IBC: No ‘Schemes’ By Promoters, Supreme Court Says 
A gavel placed on a block for this arranged photograph (Source: Freepik)

IBC: No ‘Schemes’ By Promoters, Supreme Court Says 

Promoters of companies undergoing liquidation under the insolvency law will not be eligible to submit a scheme of arrangement during the liquidation process, the Supreme Court has said.

The reason for this, the top court held, was the spirit of the Insolvency and Bankruptcy Code, which aims to keep out such promoters and management from making a backdoor entry into the company.

The judgment may see a reduction in the scheme of arrangements for corporates under liquidation as that was the preferred route for promoters to get control, Rajiv Chandak, partner at Deloitte India, told BloombergQuint.

Schemes And IBC

Back in 2019, in Y Shivram Prasad case, the NCLAT had allowed a scheme of arrangement to revive the company during the liquidation proceedings.

Post which, in January last year, the insolvency regulator made a specific amendment to the liquidation regulations to say that an entity who is ineligible to submit a resolution plan cannot propose a scheme of arrangement either. Section 29A of the IBC lays down disqualification criteria for resolution applicants.

Promoters of two companies—Gujarat NRE Coke Ltd. and Su-Kam Power Systems Ltd.—challenged this provision and the rejection of their move over the scheme of arrangement before the apex court.

The Promoter Argument

The appeals in the Supreme Court argued that the ineligibility criteria mentioned in section 29A of the IBC cannot be applied to section 230 of the Companies Act. IBC, they argued, doesn’t specifically say that section 29A would apply to scheme of arrangement provisions under company law, the promoters said.

The bar, they argued, was introduced via rules and was not envisaged in the statute.

Where the Code contemplated restrictions, it has explicitly specified those. For instance, section 35(1)(f) which says that sale of assets at the liquidation can’t be made to those who are barred by section 29A. No such bar has been specified in the IBC for schemes of arrangement, the promoters said.

The Supreme Court View

The apex court recognised that even at the liquidation stage, IBC allows for a chance of revival of the company. And a scheme of arrangement at the liquidation stage is a permitted route for that.

But this provision under company law cannot be viewed in isolation. The court noted that section 230 was specifically amended to allow scheme of arrangements for liquidation arising out of IBC proceedings. And so the bar on promoter participation will apply to scheme of arrangement route as well.

The stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages.
Supreme Court of India

Section 230 has a wide ambit, the court noted. Section 29A will apply when a scheme of arrangement is being proposed for an insolvent company undergoing liquidation under IBC. The two laws have to be harmoniously interpreted. But the bar, the court said, will not apply if a scheme of arrangement is being proposed outside of the IBC.

Supreme Court Cautions NCLT And NCLAT

Pointing to NCLAT’s 2019 ruling, the apex court noted that permitting scheme of arrangements at the liquidation stage was at first a consequence of judicial intervention. Meaning, until July 2019, the liquidation regulations under IBC didn’t explicitly provide for it.

The Supreme Court refrained from dealing with the correctness of the 2019 NCLAT ruling since it was not a subject of the challenge but not without a stern word of caution. NCLTs and NCLAT must keep judicial intervention at the “bare minimum”, the court said.

The IBC was introduced to overhaul the insolvency and bankruptcy regime in India. As such, it’s a carefully considered and well thought out piece of legislation which sought to shed away the practices of the past. The legislature has also been working hard to ensure that the efficacy of this legislation remains robust by constantly amending it based on its experience, the apex court pointed out.

Consequently, the need for judicial intervention or innovation from the NCLT and NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the IBC.
Supreme Court of India

The top court bench of Justice Dr DY Chandrachud and Justice MR Shah dismissed the appeals by promoters.

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