Interplay Between the Companies Act and IBC: A Positive or Negative Impact on Liquidation Process?

By Rishi Raj, Student at MNLU Aurangabad

Introduction

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the  “Code”) serves two purposes: (i) saves the business that is viable; and (ii) facilitates the exit of those that are not viable. The rescue mechanism is achieved through a Corporate Insolvency Resolution Process (CIRP) under Part II of the Code, and the exit mechanism is dealt through a liquidation process under Part III of the Code.

Section 29A of the Code which discusses the ineligibility of resolution applicant and restricts a certain class of person to propose a resolution plan and declared them as ineligible to propose a resolution plan. The ineligible persons under Section 29A are undischarged insolvent, wilful defaulter, or erstwhile promoter of a company. Further, the Code prescribes that the said persons shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts. Section 230 of the Companies Act, 2013 (hereinafter referred to as the “Act”) provides that a scheme of compromise or arrangements is to proposed between the company and its creditors or members. Further, the Act provides that any member of the company can pose the scheme of compromise or arrangements by making an application to the National Company Law Tribunal (NCLT).

The conflict often arises between Section 29A of the Code with Section 230 of the Companies Act, 2013 as to what extent the “ineligibility” under Section 29A of the Code will apply and whether the person who is ineligible under Section 29A of the Code is permitted to pose a scheme of compromise or arrangement under Section 230 of the Act at the stage of liquidation process?

Ineligibility: A restriction to erstwhile promoters 

The Report of the Insolvency Law Committee, 2018 stated that the intent behind introducing Section 29A was to prevent defaulting promoters from again taking control over the affairs of the company. On similar lines, the National Company Law Appellate Tribunal (NCLAT) in R. Vijay Kumar & Anr. v. Kasi Viswanathan & Anr., upheld the decision of NCLT Chennai that had restricted the promoter of the corporate debtor to bid in the resolution process and rendered ineligible under Section 29A of the Code.

A reference can be made to Chitra Sharma v. Union of India and Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr. wherein the Supreme Court took note of the statement of object and Reasons of the Code and observed that the Parliament has introduced Section 29A with a specific purpose. Furthermore, Section 29A has been enacted in the public interest and Supreme Court observed that the Parliament rectified a loophole in the Code by restricting defaulting promoters to submit a resolution plan, which would defeat the object of the Code if allowed to be a part of the resolution process.

Section 35(1)(f) of the Code provides that the liquidator cannot sell any movable or immovable or actionable claims to any person who “is ineligible to submit a resolution plan”. Section 35(1)(f) of the code is in consonance with Section 29A of the Code that succinctly specifies which type of properties can a liquidator sell. Moreover, the earlier decisions of Supreme Court in Chitra Sharma (Supra), Arcelormittal India Private Limited v. Satish Kumar Gupta and Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., which have held that the provisions of Section 35(1)(f) of the Code are very much similar to Section 29A, and it operates at the latter stage i.e., at the time of liquidation process.

Is a scheme of compromise or arrangements a facet of liquidation process?

Analysis can be made to the objective of Section 230 of the Act, which is to revive the company under the scheme of compromise or arrangements. The Act does not prescribe any restriction or bars any person to propose a scheme of compromise or arrangements like Section 29A of the Code does while proposing a resolution plan.

A reference may be made here to Swiss Ribbons (supra) wherein the Supreme Court observed that if a company is going under liquidation under the provisions of the Code, a scheme of compromise or arrangements under Section 230 of the Act should be proposed and it is one of the aspects of liquidation process. Further, the preamble of the Act does not in any manner refer to the liquidation, and it is only availed as a last resort when the resolution has not been achieved.

Moreover, the NCLAT in S.C. Sekaran v. Amit Gupta and Ors.,  granted 90 days’ time to take necessary steps under Section 12(3) of the Code and further observed that the Adjudication Authority may extend the period if there is a chance of approval of scheme of arrangements or compromise under the Act. Further, it should be that to ensure the revival and continuance of the corporate debtor, the liquidator is required to take steps which includes compromise or arrangements in terms of Section 230 of the Act. The NCLAT went one step further and observed that while deciding any plea under Section 230 of the Act the Adjudicating Authority should wear a dual hat: [i] one as the adjudication authority in the liquidation matter under the Code and [ii] other as a tribunal for passing an order under Section 230 of the Act.

The Supreme Court did not hesitate in confirming that the Scheme of compromise is a facet of liquidation process and in Arun Kumar (Supra) wherein it observed that while analysing the interplay between the liquidation process under the Code and the Act, it observed that Section 230 of the Act is a revival of the corporate debtor, and the restriction imposed under Section 29A and 35(1)(f) of the Code will be applicable. However, the scope of Section 230 is very wide and the restrictions can only be imposed when the scheme of arrangements is being submitted, which is in liquidation process, and the liquidation must be pursuant to the provisions of Part III of the Code.

A numb and check on the constitutional validity of Regulation 2B

Regulation 2B of the Insolvency and Bankruptcy Board of India (Liquidation Process Regulations), 2016 provides that “a person who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to such compromise or arrangement”. It is considered to be an additional restriction to theineligibility provided under Section 29A of the Code and it specifically disbars the promoters to propose a scheme of compromise and arrangement under Section 230 of the Act.

The constitutional validity of Regulation 2B was challenged in Arun Kumar (Supra) on the ground that the regulation goes beyond the authority of Insolvency and Bankruptcy Board of India (IBBI) by introducing a disqualification or sets a condition to the condition of an application of a scheme of compromise or arrangements under Section 230 of the Act.

This proviso must be observed with two viewpoints: [i] that even in the absence of Regulation 2B, a person is ineligible under Section 29A and 35(1)(f) is not permitted to propose a scheme of arrangement in the resolution process under Section 230 of the Act, provided that the liquidation is initiated under the provisions of the Code and [ii] that if a company undergoing liquidation according to the provisions of chapter III of the Code, a scheme or compromise is proposed under the Section 230 of the Act is an aspect of liquidation.

Further, it should be notedthat the Regulation 2B is only clarificatory in nature. The absence of this regulation doesn’t create any hinderance in applicability of Section 29A and the disqualifications provided in it are applicable to Section 230 of the Act.

Conclusion

The insertion of Section 29A guarantees that the former promoters are not reintroduced as resolution applicants and reclaim control of the same company that they failed to managed. If the objectives of Sections 29A of the Code and 230 of the Act are taken into consideration, then on one hand the Code suggests that the erstwhile promoters are not allowed to be a part of the resolution process to ensure company’s sustainable revival but on another hand, the Act allows to propose a scheme of compromise and arrangements to ensure the revival of the company.

Further, it is inevitable that erstwhile promoters will invoke Section 230 of the Act when the company is undergoing liquidation process and consequently the ineligibility provided in Section 29A of the Code will not apply. Such an interpretation which led to the inapplicability of Section 29A of the Code will defeat its provisions and will allow the company’s defaulters to regain control in the management of the company. The said allowance will ultimately led to defeat the objectives of the Code.