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Harmonious Construction Between Liquidation Proceedings Under IBC and Section 230 of Companies Act

The author is Ishita Chandra, a third year student at Dr. B.R. Ambedkar National Law University, Sonepat, Haryana.


Introduction


The Companies Act, 2013 offers a Compromise and Arrangement Scheme, thereby enabling companies to strategically reorganize their operations to meet specific goals, engage in various arrangements, mergers, amalgamations, demergers, acquisitions, and restructurings. Section 230 of the Companies Act allows the liquidator in the case of a company which is being wound up, to propose a Scheme of Compromise and Arrangement. Thus, Section 230 may be the final option available for the revival of a distressed company. This blog attempts to explain how a provision of Companies Act can be made applicable onto a Company undergoing liquidation under the IBC.


Schemes of compromise and arrangement during liquidation in the pre IBC regime


In India, there have been several instances where companies undergoing liquidation have been directed to be revitalized based on arrangement plans, even before the Insolvency and Bankruptcy Code (IBC) came into effect. In Meghal Homes (P) Ltd. v. Shree Niwas Girni K.K. Samiti, during the existence of the winding-up order of Shreeniwas Cotton Mills Ltd., a compromise scheme was put forth under Section 391 of the Companies Act, 1956. The court ruled that the provision in Section 391 of the Companies Act, 1956 (now Section 230 of the Companies Act, 2013) grants the liquidator of a company undergoing winding up the authority to propose a compromise or arrangement. This provision applies even if a winding-up order has been issued and a liquidator has been appointed. A compromise or arrangement concerning a company in the liquidation process should promote the revival of the company, as this aligns with the evident legislative intent behind considering proposals under Section 391 for companies in liquidation.


When a company is issued a winding-up order, its assets are entrusted to the official liquidator, placing them under the concept of “custodia legis”. If the company is not revitalized, it becomes the duty of the official liquidator to liquidate the company’s assets. This ultimately leads to the company’s dissolution. Over the years, schemes of arrangement have proven to be effective methods for resolving insolvency. Examples of this effectiveness can be observed in the cases of Miheer H. Mafatlal v. Mafatlal Industries Ltd. and Rasiklal S. Mardia v. Amar Dye Chem Ltd.


Judicial decisions and interpretations in the IBC regime


The National Company Law Appellate Tribunal (NCLAT) has instructed the liquidator to initiate actions according to Section 230 of the Companies Act, 2013, aiming to revive the corporate debtor before proceeding with the ultimate sale of the debtor’s assets. In the case of S.C. Sekaran v. Amit Gupta, the efforts under the Corporate Insolvency Resolution Process (CIRP) were unsuccessful, thereby leading to the liquidation of the company in question. The NCLAT referred to the precedent set by the Swiss Ribbons (P) Ltd. v. Union of India case, in which it was firmly established that the primary goal of the IBC is to guarantee the revival of the corporate debtor, thereby shielding it from the possibility of a corporate death triggered by liquidation. Should the scheme demonstrate viability, feasibility, optimization of the Corporate Debtor’s assets, and equitable consideration of creditors, the liquidator will submit an application under Section 230 to the NCLAT, seeking appropriate orders and guidance.


In the case of Y. Shivram Prasad v. S. Dhanapa and Ajay Agarwal v. Ashok Magnetic Ltd., the NCLAT observed that during liquidation, the liquidator is obligated to take measures that encompass a compromise or arrangement as per Section 230 of the 2013 Act. This is done to ensure the revitalization and continuous operation of the corporate debtor by shielding it from the prospect of liquidation-induced demise. When issuing an order under Section 230, the adjudicating authority plays a dual role: one as the authority overseeing liquidation under the IBC, and the other as a tribunal responsible for issuing an order pursuant to Section 230 of the 2013 Act. Similarly, in the case of Rajesh Balasubramanian v. Everon Castings (P) Ltd., the Court issued instructions that if either the members of the “Corporate Debtor” or the “creditors” engage the company through the liquidator to propose payment arrangements to all creditors, then the Liquidator, acting on behalf of the company, should file an application under Section 230 of the Companies Act, 2013 with the NCLAT. These actions align with the observations laid out in the S.C. Sekaran v. Amit Gupta case.


In the case of Jindal Steel and Power Ltd. v. Arun Kumar Jagatramka, when the NCLT ordered liquidation of the corporate debtor, the promoter of the corporate debtor sought authorization for a scheme of compromise under Sections 230 to 232 of the Companies Act, 2013. In response, the NCLT issued a directive to convene a meeting involving the shareholders and creditors of the corporate debtor. Challenging this order, an unsecured creditor appealed to the NCLAT. A crucial question brought forth in this case was whether, during a liquidation process under the IBC, it was possible to formulate a scheme for compromise and arrangement in accordance with Sections 230-232 of the Companies Act. The NCLAT responded affirmatively to this query, drawing support from Y. Shivram Prasad v. S. Dhanapal & Others and S.C. Sekaran v. Amit Gupta case. It observed that prior to initiating asset sales for the corporate debtors, the Liquidator must follow the procedures outlined in Section 230 of the Companies Act, 2013. It is mandated that the Liquidator concludes this process as stipulated by Section 230 within a span of 90 days to account for the liquidation period. Furthermore, the incorporation of Regulation 2-B into the Liquidation Process Regulations of 2016 distinctly affirms the same.


Interplay of liquidation under IBC and Scheme of Compromise/Arrangement under Section 230 of Companies Act 2013.


One of the methods of revival of a Company undergoing the liquidation process is outlined within the provisions of Section 230 of the 2013 Act, which is accessible to the liquidator designated under the IBC. Section 230(1) of the Companies Act envisages that an application pertaining to a Company undergoing winding up can be presented by a liquidator appointed either under the 2013 Act or pursuant to the IBC. The legally prescribed responsibilities of the liquidator do not cease even while initiating a scheme of compromise or arrangement under Section 230. The outcome of the scheme of revival or compromise gaining approval and subsequently obtaining the Tribunal’s endorsement under sub-section (6) is that the scheme becomes legally binding on stakeholders, including the liquidator who has been assigned the role under the IBC.


Section 230 of the 2013 Act goes beyond the narrow confinement to solely a company undergoing winding up as outlined in Chapter III of the IBC. A consistent and sensible interpretation that harmonizes the IBC and the 2013 Act ensures that the endeavour to establish a scheme of compromise or arrangement under Section 230 aligns with the core principles of the IBC. This alignment is especially pertinent given that the scheme is proposed in connection with an entity undergoing liquidation as specified within the framework of Chapter III of the IBC.


When a company is undergoing liquidation as per the provisions of the IBC, the submission of a compromise or arrangement under Section 230 shares notable similarities with a resolution plan, encompassing the following aspects:

(a) The primary objective is the revival of the company.

(b) Upon receiving official approval, it acquires legally binding status.

These inherent traits of revival and enforceability are pervasive in both a resolution plan and a compromise or arrangement, both of which are formulated within the liquidation context. The sanctioned resolution plan under Section 31 of the IBC, as well as a scheme of compromise or arrangement granted approval under sub-section (6) of Section 230, represent the ultimate culmination of the process.


Conclusion


Preferring the continued existence of a financially distressed company over its outright dissolution has consistently been the favoured approach. Rescuing a company burdened with debt through the implementation of a compromise or arrangement scheme is not a novel notion, and such schemes have always been perceived as an alternative to ongoing winding-up processes. Historical judgments from diverse High Courts and the Supreme Court, as well as recent rulings by the NCLAT, all concur in recognizing that schemes of compromise or arrangement can indeed be introduced during winding-up or liquidation proceedings, provided the scheme has provisions for the company’s revival. The legal provision of Company Revival serves as a remedy to both the company and its stakeholders, offering the company a new life and affording its stakeholders an opportunity to recover their rightful claims. Ultimately, the objective is to introduce an additional avenue for revitalizing the company and harmonizing the interests of diverse stakeholders, rather than resorting directly to liquidation.

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