Supreme Court Clarifies Ineligibility Under Section 29A of IBC Extends to Section 230 of Companies Act in Liquidation: Arun Kumar Jagatramka vs. Jindal Steel and Power Ltd. (2021) INSC 158

Date of the Judgment: 15 March 2021
Citation: (2021) INSC 158
Judges: Dr. Dhananjaya Y Chandrachud, J and M R Shah, J
Can promoters who are ineligible to submit a resolution plan under the Insolvency and Bankruptcy Code (IBC) propose a scheme of compromise under Section 230 of the Companies Act, 2013? The Supreme Court of India addressed this crucial question, clarifying the interplay between the two statutes. The court held that the ineligibility under Section 29A of the IBC extends to Section 230 of the Companies Act, 2013 during liquidation proceedings. The judgment was delivered by a two-judge bench comprising of Dr. Dhananjaya Y Chandrachud, J and M R Shah, J.

Case Background

The case involves appeals against orders of the National Company Law Appellate Tribunal (NCLAT) which held that a person ineligible under Section 29A of the IBC cannot propose a scheme of compromise under Section 230 of the Companies Act, 2013. The primary dispute arose from the insolvency of Gujarat NRE Coke Limited (GNCL). Mr. Arun Kumar Jagatramka, a promoter of GNCL, submitted a resolution plan which was later rejected due to his ineligibility under Section 29A of the IBC. Following this, GNCL went into liquidation. During the liquidation process, Mr. Jagatramka attempted to propose a scheme of compromise under Sections 230 to 232 of the Companies Act, 2013, which was initially allowed by the National Company Law Tribunal (NCLT). However, this was overturned by the NCLAT, leading to the appeal before the Supreme Court. A similar issue arose in the case of Mr. Kunwer Sachdev, the promoter of Su-Kam Power Systems Limited, who was also deemed ineligible under Section 29A and subsequently barred from proposing a scheme under Section 230.

Timeline

Course of Proceedings

The NCLT initially allowed Mr. Jagatramka’s application for a scheme of compromise, directing a meeting of shareholders and creditors. However, the NCLAT reversed this decision, stating that promoters ineligible under Section 29A of the IBC cannot propose a scheme under Section 230 of the Companies Act, 2013. The NCLAT relied on the principle that the corporate debtor should be protected from its own management, especially those ineligible under Section 29A. This was further supported by the proviso to Section 35(f) of the IBC, which prohibits the liquidator from selling assets to persons ineligible to be resolution applicants. The NCLAT’s decision was challenged in the Supreme Court. Similarly, the NCLAT also dismissed the appeal of Mr. Kunwer Sachdev, relying on the same reasoning.

Legal Framework

The judgment primarily revolves around the interpretation of the following legal provisions:

• Section 29A of the Insolvency and Bankruptcy Code, 2016: This section lists persons ineligible to submit a resolution plan. It was introduced to prevent those responsible for a company’s downfall from regaining control. The section states:
  
  “A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person…” followed by a list of disqualifications.
• Section 35(1)(f) of the Insolvency and Bankruptcy Code, 2016: This section outlines the powers and duties of a liquidator, including the sale of assets. The proviso to this section states:
  
  “Provided that the liquidator shall not sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant.”
• Section 230 of the Companies Act, 2013: This section deals with the power to compromise or make arrangements with creditors and members. Sub-section (1) states:
  
  “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, 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.”

The Supreme Court emphasized that the IBC aims to ensure a time-bound resolution of insolvency, maximize asset value, and balance the interests of all stakeholders. The court also highlighted that the ineligibility under Section 29A is intended to prevent unscrupulous persons from gaining control of the company.

Arguments

Appellant’s Arguments:

• The ineligibility under Section 29A of the IBC applies only to the resolution process under Chapter II of the IBC and not to the settlement mechanism under Section 230 of the Companies Act, 2013.
• Section 230 of the Companies Act, 2013, is a separate provision and does not explicitly bar persons ineligible under Section 29A of the IBC from proposing a scheme of compromise or arrangement.
• The purpose of Section 29A is to prevent a back-door entry to promoters during the resolution process, which is not applicable to a scheme of compromise where the company is restored to the promoters with all its liabilities.
• Section 230 of the Companies Act, 2013, is a part of the settlement mechanism, similar to Section 12-A of the IBC, where the company is restored to the promoter upon withdrawal of the application.
• The ineligibility under Section 29A is only during the resolution process and not during liquidation, unless specifically mentioned.
• 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.
• 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.

Respondent’s Arguments:

• A person ineligible under Section 29A of the IBC cannot propose a scheme of compromise under Section 230 of the Companies Act, 2013, especially during liquidation.
• Section 29A and Section 35(1)(f) of the IBC were introduced to ensure a sustainable revival and to exclude those responsible for the company’s downfall.
• The NCLT performs a dual role when dealing with a scheme under Section 230 of the Companies Act, 2013, in respect of a company undergoing liquidation under the IBC.
• The proposal of a compromise or arrangement under Section 230 of the Companies Act, 2013, during liquidation under the IBC is a facet of the liquidation process.
• The ineligibility under Section 29A extends to Chapter III of the IBC by virtue of Section 35(1)(f), which must be read together with Regulation 32 of the Liquidation Process Regulations.
• The IBC provides for three modes of revival: the CIRP, sale of a company in liquidation as a going concern, and a scheme of compromise or arrangement under Section 230 of the Companies Act, 2013. The prohibition that applies in the first two modes must also apply to the third.
• The purpose of the disqualification under Section 29A is to ensure a sustainable revival, which means that those responsible for the state of affairs of a company and other persons regarded by the legislature as undesirable should be excluded from the process.
• Regulation 2B of the Liquidation Process Regulations is a clarification and is consistent with the IBC.
• Section 240 of the IBC empowers the IBBI to make regulations consistent with the Code.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether in a liquidation proceeding under the Insolvency and Bankruptcy Code, 2016, the Scheme for Compromise and Arrangement can be made in terms of Sections 230 to 232 of the Companies Act, 2013.
2. If so permissible, whether the Promoter is eligible to file an application for Compromise and Arrangement, while he is ineligible under Section 29A of the I&B to submit a ‘Resolution Plan’.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Chitra Sharma v. Union of India [CITATION]*: The court relied on this case to emphasize the purpose of Section 29A, which is to ensure that persons responsible for the insolvency of the corporate debtor do not participate in the resolution process.
• Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors. [CITATION]*: The court used this case to emphasize the need for a purposive interpretation of Section 29A, depending on the text and context in which the provision was enacted.
• Swiss Ribbons Private Limited v. Union of India [CITATION]*: The court relied on this case to underscore the object of the IBC, which is to ensure the revival of the corporate debtor, and that the norm underlying Section 29A continues to permeate Section 35(1)(f).
• Meghal Homes Pvt. Ltd. v Shree Niwas Girni K. K. Samiti [CITATION]*: The court used this case to highlight that a scheme of compromise in respect of a company in liquidation must foster a revival of the company.
• Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [CITATION]*: The court cited this case to emphasize that a successful resolution applicant starts running the business of the corporate debtor on a “fresh slate.”
• Y Shivram Prasad v. S Dhanapal [CITATION]*: The court acknowledged that the NCLAT had recognized that the liquidation process includes a compromise or arrangement under Section 230 of the Companies Act, 2013.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Prevention of Backdoor Entry: The court aimed to prevent those responsible for a company’s insolvency from regaining control through a scheme of compromise, which would undermine the objectives of the IBC.
• Harmonious Interpretation: The court sought a harmonious interpretation between the IBC and the Companies Act, 2013, to ensure that the ineligibilities under the IBC are not circumvented.
• Purposive Interpretation: The court adopted a purposive interpretation of Section 29A and Section 35(1)(f) of the IBC, emphasizing that these provisions are intended to achieve a sustainable revival of the company.
• Protection of Creditors: The court emphasized that the IBC is designed to protect the interests of creditors and that allowing ineligible promoters to propose a scheme would be detrimental to this objective.
• Distinction between Withdrawal and Revival: The court distinguished between a simple withdrawal of an application under Section 12-A of the IBC and a scheme of compromise under Section 230 of the Companies Act, 2013, noting that the latter results in a binding compromise and a revival of the company.

Fact:Law Ratio

Logical Reasoning:

The court reasoned that if persons who are ineligible under Section 29A are allowed to propose a scheme of compromise under Section 230, it would defeat the very purpose of the IBC and the intent of the legislature. The court emphasized that the IBC is a beneficial legislation aimed at the revival of companies and that this objective must be upheld.

The Supreme Court quoted from the judgment:

“The legislative purpose which permeates Section 29A continues to permeate the section when it applies not merely to resolution applicants, but to liquidation also.”

“The purpose of the ineligibility under Section 29A is to achieve a sustainable revival and to ensure that a person who is the cause of the problem either by a design or a default cannot be a part of the process of solution.”

“It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a compromise or arrangement under Section 230 of the Act of 2013.”

There were no dissenting opinions in this case.

Key Takeaways

The key takeaways from this judgment are:

• Individuals ineligible under Section 29A of the IBC are also barred from proposing schemes of compromise or arrangement under Section 230 of the Companies Act, 2013, during liquidation proceedings.
• The ineligibility under Section 29A extends to all stages of the IBC process, including liquidation and compromise, ensuring that those responsible for a company’s downfall do not regain control.
• The Supreme Court emphasized the need for a harmonious interpretation of the IBC and the Companies Act, 2013, to uphold the objectives of the IBC.
• The judgment reinforces the principle that the IBC aims to achieve a sustainable revival of companies and to protect the interests of creditors.
• The Supreme Court cautioned the NCLT and NCLAT against judicial innovation that could disturb the foundational principles of the IBC.

Directions

No specific directions were given by the Supreme Court in the judgment.

Development of Law

The ratio decidendi of this case is that the ineligibility under Section 29A of the IBC extends to Section 230 of the Companies Act, 2013, during liquidation proceedings. This judgment clarifies that the provisions of the IBC take precedence over the Companies Act, 2013, when a company is undergoing liquidation under the IBC. This is a significant development as it prevents promoters who are ineligible under Section 29A from circumventing the provisions of the IBC by proposing a scheme of compromise under Section 230 of the Companies Act, 2013.

Conclusion

In conclusion, the Supreme Court’s judgment clarifies that individuals ineligible under Section 29A of the IBC cannot propose schemes of compromise or arrangement under Section 230 of the Companies Act, 2013, during liquidation. This ruling ensures that those responsible for a company’s downfall cannot regain control through these means, upholding the objectives of theInsolvency and Bankruptcy Code. The court’s decision reinforces the legislative intent of the IBC, aiming for a sustainable revival of companies and the protection of creditors’ interests.