Subject: A Person Ineligible u/s 29A IBC to Submit Resolution Plan Cannot Propose Scheme of Compromise & Arrangement u/s 230 Companies Act 2013.
FACTS OF THE CASE :
By its judgment 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 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 judgment was rendered in an appeal filed by Jindal Steel and Power Limited, an unsecured creditor of the corporate debtor, Gujarat NRE Coke Limited. The appeal was preferred against an order passed by the National Company Law Tribunal (NCLT) in an application 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 Supreme Court.
Held by Hon’ble Supreme Court
Upholding the constitutional validity of regulation 2B of the Liquidation Process Regulations, the SC held that prohibition in section 29A* and section 35(1)(f)# of the Code must also attach to a scheme of compromise or arrangement under section 230 of the Companies Act, 2013 (scheme), where a company is undergoing liquidation under the Code. Even in the absence of said regulation, a person ineligible under section 29A* read with section 35(1)(f)# is not permitted to propose a scheme for revival of a company undergoing liquidation under the Code.
In case of a company undergoing liquidation pursuant to the provisions of Chapter III of the Code, a scheme is a facet of the liquidation process. 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 scheme. 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)*.
The SC clarified that three modes of revival are contemplated under the Code.
i) The first is in the form of the CIRP elucidated in the provisions of Chapter II.
ii) The second is where the CD or its business is sold as a going concern within the purview of clauses (e) and (f) of regulation 32.
iii) The third is when a revival is contemplated through the modalities provided in section 230 of the Companies Act.
It further clarified that the scheme cannot certainly be equated with a withdrawal simpliciter of an application, as contemplated under section 12A of the Code.
CONCLUSION: the IBC (Amendment ) Act, 2018 with effect from 23.11.2017 has inserted a proviso in Section 35(1)(f) of the IBC, 2016 which provides 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. Thus a person who is not eligible under provisions of Section 29A of the IBC,2016 to submit a resolution plant is also not eligible to participate in scheme of amalgamation and merger of the Corporate Debtor.
DISCLAIMER: the article produced is only for knowledge and information of readers. It is advisable to go through order copy for more understanding and clarification.
*Section 29A of IBC,2016 provide some barriers for resolution applicant to submit resolution plan. The persons either acting individually or jointly or in concert with such persons fall under any of the disqualification list will not be allow to submit any resolution plan.
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—
a. is an undischarged insolvent;
b. is a wilful defaulter in accordance with the guidelines of the RBI issued under the Banking Regulation Act, 1949;
c. Clause c of section 29A debars a person or a person acting jointly or in concert with such person who-
o is a promoter of a corporate debtor the account of which has been classified as NPA;
o is in the management of a corporate debtor the account of which has been classified as NPA
o is in control of a corporate debtor the account of which has been classified as NPA;
o At least a period of 1 year should have elapsed from the date of classification till the insolvency commencement date. Therefore, any company (including the promoters/persons in the management of or control of such company) which has its account classified as NPA for last 1 year will not be able to file a resolution plan however, the Code provides for a carve out that such person shall be eligible to submit the resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan. See also, clause (j) of Section 29A.
d. the person has been convicted for any offence punishable with imprisonment for 2 (Two) years or more;
e. is disqualified to act as a director under the Companies Act, 2013;
f. is prohibited by SEBI from trading in securities or accessing the securities markets;
g. Clause g of section 29A debars the person who has been
of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and an order has been made by the adjudicating authority under the provisions of the Code;
Proviso of this clause allows the resolution applicant if such preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has been taken place prior to the acquisition of 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. The negative list includes persons who might have guaranteed the obligations of the corporate debtor which is currently in insolvency. As the provision goes:-
Going by the construction of the clause, it appears that the guarantee should be in favour of that creditor who has applied for insolvency resolution of the corporate debtor.
i. a person who has been subject to the above listed disabilities under any law in a jurisdiction outside India;
j. A person who is connected to the persons as defined under the Explanation, shall be disqualified if the other person suffers disability under clause (a) to (i) of section 29A
Connected Persons means :-
i. any person who is the
* promoter or
* in the management or
* control of the resolution applicant; or
ii. Clause (ii) basically seeks to debar persons from submitting resolution plans in which persons suffering from disabilities mentioned under Section 29A are proposed as promoters or in the management of or in the control of the corporate debtor during implementation of the resolution plan. It includes-
• would-be promoter;
• person, would-be in the management; and
• person, would-be in control
of the corporate debtor, who suffer from disqualification under section 29A.
For example, A wants to submit resolution plan for XYZ Ltd. A proposes that B shall be in the management of XYZ Ltd. during the implementation of the resolution plan. However, B is a person suffering disability under Section 29A. A, therefore becomes ineligible to submit resolution plan.
iii. the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):
Related Party has been defined under section 5(24) and 5(24A) of the IBC Code, 2016 but for the purpose of Section 29A Related Party shall not include financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date.
#Section 35(1)(f) of IBC, 2016 – 35(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 property to any person or body corporate, or to sell the same in parcels in such manner as may be specified;
[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.]
This proviso has been inserted through IBC (Amendment) Act,2018 with effect from 23.11.2017.
3. For details Vist: https://www.ibbi.gov.in/uploads/publication/2021-05-29-204331-atxcy-3363461de858b06bfa1afdbf13151b90.pdf