India: Alternatives To I&B Code: A Restructuring Route Through Section 230 Of The Companies Act, 2013

Introduction

In a press conference conducted on May 17, 2020 by Finance Minister Nirmala Sitharaman, it was stated that the COVID-19 related debts shall not form part of the default under the Insolvency and Bankruptcy Code, 2016 (I&B Code). Further, by proposing Section 10A, it was stated that there shall be no fresh initiation of new cases under Section 7, 9 and 10 of the IBC for a period of 1 year. The President's assent is awaited for section 10A of the I&B Code.

This is done to mainly protect the Micro, Small, Medium Enterprises (MSME's) for which a special insolvency framework has been proposed by the Ministry of Finance which will be introduced under Section 240-A of the I&B Code. It has been announced by the Finance Minister that the said Insolvency framework will be notified soon under Section 240-A of the Code.

IMPLICATIONS OF SUSPENSION OF SECTION 7, 9 and 10 OF I&B CODE, 2016

Suspending fresh applications under the I&B Code will definitely take away the creditors' option of enforcing their rights under the Code but will not render them remediless. They will always have the alternative remedy available under Section 230 of the Companies Act, 2013.

"Section 230 of the Companies Act, 2013 provides for a scheme of compromise or arrangement between the company and its creditors or class of creditors or members or class of members.

"Section 230. (1) Where a compromise or arrangement is proposed—

(a) between a company 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, ["appointed under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be,"] 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 reorganisation 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......."

Another remedy which could be availed is the out-of-court restructuring as provided by the Reserve Bank of India (RBI) in its circular dated 7th June 2019. This prudential fr amework circular provides for the debt restructuring through the inter -creditor agreement (ICA) entered into by the RBI regulated lenders.

RBI has called for a 3-month moratorium on the repayment of loans and has also revised contractual relationships between the debtors and the financial institutions.

MAJOR REQUIREMENTS OF THE SCHEMES UNDER SECTION 230 OF THE COMPANIES ACT, 2013

Proposal of the Scheme:

Section 230 provides for filing of the scheme by a creditor (or class of creditors) or a member (or class of members) or by the liquidator himself. If approved, then the scheme becomes binding on the company, its creditors and members. Also, the Act provides for a provision for the third party to propose a scheme and become contractually bound by the same.

Approval of the Scheme:

The Corporate Debt Restructuring Scheme provides for prior approval of minimum 75% of the value of the secured creditors before it's presented to the NCLT for approval. Further, it requires the approval of 75% of the value of creditors (or class of creditors) or members (or class of members) which then becomes binding on them and the company.

THE PARADOX BETWEEN SECTION 230 AND PROVISIONS OF I&B CODE

Unlike the I&B Code, where only the Financial Creditors can become a part of the Committee of Creditors and can vote and draw a resolution plan for the Corporate Debtor. Section 230 of the Companies Act, 2013 provides for submission of restructuring, compromise, composition and arrangement scheme by any of the creditors (be it secured or unsecured).

Under the Companies Act, for approval, the application to Tribunal for rearrangement scheme need only to disclose the basis of the identification of each class of the members and the creditors. It means that the Operational Creditors, who generally are the unsecured creditors, can be included and will have the right to vote under Section 230. This may go against the dualism in treatment of creditors under the I&B Code and also against the principle of going concerned for which the I&B Code was enacted.

It may also end up in violation of the ruling given by the NCLAT in the case of Y. Shivram Prasad v. Dhanapal, Company Appeal (AT) (Insolvency) No. 224 of 2018, where the Appellate Tribunal has explicitly laid down that the scheme of arrangement under the Companies Act, 2013 must align with the objectives for which the Code was enacted.

Unlike the I&B Code, where the promoters of the companies were barred from the submission of the resolution plan under Section 29A of the Code, Companies Act, 2013 in its Section 230 doesn't provide for any such restrictions. This means that applicability of Section 29A of the Code doesn't extend to schemes promulgated under Section 230 of the Act.

To support this contention NCLAT in the case of Anil Bafna v. Madhu Desikan & Ors., Company Appeal (AT) (Insolvency) No. 757 of 2018, held that the promoters of the companies can go roundabout and can take advantage of the benefits given under Section 230 of the Act if there is any liquidation order passed by the NCLT. Also, in the case of Rasiklal S. Mardia v. Amar Dye Chem Limited, Company Appeal (AT) No.337 of 2018, the NCLAT held that the promoter is the eligible person to apply for a scheme of arrangement and also concluded that the liquidator is the additional person and not the exclusive person to apply to Section 391 of the Companies Act, 1956.

Further, a contrary view has also been taken by the NCLAT in the case of Jindal Steel and Power Limited v. Arun Kumar Jagatramka, Company Appeal (AT) No, 221 of 2018, wherein the Appellate Tribunal has laid down that the promoters are not eligible to file for the scheme of arrangement. The Tribunal held that the Corporate Debtor or the defaulting company is to be protected from its management and thus, promoters ineligible under Section 29A of the Code are not permitted to file an application under Section 230 of the Act.

Hence, there exists a grey area upon the promoters right of filing an application for a scheme of compromise and arrangement under Section 230 of the Act.

Under I&B Code, the approval for the resolution plan requires the sanction of the Adjudicating Authority under Section 31 of the Code which provides that the plan should comply with the requirements given under Section 30(2) of the I&B Code.

But, for a scheme to get approved, it requires a notice to be sent to all the sectoral regulators (such as SEBI, RBI etc.) who are likely to get affected under the scheme along with the Central government, income-tax authorities and registrar of the companies.

The NCLT will also satisfy itself of the scheme to be just, fair and reasonable to all the stakeholders and also not oppressive to the minority shareholders.

CONCLUSION

The suspension of Section 7, 9 & 10 of the Code shall not have any effect on the other provisions of I&B Code. I&B Code was enacted to facilitate the principle of going concern for Corporate Debtors and not restructuring of debts. In contrast, the crisis as a result of COVID19 seeks for the restructuring of debts and not going concern sales.

Hence, the suspension will not resolve this dilemma. Instead, a better reform could have been made to facilitate the restructuring of debts. Also, the suspension of the fresh applications under the Code will drive us back to the pre-IBC era where several other recourses were available but were costly, complex and time-consuming, like, an application under Section 230 of the Companies Act, 2013, application for recovery of money under Civil Procedure Code, applications under SARFAESI before DRT.

Lastly, a decision of the Hon'ble Supreme Court is awaited on the grey area of promoters right and entitlement under Section 230 to file for a scheme of arrangement.