Promoter of a corporate debtor in liquidation is ineligible to apply for the compromise and arrangement of such corporate debtor November 26, 2019
Published in: Between The Lines
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In Jindal Steel and Power Limited v. Arun Kumar Jagatramka and Another (dated October 24, 2019) the National Company Law Appellate Tribunal (“NCLAT”) has held that even though a compromise and arrangement is permissible with respect to a company undergoing liquidation, however, the promoter of such a company is ineligible to make an application for such compromise and arrangement.
An appeal was filed by Jindal Steel and Power Limited (“Unsecured Creditor”) which is an unsecured creditor of Gujarat NRE Coke Limited (“Corporate Debtor”) against an order passed by National Company Law Tribunal, Kolkata (“NCLT, Kolkata”). In the said matter, the Corporate Debtor ran into financial crisis due to adverse market conditions and was driven to filing an insolvency application under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) (initiation of corporate insolvency resolution process by corporate applicant). The said application was admitted. However, the committee of creditors formed was unable to approve a resolution plan and eventually the NCLT passed a liquidation order against the Corporate Debtor. Thereafter, the promoter of the Corporate Debtor filed an application before the NCLT under Sections 230 to 232 of the Companies Act, 2013 (“Companies Act”) to obtain the sanction for a scheme of compromise and arrangement between the promoter, the Corporate Debtor, its creditors and its shareholders. Pursuant to this application, NCLT Kolkata passed an order to convene the meeting of the shareholders and creditors of the Corporate Debtor. Aggrieved by the said order, the Unsecured Creditor filed an appeal before the NCLAT contesting the same.
The issues framed by the NCLAT were as follows:
1. 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 Companies Act?
2. If so permissible, whether the promoter is eligible to file application for compromise and arrangement, while he is ineligible under Section 29A of the IBC to submit a ‘Resolution Plan’?
The arguments of the parties were not discussed by the NCLAT.
FINDINGS OF THE NCLAT
While determining the first issue, the NCLAT referred to its judgement in S.C. Sekaran v. Amit Gupta and Others [Company Appeal (AT) (Insolvency) Nos. 495 and 496 of 2019] (“S.C. Sekaran”) and Y. Shivram Prasad v. S. Dhanapal and Others [Company Appeal (AT) (Insolvency) No.224 of 2018] (“Y. Shivram Prasad”). In the aforementioned judgements, the issue was the same as the one in the instant case that is whether during a liquidation proceeding under IBC, an application under Sections 230 to 232 of the Companies Act can be entertained by the NCLT or not. The NCLAT had held that even during liquidation, the liquidator could sell the business of the corporate debtor as a going concern. It was further held that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The IBC is thus, a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors.
It further emphasized on the Supreme Court judgement in Meghal Homes Private Limited v. Shree Niwas Girni K.K. Samiti and Others [(2007) 7 SCC 753] whereby, it was held that Section 391(1)(b) of the Companies Act, 1956 (now replaced by Section 230 of the Companies Act) gives a right to the liquidator in the case of a company which is being wound up, to propose a compromise or arrangement with creditors and members indicating that the provision would apply even in a case where an order of winding up has been made and a liquidator had been appointed. The NCLAT in Y. Shivram Prasad accordingly held that before taking steps to sell the assets of the corporate debtor, the liquidator would take steps in terms of Section 230 of the Companies Act. In view of the aforesaid decisions of NCLAT
in Y. Shivram Prasad and S.C. Sekaran, the first question was answered in the affirmative, that is, in a liquidation proceeding under the IBC, a petition under Section 230 to 232 of the Companies Act was maintainable.
Pronouncing on the second issue, NCLAT relied on yet another Supreme Court judgement, Swiss Ribbons Private Limited and Another v. Union of India and Others [Writ Petition (Civil) No. 99 of 2019], which states that ‘primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation’. It was held that the aforesaid judgement clarified that even during the period of liquidation, for the purpose of Sections 230 to 232 of the Companies Act, the corporate debtor is to be saved from its own management, meaning thereby, the promoters, who are ineligible under Section 29A of the IBC, are not entitled to file an application for compromise and arrangement in their favour. Proviso to Section 35(f) of the IBC prohibits the liquidator to 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. It states that, “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… 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.”Accordingly, the promoter was ineligible to file an application for compromise and arrangement under Sections 230-232 of the Companies Act.
DECISION OF THE NCLAT
The NCLAT held that although a scheme of compromise and arrangement is maintainable even if a Corporate Debtor is under liquidation, the promoter of the Corporate Debtor shall not be eligible to propose such a scheme.
Vaish Associates Advocates View
The NCLAT previously in the case of Rajesh Balasubramanian v. M/s. Everon Castings Private Limited and Another (dated February 25, 2019) and Y. Shivram Prasad had held that if the members of the corporate debtor or the creditors approach the company through the liquidator for compromise or arrangement by making a proposal of payment to all the creditor(s), the liquidator on behalf of the company will move an application under Section 230 of the Companies Act before the National Company Law Tribunal. However, none of these judgements envisaged a situation where the promoter of the corporate debtor, who very likely will be a member of the corporate debtor, would approach the liquidator/tribunal with a compromise and arrangement proposal.
This judgement clarifies the position and holds that the ineligibility of the promoter to submit the resolution plan would continue even in the event of liquidation where a compromise and arrangement between the shareholders and the creditors is to be considered. The reasoning provided, backed by the proviso to Section 35(f) of the IBC, is that one of the purposes of the IBC is to protect the corporate debtor from its own management. The principle that the control of the corporate debtor should not be given to the very same entity that drove it to insolvency has been upheld in various other judgements as well and seems to be sound.
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