India: Maintainability Of Application For Compromise And Arrangement During Liquidation Proceeding

The purpose of this article is to analyse the recent NCLAT order in the case of Jindal Steel and Power Limited v. Arun Kumar Jagatramka & Gujarat NRE Coke Limited (Company Appeal (AT) No. 221 of 2018). This article shall attempt to analyse and discuss the implication of the said order with respect to companies undergoing liquidation.

Factual Background

The Appellant Jindal Steel and Power Limited filed the appeal under section 421 of the Companies act, 2013(hereinafter referred to as Companies Act) against the order of National Company Law Tribunal (hereinafter referred to as NCLT), Kolkata Bench, whereby the tribunal allowed application of compromise and arrangement during the liquidation process as per Section 230-232 of Companies Act, filed by Promoter between himself and the corporate debtor. The Gujarat NRE coke Limited (Corporate Debtor) filed an application in NCLT for Corporate Insolvency Resolution Process as per Section 7 of Insolvency and Bankruptcy Code 2016 (hereinafter referred to as IB Code) owing to various defaults committed by it. No resolution plan was presented to the adjudicating authority and therefore after completion of 270 days the adjudicating authority passed an order for liquidation. The appellant further challenged this liquidation proceeding in the appellate tribunal on the basis that the 'Resolution Plan' submitted by him was barred by the IB Code applying the restriction contained under the Section 29A which precludes promoters from proposing 'Resolution Plan'. The Appellate court rejected this contention and allowed liquidation proceeding to continue meanwhile the appellant promoter further filed for Compromise and Arrangement under Section 230-232 in National Company Law Tribunal, Kolkata.

The question arises whether in case of liquidation proceeding going on under the IB Code, a scheme of compromise and arrangement can be introduced under Section 230 of Companies Act. The other issue which National Company Law Appellate Tribunal (hereinafter referred to as NCLAT) had to decide was whether Promoters being ineligible under the section 29A of IB Code can apply for scheme of Compromise and Arrangement under Section 230 of Companies Act 2013?

Judgement

The object and purpose of the IB Code is discussed by the NCLAT in its previous order¹ and also by the Supreme Court.² The purpose of this IB Code is to recuperate the corporate debtor and therefore, this legislation is not a mere recovery tool in hands of creditor but a beneficial legislation for the corporate debtor. Hence resolution process protects the corporate debtor from further dilution. Further, in Meghal Homes Pvt. Ltd vs. Shree Niwas Girni K.K. Samiti and Ors³ the apex court interpreted Section 391 of Companies Act, 1956 which is now placed as Section 230 of the Companies Act, which states that Compromise and arrangement can be proposed for a company 'being wound up'. Further the court interpreting Section 391(1)(b) held that the Section gives power to liquidator to propose compromise and arrangement with creditors and company i.e. provision is to apply even in case a liquidator had been appointed when order of winding up has been made. For the abovementioned reasons the court held that during liquidation proceeding a petition under Section 230-232 is maintainable.

For the second issue, court relied on section 35(f) of IB Code and held that promoter is barred from filing an application for taking back movable and immovable property or actionable claims of corporate debtor.

Analysis

This order by NCLAT which tries to settle the contradiction arisen after the insertion of Section 29A in the IB Code, in relation to Section 230 of the Companies Act which allows for scheme of compromise and arrangement. A promoter being ineligible to submit a resolution plan can he find a surrogate route in compromise and arrangement? The scenario before IB Code was that both compromise and liquidation were to be held according to the Companies Act 1956, but now after the enactment of IB Code, which act should prevail, whether liquidation proceeding should be stayed, as if it is allowed it will go against the whole scheme of compromise and arrangement which aims at reviving the company.

Section 29A of IB Code, serves a very important object that is to see that undesirable persons who are mention in the section to be ineligible, not to submit resolution plan so that such person may not come into management of stressed corporate debtors. The Tribunal had passed the order relating to the promoters ineligibility without drawing the necessary distinction between promoters classified as a non-performing asset and promoters as per the proviso to Section 29A(c) of IB Code which states that a person is eligible to submit a resolution plan if such person has paid all overdue amounts with interest and charges relating to non-performing asset account.⁴ Section 29A of IB Code prohibits promoters in default to prolong their control over company. It is a widely accepted principle of law that lex specialis should prevail over lex generali. As far as Section 230 of the Companies Act is concerned, which provides that company in case of liquidation, a liquidator can only apply for the scheme but NCLAT in its previous order⁵ has held that liquidator has a general power to propose scheme of compromise but that will not forbid the promoter, creditor and the company who had special power to move an application under section 230 of Companies act. But the Gujarat NRE ruling by NCLAT has stated that promoters ineligible under Section 29A of IB Code are not eligible for the purpose of section 230 of Companies Act. The object behind the enactment of the IBC is not liquidation of companies but the law was framed with the intention to expedite and simplify the process of insolvency and bankruptcy proceedings in India ensuring fair negotiations between opposite parties and encouraging revival of the company by formulation of a resolution plan.⁶ Section 29A of IB Code being a law which legislator specifically enacted to draw out promoters or the person who are in default of the said company cannot be allowed to gain control of the assets of corporate debtor. Therefore, this NCLAT order has upheld the purpose of Section 29A of IB Code by disqualifying promoters from filing the scheme of compromise and arrangement under Section 230 of the Companies Act.

The alternative argument which comes forward is that if the compromise under Section 230 is not a resolution plan, the company could be permitted to be get revived under the companies Act. Further, if Creditor and Shareholder has posed trust in the scheme and any misuse of the law is not apparent to the NCLT then there is no need to disqualify the whole class of promoters from presenting a scheme under Section 230 of Companies Act.

Conclusion and our views

The option of proposing scheme of compromise and arrangement has been prevalent in cases of company being ordered liquidation, IB Code which emphasizes on revival of the company, keeping that purpose in mind it can be said that although liquidation proceeding has started, there should always be an effort to revive the company and Section 230 of Companies Act provides that opportunity. The tribunal in the given order has equated the resolution during liquidation with the scheme of compromise presented at the time of liquidation. Schemes are an agreement between company's promoters and its creditors and if they decide to revive the company it should be allowed as it serves the object of the IB Code which is not the liquidation of the company but the revival of the companies which encourage entrepreneurship leading to higher economic growth.

Footnotes

1 S.C. Sekaran v. Amit Gupta & Ors. – Company Appeal (AT) (Insolvency) Nos.495 & 496 of 2019

2 Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. – Writ Petition (Civil) No. 99 of 2018

3 AIR 2007 SC 3079.

4 ArcelorMittal India Private Limited Vs.Satish Kumar Gupta and Ors, AIR 2018 SC 5646.

5 Rasiklal s Mardia v. Amar Dye Chemical Ltd., Company Appeal (AT) No.337 of 2018.

6 Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors, AIR 2019 SC 739.

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