Companies

IBC: No back-door entry for ineligible promoters in liquidation proceedings

Radhika Merwin BL Research Bureau | Updated on October 31, 2019 Published on October 31, 2019

In Gujarat NRE Coke case, NCLAT rules that ineligible promoters cannot reclaim control via scheme of arrangement under the Companies Act

Two years ago, Section 29A was inserted in the Insolvency and Bankruptcy Code (IBC) to keep out errant and wilful defaulters from buying back stressed assets. This was essential to prevent chronic defaulters and fraudulent promoters from gaming the system and taking back control of their company at a fraction of what they owed lenders.

The provision has served the intended purpose in many cases (as in the Essar Steel case). But there has been lack of clarity on how the provision will apply in liquidation proceedings in the case of scheme of arrangement under Section 230 of the Companies Act.

When resolution fails and the debtor goes into liquidation, the adjudicating authority has, in the past, directed the liquidator to consider provisions of Section 230 of Companies Act, 2013, which deals with ‘Power to Compromise or Make Arrangements with Creditors and Members’. It had been unclear whether promoters ineligible under Section 29 A of the IBC can participate in the scheme of arrangement under Section 230 of the Companies Act.

In its October 24 order in the Gujarat NRE Coke case, the NCLAT removed the ambiguity around this and held that promoters ineligible under Section 29A of the IBC cannot participate in the scheme of arrangement under Section 230 of the Companies Act.

In other words, there can be no back-door entry for errant promoters to regain the control of the company, even in a liquidation proceeding where a liquidator proposes a compromise or arrangement with creditors and members (shareholders).

The crux of the issue

The Supreme Court, in the oft-quoted Swiss Robbins case, had observed that “the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort, if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern”.

Hence, the NCLAT ruling in the the SC Sekaran vs Amit Gupta case (January 2019 order) had cited the Meghal Homes vs Shree Niwas Girni KK Samiti case, in which the Supreme Court upheld the provisions under Section 391 of the Companies Act, 1956, and Section 230 of the Companies Act, 2013. These provisions give the liquidator (resolution professional under IBC) the right to propose a compromise or arrangement with creditors and members (shareholders) even in the case of a company which is being wound up.

Section 230 of the Companies Act, in effect, deals with ‘Power to Compromise or Make Arrangements with Creditors and Members’, which may include reconstruction or amalgamation/merger/demerger of companies or reduction of share capital or even corporate debt restructuring.

While Section 29 A debars errant promoters from bidding in the resolution process, it was unclear if it specifically precluded them from participating in the scheme of arrangement under Section 230 of the Companies Act.

NCLAT clarifies

In the Gujarat NRE Coke case, the NCLAT removed the ambiguity around the applicability of Section 29 A of the Code under the scheme of arrangement.

In that case, the question raised was whether Arun Kumar Jagatramka (promoter), ineligible under Section 29A of the Code to be a resolution applicant (buyer), could ask for a financial scheme of comprise and arrangement under Section 230 of the Companies Act.

NCLAT held that “even during the period of liquidation, the ‘Corporate Debtor’ is to be saved from its own management, meaning thereby that the promoters who are ineligible under Section 29A are not entitled to file application for compromise and arrangement in their favour under Section 230 to 232 of the Companies Act.”

Hence, a promoter, ineligible under Section 29A of the Code, cannot make an application for compromise and arrangement for taking back the immovable and movable property or actionable claims of the debtor.

Published on October 31, 2019
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