| CASE NAME | Arun Kumar Jagatramka v. Jindal Steel and Power Ltd and Anr |
| CITATION | AIRONLINE 2021 SC 136 |
| COURT | Supreme Court Of India |
| PETITIONER | Arun Kumar Jagatramka |
| RESPONDENTS | Jindal Steel and Power Ltd and Anr |
| DECIDED ON | Judgement Reserved |
INTRODUCTION
This appeal pertains to a fundamental question surrounding the eligibility of promoters to submit schemes of compromises and arrangements under Section 230 of the Companies Act, 2013, in relation to insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”). The judgment explains the position between the Companies Act and the IBC, in respect of prohibition because of ineligibility under Section 29A of the IBC. This case examines whether promoters disqualified under Section 29A of the Insolvency and Bankruptcy Code can submit schemes of compromise or arrangement under Section 230 of the Companies Act during liquidation. The Supreme Court clarified that such persons are barred from participating, reinforcing the principle of a “clean slate” in corporate insolvency. The judgment highlights the interplay between the Companies Act and IBC, ensuring that those responsible for a company’s financial distress cannot regain control through backdoor arrangements. It also affirms the constitutionality of Regulation 2B, which prevents ineligible parties from proposing compromises. Overall, the ruling emphasizes corporate accountability, creditor protection, and the integrity of insolvency proceedings in India.
FACTUAL BACKGROUND AS PER COURT COPY
A.1 Civil Appeal 9664 of 2019
The National Company Law Appellate Tribunal (NCLAT) delivered its ruling on October 24, 2019, which stated that any person not eligible to submit a resolution plan under Section 29A of the IBC, would also not be eligible to submit a scheme of arrangement and compromise under Section 230 of the Companies Act, 2013. The ruling was made in an appeal by Jindal Steel and Power Ltd., from Gujarat NRE Coke Ltd., an unsecured creditor.
The case was regarding an appeal before the National Company Law Appellate Tribunal (“NCLAT”) against the decision of the National Company Law Tribunal (“NCLT”) which allowed an application by Mr. Arun Kumar Jagatramka (“Mr. Jagatramka”), a promoter of Gujarat NRE Coke Limited (formerly known as Global NRE Coke Limited) (“GNCL”), to call a meeting of shareholders and creditors to consider his proposed scheme. Mr. Jagatramka challenged the ruling of the NCLAT by arguing that Section 230 does not disallow anyone from making a submission to propose a scheme. He also submitted that the interpretation of the NCLAT of ineligibility under Section 29A to Section 230 was a judicial amendment of the law, which was not permitted.
A.2 Civil Appeal 2719 of 2020
This appeal was initiated to challenge an order of the NCLAT dated December 19, 2019, which upheld a previous order stating that a person who is otherwise ineligible to file a resolution plan under Section 29A of the IBC is also not permitted to file a scheme of compromise and arrangement under Section 230 of the Companies Act.
On this point, Mr. Kunwer Sachdev, who was the promoter and suspended director of Su-Kam Power Systems Ltd. did, however, face similar issues and had his motion for a resolution plan denied due to ineligibility under Section 29A and, after a liquidation order, was then denied a scheme of arrangement.
A.3 Liquidation Process Regulations, 2016
The Liquidation Process Regulations were issued by the Insolvency and Bankruptcy Board of India (IBBI), to prescribe the procedures applicable to the liquidation process under the IBC. These regulations were amended to contain provisions regarding compromises and arrangements during liquidation.
Specifically, Regulation 2B states that, any statutory compromise proposed under Section 230 of the Companies Act must be in effect within 90 days after the order of liquidation, and that any person who is ineligible to submit a resolution plan under the IBC shall also be prohibited from proposing a compromise during the liquidation process.
A.4 Article 32 Petition
A writ petition (C) No. 269 of 2020 was filed by Mr. Jagatramka asserting that the amendments to the Liquidation Process Regulations were ultra vires the IBC and the Companies Act, as well as violative of Articles 14, 19, and 21 of the Constitution.
ISSUES
- The scenario of Eligible Promoters- Is it valid for a person who is disqualified from submitting a plan of revival under Section 29A of the IBC to submit a scheme of compromise and arrangement in accordance with Section 230 the Companies Act in liquidation?
- The constitutionality of Regulation 2B- Is Regulation 2B of the Liquidation Process Regulations constitutionally valid, particularly, the proviso that disqualifies ineligible persons from attending compromises or arrangements of the creditors?
- I.B.C. and Companies Act Interaction- How do the provisions of the I.B.C. interact with the Companies Act with respect to liquidation and compromise arrangements?
- Judicial Interpretation of Statutory Intent- To what extent can the courts interpret provisions of the law consistent with statutory intent without exceeding their jurisdiction?
CONTENTIONS
APPELLANT’S CONTENTIONS
- No Empirical Bar – Mr. Sandeep Bajaj, counsel for the appellant argued that there is nothing in Section 230 that explicitly prohibits promoters from submitting a scheme. As a result of lacking disqualification, the NCLAT has no authority to extend the ineligibility clause in Section 29A to Section 230 of the Code.
- Judicial Reformation – The appellant argued that the NCLAT’s interpretation effectively amounts to judicial reformation of the law, which the court is unable to do.
- Different Legal Regimes – The appellant argues the IBC and Companies Act constitute different legal regimes. The IBC is an alteration of the scheme, so this cannot be treated the same distinguish and not to be altered.
- Legislative History – The legislative history of the IBC indicates the introduction of Section 29A aimed to prevent conduct by promoters declining or against business integrity during a resolution process, and not at a point where a liquidation order is made.
- Purposive Interpretation – The appellant pushed for purposive (meaning aimed at public policy) interpretation, or as intended meaning of the proceedings, as the purpose of Section 230 should allow and anticipate promoters to process compromises etc unless they are in control of the corporate debtor at that point.
RESPONDENT’S CONTENTIONS
- Ineligibility under Section 29A- Mr. Amit Sibal, on behalf of JSPL, stated that the ineligibility under Section 29A of the IBC includes disqualifications found in Section 230 of the Companies Act, particularly with respect to liquidation.
- Protecting the Rights of Stakeholders- The respondent contended that the ultimate aim of the IBC is to protect the interests of creditors so that only those responsible for the company’s finances will have no opportunity to reclaim their control over the company using backdoor methods.
- Judicial Precedent- The respondent stated that the courts have continually interpreted provisions of the IBC so that the Company does not allow someone known to have acted in a morally questionable manner to be involved in the resolution process.
- Regulatory Framework- The respondent pointed to Regulation 2B with clarifying explanations that were added to ensure that the disqualification of the ineligible parties under occurs under Section 29A is enforceable but also accuracy ensures the liquidation framework remains.
- Public Interest- The respondent stated that it is imperative for the responsible in the public interest that orders are sanctioned by the Board of Directors in petitioning for a company that is in default and this case did not sufficiently prove the case against the ineligible parties that bashed good faith.
JUDGEMENT AND ANALYSIS OF THE LEGAL FRAMEWORK AS PER COURT COPY
D.1 Ineligibility During Resolution and Liquidation
- Section 29A Introduction- Section 29A of the IBC lists types of people who are not able to submit a resolution plan because of their ineligibility due to status as willful defaulters, undischarged insolvents or non-performing assets.
- Reason for Section 29A- This provision is enacted to hinder someone who has assisted the financial problem of the corporate debtor from regaining control through the resolution process.
- Relation to liquidation- The terminology found in Section 35(1)(f) is similarly applicable for liquidation purposes and safeguarding the detrimental consequences of unscrupulous people to the liquidation of corporate debtors.
D.2 Interplay- IBC Liquidation and Section 230 of the Companies Act, 2013
- Section 230 Mechanism- Section 230 creates a scheme for compromise and arrangement, enabling a company to arrive at agreements with its creditor. This mechanism is standalone from the resolution process and, as we note in the Liquidation Instruments section, can be utilized in the context of liquidation.
- Judicial Interpretation- Courts have construed Section 230 with the IBC to reinforce the aims of both statutes, in conversation to preserve corporate efficacy and the wants of stakeholders.
- Liquidation as Last Resort- Liquidation under the IBC is regarded as a last resort. The interaction of liquidation as a process, and the compromise arrangements raises questions of whether to meet strict eligibility requirements.
D.3 The ‘Clean Slate’
- Resolution Plans and Clean Slate- The notion of having a “clean slate,” is a major interest in the IBC which would allow resolution applicants who are successful in their resolution bids to continue operating without the burden of past liabilities.
- Prohibition on Ineligible Persons- In order to uphold this principle, individuals who fall under Section 29A as being ineligible would not be able to propose compromises. Allowing such would render their contributions futile and violate the whole point of maintaining the integrity of the resolution process.
- Absurdity of Allowing Proposals- Allowing ineligible persons who cannot even propose plans for resolutions the ability to propose compromises is unfathomable as it runs counter to the objectives of the IBC.
D.4 Constitutionality of Regulation 2B
- Regulatory Authority- The IBBI is authorized to issue regulation under the IBC, as long as the regulation is in conformity to the provisions in the Act.
- Proviso to Regulation 2B- The proviso which disqualifies ineligible persons from participating in compromises, aligns with the overall objectives of the IBC.
- Constitutionality of Regulation- The regulations do not contravene constitutional amendments because it serves a legitimate reason to deter misconduct and maintain effective corporate governance.
CONCLUSION
The ruling highlights the important relationship between the operation of the IBC and the Companies Act regarding promoter eligibility while in insolvency and liquidation. In the judgment, the Court held disqualified persons under Section 29A of the IBC are also prohibited from proposing schemes of compromise and arrangement under Section 230 of the Companies Act while in liquidation. This supports the legislative purpose of maintaining the integrity of corporate operations and equity interested parties.
The Supreme Court’s decision reasonably emphasized the IBC and its eligibility to prevent those in charge of a company’s distress from exercising control through various arrangements. The Supreme Court noted the importance of a purposive interpretation of the IBC so that the intention of the legislation, namely prompt resolution, striking a balance in asset value, and preserving creditor interests, are achieved.
This has future implications on insolvency and restructuring matters going forward and confirms that corporate governance will look at accountability and integrity. As IBC continues to develop, the principles in the majority decision will be relevant to the establishment of the law in insolvency and restructuring in India.
‘This article has been written by Tamanna Jain from University Five Year Law College, University of Rajasthan.’
