top of page

Critical Analysis Of Extending The Rigours Of Section 29A Of The Insolvency and Bankruptcy Code

The author is Lalitha Durvasula, a fourth year student at Symbiosis Law School, Nagpur.


Introduction

The recent decision of the Supreme Court in the case of Arun Kumar Jagatramka Vs Jindal Steel and Power Limited and Another (hereinafter known as the ‘Arun Kumar Case’) which shall be discussed in the latter part of this article, coupled with Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, elucidates that persons ineligible to submit a resolution plan when a company is undergoing insolvency resolution, remain ineligible to submit a Scheme for Compromise and Arrangement (hereinafter referred to as ‘C&A Scheme’) during its liquidation after the resolution fails.


A C&A Scheme is filed under Sections 230-232 of the Companies Act, 2013 which enables a company to enter into a compromise with its creditors or members that usually involves restructuring of the debt of the company. Additionally, the scheme could be for a merger or acquisition of two or more companies with or without the formation of a new entity.


The purpose of the insertion of Section 29A of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC, 2016’) is to place a statutory bar on certain classes of persons from submitting a resolution plan during the Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP’). The underlying objective of such inclusion is to ensure that, among other persons with undesirable elements to take over the management of the corporate debtor, certain promoters who are responsible for the insolvency of the corporate debtor do not get a chance to begin on a ‘clean slate’ by submitting a resolution plan.


It is pertinent to note that in addition to restricting such promoters from gaining access to control the corporate debtor through a resolution plan that would give them an undue benefit of starting on a clean slate, the said Section also seeks to protect the interests of the corporate debtor vis-a-vis the interests of the creditors, thereby ensuring a sustainable revival. In cases where the CIRP fails to pass through the committee of creditors or gets rejected by the adjudicating authority, the National Company Law Tribunal (hereinafter referred to as ‘NCLT’), passes an order for liquidation. This article attempts to establish that the ineligibility imposed on promoters while submitting a resolution plan for the revival of the company need not be extended to the submission of a C&A Scheme by primarily relying on the intent of such a restriction in the former and subsequently by drawing a contrast between both the cases.


The Companies Act, 2013, stepping in to further uphold the primary goal of the IBC, 2016, pertaining to the revival of the company

In recent times, even after an order for liquidation is passed under the IBC, 2016, C&A Schemes are entertained before actually proceeding with the liquidation. The rationale behind this procedure is to ensure that an additional opportunity to revive the company which is on the verge of liquidation, is not lost. This further upholds the primary objective of IBC, 2016, which is resolution of insolvency of companies thereby making liquidation of the company, the last resort. This now leaves us with the question of whether the rigours of Section 29A of the IBC, 2016, should be applied to a scheme under Section 230 of the Companies Act, 2013, when the company is undergoing liquidation under IBC, 2016. In a multitude of cases in recent times, promoters who were held ineligible to submit a resolution plan have been restrained from submitting a C&A Scheme owing to the judicial precedents along with the legislative backing.


The Honourable Supreme Court of India, in the Arun Kumar Case, held that persons ineligible under Section 29A of IBC, 2016, are considered to be ineligible to submit a C&A Scheme under Section 230 of the Companies Act, 2013. The Court held that the objectives of Section 29A of the IBC, 2016, would be defeated in case the rigours are not extended to a C&A Scheme under the Companies Act, 2013. In a paradigm where the rigours are not applied, the promoters would get an entry into the management of the company by submitting a C&A Scheme. This in turn would render Section 29A under the IBC, 2016, futile since an entry to the company would then be sought through Section 230 of the Companies Act, 2013.


At this juncture, it becomes necessary to reconsider the objectives of the insertion of Section 29A of the IBC, 2016, as to why such a backdoor entry is prevented, which is twofold- a) to prevent the promoter from taking advantage of their own wrong; b) to ensure sustainable revival of the company in order to protect the interests of the creditors. A bare perusal of Section 230 of the Companies Act, 2013, makes it evident that the procedure and consequences of CIRP and a C&A Scheme are very distinct in nature and there arises no need to extend the restriction under CIRP to a C&A Scheme.


The issues that Section 29A of the IBC, 2016, seeks to address do not arise under a C&A Scheme

i. The promoter does not get an undue advantage in a C&A Scheme

Firstly, the issue of granting an unfair opportunity to the promoters to start on a ‘clean slate’, through the submission of a resolution plan, is being addressed by Section 29A of the IBC, 2016. However, in a C&A Scheme, the primary purpose is restructuring of debt through a compromise with the creditors or members, that does not involve starting off on a ‘clean slate’. The company would be restored to the previous management with the liabilities through a C&A Scheme. The revival of a company through corporate debt restructuring does not necessarily involve the extinguishment of claims as in the case of a CIRP mechanism, thereby ensuring that the promoter is not gaining in an unfair manner. Therefore, since the consequences of both these processes stand different, the issue of unfair advantage does not arise in the latter.


ii. The consent of the creditors along with procedural mandates in a C&A Scheme safeguard the interests of the stakeholders

Section 230 of the Companies Act, 2013, has an elaborate procedural mandate for the scheme to be binding on all the stakeholders. An applicant under the said section must submit an affidavit accompanying the application stating the debt restructuring scheme that is consented to by not less than 75% of the Secured Creditors. This is further accompanied by a creditor’s responsibility statement and a statement for the protection of other secured and unsecured creditors, among other procedural safeguards. This makes it clear that the creditors, regarding whose interests the legislators have inserted Section 29A of the IBC, 2016, are themselves either explicitly agreeing to a C&A Scheme or a statement protecting their interests is being filed.


In the case of Vallal Rck v. Siva Industries And Holdings Limited And Others, the Honourable Supreme Court recognised the commercial wisdom of the Committee of Creditors to be of paramount importance. This is due to the reason that the financial creditors that constitute the committee are assumed to have the best interests of the corporate debtor in mind owing to their intricate relationship with the affairs of the corporate debtor. Hence, their consent, pertaining to the matters of the corporate debtor, being of utmost importance cannot be undermined.


Drawing the same parallel in case of a C&A Scheme, wherein the consent of secured creditors (most of them being financial creditors) is taken for corporate debt restructuring, their consent must be given due importance since their wisdom would safeguard the interests of all the stakeholders including their own rights.


Further, this scheme reaches the meeting stage only after the NCLT admits the scheme at its nascent stages. Additionally, it has to attain a dual consent of the majority of the members or creditors representing three-fourth in value. Lastly, the scheme is binding only after the NCLT sanctions it, upon being satisfied that the scheme is in the best interests of all the stakeholders.


Conclusion

The multi-layered involvement of the creditors and the NCLT at various stages in case of a C&A Scheme under the Companies Act, 2013, ensures that the scheme is effectively accommodating the interests of the corporate debtor and the creditors. Therefore, both in terms of the effect of CIRP under IBC, 2016, and C&A Scheme under Section 230 of the Companies Act, 2013, and the procedural safeguards in the latter, the issues that Section 29A of the IBC, 2016 seeks to address, do not arise. Hence, extending the rigours would only water down the importance of revival of the company and undermine the consent of the creditors which is paramount.

1,709 views0 comments

Comments


bottom of page