ARUN KUMAR JAGATRAMKA VS JINDAL STEEL & POWER LTD : CASE SUMMARY
The Supreme Court in Arun Kumar Jagatramka Vs Jindal Steel & Power Ltd (2021) 7 SCC 474 held that Regulation 2B of IBBI (Liquidation Process) Regulations is valid. A person who is ineligible under Section 29A of IBC to submit a Resolution Plan will also be ineligible to submit scheme for compromise or arrangement under Section 230 of the Companies Act, 2013.
FACTS OF THE CASE
The Supreme Court was considering two appeals and one Writ Petition in this matter.
Civil Appeal 9664 of 2019
An Application under Section 10 IBC was moved by GNCL (Corporate Debtor ) for initiating CIRP, which was admitted on 7th April, 2017. Mr. Arun Kumar Jagatramka submitted a Resolution Plan. In the meanwhile, Section 29A was introduced vide the Insolvency and Bankruptcy Code (Amendment) Act , 2018 which excluded certain category of persons from submitting Resolution Plan. Due to insertion of Section 29A, Arun Kumar Jagatramka became ineligible to submit Resolution Plan. CIRP was not successful and Liquidation Order was passed by the NCLT. Liquidation Order was challenged before NCLAT which was dismissed.
Arun Kumar Jagatramka also moved an application under Section 230 to 232 of Companies Act, 2013 before NCLT proposing scheme of compromise and arrangement. This application was allowed by NCLT. JSPL , an operational Creditor, preferred an appeal before NCLAT , which was allowed on the ground that promotors who are ineligible to submit Resolution Plan under Section 29A of IBC are not entitled to file an application for compromise and arrangement under Section 230-232 of the Companies Act, 2013. The order of the NCLAT was challenged before the Supreme Court.
Civil Appeal 2719 of 2020
CIRP was initiated against Su-Kam Power Systems Ltd. vide order dated 5th April, 2018 by NCLT. Mr Kunwar Sachdev submitted Resolution Plan alongwith Phoenix ARC Pvt. Ltd. which was rejected by RP as Mr Kunwar Sachdev was ineligible under Section 29 IBC. CIRP was not successful and Liquidation Order was passed by the NCLT. Mr Kunwar Sachdev expressed interest in submitting scheme of compromise and arrangement which was rejected by the Liquidator in light of Section 29 A (h). Mr. Kunwar Sachdev challenged the decision before NCLT which was dismissed. Mr. Kunwar Sachdev approached NCLAT which also dismissed the appeal.
Writ Petition
Arun Kumar Jagatramka also filed Writ Petition under Article 32 of the Constitution for seeking declaration that Regulation 2B of IBBI (Liquidation Process Regulations) are ultra vires IBC and in violation of Article 14, 19 and 21.
FINDINGS OF THE SUPREME COURT
The Supreme Court noted that Parliament vide the same amendment introduced Section 29A and Section 35 (1) (f) in the Code. While 29A bars certain category of persons from submitting Resolution Plan while Section 35 (1) (f) prevents the Liquidator from selling the immovable and movable property or actionable claim of the Corporate Debtor in liquidation to any person who is not eligible to be a Resolution Applicant.
The Supreme Court in Chitra Sharma Vs Union of India (2018) 18 SCC 575 observed that Section 29A has been enacted in larger public interest and to facilitate effective good governance. Parliament rectified loophole in the Act, which allowed backdoor entry to erstwhile managements in CIRP.
The Supreme Court in Swiss Ribbons Pvt. Ltd. Vs Union of India (2019) 4 SCC 17 observed that the norms underlying Section 29A continues to permeate Section 35 (1) (f) when it not only applies not merely to resolution process but to liquidation also.
The Supreme Court noted that purposive interpretation of 29A has been adopted in Chitra Sharma, Arcelor Mittal and Swiss Ribbons. Section 29A ensures that the objects of IBC is not defeated by allowing ineligible persons to return in new avatar of resolution applicants. Section 35 (1) (f) is kept in same continuum.
The Supreme Court noted that Compromise or Arrangement under Section 230 (1) of the Companies Act, 2013 may take place between a company and its creditors or any subset of creditors; or between a company and its members or subset of members. The compromise or arrangement has to be agreed by majority of persons representing 3/4th of value of the creditors, members or class of them. Upon sanctioning of the compromise or arrangement by the NCLT it binds the company, all the creditors, members or a class of them. Liquidation is one of instances wherein Section 230 can be invoked.
The Supreme Court in Meghal Homes Pvt. Ltd. Vs. Shree Nivas Girni K. K. Samiti (2007) 7 SCC 753 has observed that when a company is in liquidation, its assets are custodia legis, the Liquidator being the custodian for the distribution of the liquidation estate. A compromise or arrangement in respect of company in liquidation must foster revival of a company, this being the clear statutory intention behind entertaining a proposal under Section 391 of Companies Act, 1956 in respect of company in liquidation.
Section 230 of Companies Act, 2013 and IBC
It was argued before the Supreme Court that Section 230 of Companies Act, 2013 is an independent provision and is not regulated by IBC. The Supreme Court observed that Liquidation of Company under IBC is a matter of last resort. There are three modes through which revival is contemplated under IBC. First mode is through CIRP. Second mode is selling as going concern under Liquidation Process Regulation 32 (e ) and (f). Third mode is through compromise or arrangement under Section 230 of Companies Act, 2013. A harmonious construction of two statute i.e. Section 230 of Companies Act, 2013 and provisions of IBC has to be done. Company has to be protected from its management and corporate death. It would lead to absurdity if persons ineligible to submit Resolution Plan or participating in sale of assets are allowed to submit scheme of compromise or arrangement.
Section 12A IBC and Section 230 of Companies Act, 2013
It was argued before the Supreme Court that Section 12 A of IBC and Section 230 of Companies Act, 2013 are “settlement mechanism” rather than “resolution mechanism” as such there is no reason to prevent a person ineligible under Section 29A from submitting scheme of compromise or arrangement. This argument was rejected by the Supreme Court. The Supreme Court observed that Section 12 A is not intended to be a culmination of the resolution process. Section 12A is applicable at inception of the process. A scheme of compromise or arrangement represents culmination of the process. A scheme of compromise or arrangement binds the company, its creditors, and members or class of persons or creditors as well as the liquidator.
Constitutional Validity of Regulation 2B
The Supreme Court noted that power of IBBI to frame regulations under Section 240 (1) is conditioned by two requirements- (i) Regulations have to be consistent with the provisions of IBC and rules framed by the Central Government. (ii) the regulations must be to carry out the provisions of IBC. The Court observed that Regulation 2B meets both the requirement of being consistent with the provisions of IBC and of being made in order to carry out provisions of the Code. There cannot be any doubt that proviso to Regulation 2B is clarificatory in nature. Even in absence of this provision, a person who is ineligible under Section 29A would not be permitted to propose a compromise or arrangement under Section 230 of the Companies Act, 2013. The Supreme Court did not find any merit in challenge to validity of Regulation 2B.
The Supreme Court dismissed the Appeals as well as the Writ Petition.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.