of this Court in Swiss Ribbons (supra), which was rendered on 25 January 2019, it was contemplated that an application for withdrawal may be presented between the period commencing from the admission of the application and the date of the constitution of the CoC. This led to the substitution of the Regulation 30-A "30A. Withdrawal of Application- (1) An application for withdrawal under section 12A may be made to the Adjudicating Authority- (a) before the constitution of the committee, by the applicant through the interim resolution professional; (b) after the constitution of the committee, by the applicant through the interim resolution professional o....
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....hat an application for withdrawal under Section 12-A may be made to the adjudicating authority: (a) before the constitution of the CoC, by the applicant through the IRP; and (b) after the constitution of the CoC, by the applicant through the IRP or the RP as the case may be. However, where the application under clause (b) is made after the issuance of the invitation for expression of interest, the applicant has to state the reasons justifying withdrawal after the issuance of the invitation. In the decision of this Court in Brilliant Alloys (supra), it has been held that a withdrawal may be contemplated even after the issuance of invitation of expression of interest. In Swiss Ribbons (supra), the provisions of Section 12-A were upheld against the challenge that they violated Article 14 of the Constitution. Justice Rohinton F Nariman, while adverting to the decision in Brilliant Alloys (supra), noted that Regulation 30-A(1) has been held not to be mandatory but directory because in a given case an application for withdrawal may be allowed for exceptional reasons even after issuance of an invitation for expression of interest under Section 36-A. Dealing with th....
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....3 The submission is that on the withdrawal of the application under Sections 7, 9 and 10, as the case may be, the company goes back to the same promoter in spite of such a promoter being ineligible under Section 29A for submitting a resolution plan. As such, it was urged that there is no reason or justification then to preclude a promoter from presenting a scheme of compromise or arrangement under Section 230. 74 There is a fundamental fallacy in the submission. An application for withdrawal under Section 12-A is not intended to be a culmination of the resolution process. This, as the statutory scheme would indicate, is at the inception of the process. Rule 8 of the Adjudicating Authority Rules, as we have seen earlier, contemplates a withdrawal before admission. Section 12-A subjects a withdrawal of an application, which has been admitted under Sections 7, 9 and 10, to the requirement of an approval of ninety per cent voting shares of the CoC. The decision of this Court in Swiss Ribbons (para 82 extracted above) stipulates that where the CoC has not yet been constituted, the NCLT, functioning as the Adjudicating Authority, may be moved directly for withdrawal which, in the e....
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.... reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been given in relation to the debts of the corporate debtor. Far from supporting the stand of the respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him."" In the same vein, the Court observed: "107. For the same reason, the impugned NCLAT judgment [Standard Chartered Bank v. Satish Kumar Gupta, 2019 SCC OnLine NCLAT 388] in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with "undecided" claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution appl....
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.... 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. D.4 Constitutional validity of Regulation 2B - Liquidation Process Regulations 77 Regulation 2B(1) introduced on 25 July 2019 provides that where a compromise or arrangement is proposed under Section 230 of the Act of 2013, it shall be completed within ninety days of the order of liquidation under subSections (1) and (4) of Section 33. The proviso to Regulation 2B has been inserted with effect from 6 January 2020 to stipulate 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. IBBI discussion p....
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....he CD in liquidation to any person who is not eligible to be a resolution applicant. This prohibits GCS to persons ineligible under section 29A. However, the law does not prohibit such ineligible persons to participate in compromise or arrangement under section 230 of the Act. It may be necessary to harmonise the provisions in the Code and the Act to provide level playing field. Some stakeholders feel that the ineligibility norms under section 29A of the Code may also apply to compromise or arrangement under section 230 of the Act. Other stakeholders feel that unlike liquidation under the Code, which is mostly Liquidator driven, the compromise or arrangement under the Act is mostly driven by the Tribunal. Further, section 29A of the Code has several exceptions, while section 230 of the Act deals with all kinds of companies in all situations. There will be practical difficulties in implementation of ineligibility for the purposes of section 230 of the Act. Therefore, it is proposed that the ineligibility norms under section 29A of the Code may not apply to compromise or arrangement under section 230 of the Act." Be that as it may, the IBBI solicited public comments on its proposa....
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.... that it was necessary to have a discussion on the following amongst other issues: "f. Should the persons ineligible under section 29A of the Code to be a resolution applicant be barred from becoming a party in compromise or arrangements under section 230 of the Companies Act, 2013? g. Or, should applicability of section 230 of the companies act, 2013 during liquidation process under the Coe be reviewed?" 82 Thereafter, 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. Section 196 of the IBC 83 The powers and functions entrusted to IBBI are specified in Section 196 of the IBC. Section 196(1)(t) provides IBBI with the power to frame regulations, as follows: "(t) make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required ....
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....e was enunciated in the decision in Meghal Homes (supra) while construing the provisions of erstwhile Section 391. The same rationale which permeates the resolution process under Chapter II (by virtue of the provisions of Section 29A) permeates the liquidation process under Chapter III (by virtue of the provisions of Section 35(1)(f)). That being the position, there can be no manner of doubt that the proviso to Regulation 2B is clarificatory in nature. Even absent the proviso, a person who is ineligible under Section 29A would not be permitted to propose a compromise or arrangement under Section 230 of the Act of 2013. We therefore do not find any merit in the challenge to the validity of Regulation 2B. E Epilogue 85 In paragraph 24 of our judgment, we noted the two issues which had been framed by the NCLAT in the impugned judgment in the first of the appeals. The first issue was "Whether in a liquidation proceeding under [IBC] the Scheme for Compromise and Arrangement can be made in terms of Sections 230 to 232 of the [Act of 2013]". While we noted in paragraph 25, that no challenge has been made by the appellant in regard to the finding of the NCLAT on this issue, it is imp....
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....ims against the corporate debtor under the Code. 4.7 Given the incompatibility of schemes of arrangement and the liquidation process, the Committee recommended that recourse to Section 230 of the Companies Act, 2013 for effecting schemes of arrangement or compromise should not be available during liquidation of the corporate debtor under the Code. However, the Committee felt that an appropriate process to allow the liquidator to effect a compromise or settlement with specific creditors should be devised under the Code." (emphasis in original) 88 Due to the ambiguity in the application of the two frameworks, it became imperative that a clarification be issued in this regard. The introduction of the proviso to Regulation 2B was a step in this direction which sought to clarify the position with respect to the applicability of the disqualifications set out in Section 29A of the IBC to Section 230 of the Act of 2013 in tandem with the legislative intendment. 89 At this juncture, it is important to remember that the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through the judicial intervention of the NCLAT in....