Saturday, 4 November 2023

Imp. Rulings - Compromise & Arrangements during Liquidation

 Imp. Rulings - Compromise & Arrangements during Liquidation

Index;

  1. NCLAT (15.03.2022) in Ramesh Kumar Chaudhary & Anr.  Vs. Anju Agarwal, Liquidator of M/s. Shree Bhawani Paper Mills & Ltd. Ors.

  2. NCLT Mumbai-4 (09.12.2021) in Borchers India Chemicals Pvt. Ltd. Vs. Milliken Chemical and Textile (India) Co. Pvt. Ltd

  3. NCLAT (01.06.2021) in Rakesh Kumar Agarwal & Ors. Vs Devendra P. Jain

  4. NCLAT(13.04.2021) in Ashish Mohan Gupta Vs. The Liquidator of M/s. Hind Motors India Ltd

  5. SCI  (15.03.2021) in  Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr. 

  6. NCLAT (27.02.2019) in Y. Shivram Prasad Vs. S. Dhanapal & Ors.

  7. NCLAT (29.01.2019) in S.C. Sekaran Vs. Amit Gupta & Ors.

 

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NCLAT (15.03.2022) in Ramesh Kumar Chaudhary & Anr.  Vs. Anju Agarwal, Liquidator of M/s. Shree Bhawani Paper Mills & Ltd. Ors.[Company Appeal (AT) (Insolvency) No. 957 of 2021] held that;

  • The action of the Liquidator in placing the Scheme of Compromise or Arrangement before the Stakeholders Consultation Committee was uncalled for and is not in accordance with the provisions of the Code and the Regulations. 

  • Section 230 of the Companies Act read with Regulation 2B of the Liquidation Regulations indicates that it is the Liquidator who is to take a decision as to whether Scheme for Compromise or Arrangement is to be placed before the Tribunal by an Application or not. 

  • When sub-regulation (1) of Regulation 31 specifically refers to advice of Stakeholders Consultation Committee on the matters relating to sale under Section 32, the Stakeholders Consultation Committee was not any competent forum for obtaining any advice with regard to Scheme for Compromise or Arrangement submitted under Section 230.

  • Hence, the Scheme under Section 230 submitted by Respondent Nos.2 and 3 ought to have consent of not less than 75% of the Secured Creditors, and an affidavit to that effect ought to accompany with the Scheme.

  • Obligation to obtain the consent of 75% of the Creditors is on the person who proposes the Scheme. When the Scheme was submitted by Respondent Nos.2 and 3 to the Liquidator, the Liquidator was required to intimate the Respondent Nos.2 and 3 to obtain consent by 75% of creditors and it was for Respondent Nos. 2 and 3 to present the Scheme before Creditors and impress them to give their consent. 

 

[ Link - Synopsis ]

 

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NCLT Mumbai-4 (09.12.2021) in Borchers India Chemicals Pvt. Ltd. Vs. Milliken Chemical and Textile (India) Co. Pvt. Ltd. [CA(CAA)/67/MB/2021] held that;.

  • If no response is received by the Tribunal from the Goods and Service Tax Authority within 30 days from the date of receipt of the notice it will be presumed that Goods and Service Tax Authority has no objection to the proposed Scheme as per Rule 8 of the Companies (Compromises, Arrangements and Amalgamations) Rules. 2016.

[ Link - Synopsis ]

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NCLAT (01.06.2021) in Rakesh Kumar Agarwal & Ors. Vs Devendra P. Jain [Company Appeal (AT) (Insolvency) No. 1034 of 2020] held that;

  • We have perused the notification dated 01.06.2020 and Section 240A of the IBC and in terms of above notification the Corporate Debtor falls into the category of MSME. The Appellants vehemently contend that being existing promoters now they are eligible to submit a Scheme.

  • Before taking steps to sell the assets of the ‘corporate debtor(s)’(companies herein), the Liquidator will take steps in terms of Section 230 of the Companies Act, 2013. The Adjudicating Authority, if so required, will pass appropriate order. Only on failure of revival, the Adjudicating Authority and the Liquidator will first proceed with the sale of company’s assets.  . . . .

  • it is settled law as per the decisions of the Hon’ble Supreme Court that the liquidation is only the last resort and as per the preamble of the IBC the main object of the Code is in resolving corporate insolvencies and not the mere recovery of monies due and outstanding.

  • For the foregoing reasons and relied upon the Judgments of the Hon’ble Supreme Court and this Tribunal we are of the view that the Appellant being eligible to submit a scheme by virtue of an amendment to Section 7 of Micro, Small and Medium Enterprises Development Act, 2006 vide notification dated 01.06.2020.

[ Link - Synopsis ]

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NCLAT (13.04.2021) in Ashish Mohan Gupta Vs. The Liquidator of M/s. Hind Motors India Ltd (In Liquidation) [Company Appeal (AT) (Insolvency) No. 875 of 2019] held that;

  • The introduction of the proviso to Regulation 2B was a step in this direction which sought to clarify the position with respect to the applicability of the disqualifications set out in Section 29A of the IBC to Section 230 of the Act of 2013 in tandem with the legislative intendment.

  • the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through the judicial intervention of the NCLAT in Y Shivram Prasad (supra). Since the efficacy of this arrangement is not challenged before us in this case, we cannot comment on its merits. However, we do take this opportunity to offer a note of caution for the NCLT and NCLAT, functioning as the Adjudicatory Authority and Appellate Authority under the IBC respectively, from judicially interfering in the framework envisaged under the IBC. . . . . . . . .

  • we find that the prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC must also attach itself to a scheme of compromise or arrangement under Section 230 of the Act of 2013, when the company is undergoing liquidation under the auspices of the IBC. As such, Regulation 2B of the Liquidation Process Regulations, specifically the proviso to Regulation 2B(1), is also constitutionally valid.

  • In the Summary Procedure under IBC, the Resolution Professional and Adjudicating Authority are not expected to go into accounts and investigate if and in which category an application falls under Section 7 examining Notifications under Explanation 2 or Sub-Section 9 of Section 7 of MSME Act.

  • When we find that it is not necessary for us to pursue Section 230 of the Companies Act at the stage of Liquidation, the same not being part of Procedure of IBC when the Corporate Debtor is in Liquidation, both the Appeals must fail, not having substance in the contentions raised. 

[ Link - Synopsis ]

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SCI  (15.03.2021) in  Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr.  [Civil Appeal No. 9664 of 2019] held that; 

  • The statutory scheme underlying the IBC and the legislative history of its linkage with Section 230 of the Act of 2013, in the context of a company which is in liquidation, has important consequences.

  • A harmonious construction between the two statutes would ensure that while on the one hand a scheme of compromise or arrangement under Section 230 is being pursued, this takes place in a manner which is consistent with the underlying principles of the IBC

  • It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a compromise or arrangement under Section 230 of the Act of 2013.

  • Based on the above analysis, we find that the prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC must also attach itself to a scheme of compromise or arrangement under Section 230 of the Act of 2013, when the company is undergoing liquidation under the auspices of the IBC. As such, Regulation 2B of the Liquidation Process Regulations, specifically the proviso to Regulation 2B(1), is also constitutionally valid.

[ Link - Synopsis ]

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NCLAT (27.02.2019) in Y. Shivram Prasad Vs. S. Dhanapal & Ors. [Company Appeal (AT) (Insolvency) No. 224 of 2018] held that; 

  • during the liquidation process, step required to be taken for its revival and continuance of the ‘Corporate Debtor’ by protecting the ‘Corporate Debtor’ from its management and from a death by liquidation. Thus, the steps which are required to be taken are as follows:

  • i. By compromise or arrangement with the creditors, or class of creditors or members or class of members in terms of Section 230 of the Companies Act, 2013.

  • ii. On failure, the liquidator is required to take step to sell the business of the ‘Corporate Debtor’ as going concern in its totality along with the employees.

  • While passing such order, the Adjudicating Authority is to play dual role, one as the Adjudicating Authority in the matter of liquidation and other as a Tribunal for passing order under Section 230 of the Companies Act, 2013. 

  • As the liquidation so taken up under the ‘I&B Code’, the arrangement of scheme should be in consonance with the statement and object of the ‘I&B Code’. Meaning thereby, the scheme must ensure maximisation of the assets of the ‘Corporate Debtor’ and balance the stakeholders such as, the ‘Financial Creditors’, ‘Operational Creditors’, ‘Secured Creditors’ and ‘Unsecured Creditors’ without any discrimination. 

  • the ‘Liquidator’ to constitute a ‘Committee of Creditors’ for its opinion to find out whether the arrangement of Scheme is viable, feasible and having appropriate financial matrix. It will be open for the Adjudicating Authority as a Tribunal to approve the arrangement or Scheme

[ Link - Synopsis ]

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NCLAT (29.01.2019) in S.C. Sekaran Vs. Amit Gupta & Ors. [Company Appeal (AT) (Insolvency) No. 495 & 496 of 2018] held that; 

  • # 6. In ‘Meghal Homes Pvt. Ltd. vs. Shree Niwas Girni K.K. Samiti & Ors. – (2007) 7 SCC 753” the Hon’ble Supreme Court observed and held as follows:

  • “33. The argument that Section 391 would not apply to a company which has already been ordered to be wound up, cannot be accepted in view of the language of Section 391(1) of the Act, which speaks of a company which is being wound up. If we substitute the definition in Section 390(a) of the Act, this would mean a company liable to be wound up and which is being wound up. It also does not appear to be necessary to restrict the scope of that provision considering the purpose for which it is enacted, namely, the revival of a company including a company that is liable to be wound up or is being wound up and normally, the attempt must be to ensure that rather than dissolving a company it is allowed to revive. Moreover, Section 391(1)(b) gives a right to the liquidator in the case of a company which is being wound up, to propose a compromise or arrangement with creditors and members indicating that the provision would apply even in a case where an order of winding up has been made and a liquidator had been appointed. Equally, it does not appear to be necessary to go elaborately into the question whether in the case of a company in liquidation, only the Official Liquidator could propose a compromise or arrangement with the creditors and members as contemplated by Section 391 of the Act or any of the contributories or creditors also can come forward with such an application.”

  • # 7. Section 391 of the Companies Act, 1956 has since been replaced by Section 230 of the Companies Act, 2013, which is as follows: …………

  • # 8. In view of the provision of Section 230 and the decision of the Hon’ble Supreme Court in ‘Meghal Homes Pvt. Ltd.’ and ‘Swiss Ribbons Pvt. Ltd.’, we direct the ‘Liquidator’ to proceed in accordance with law. He will verify claims of all the creditors; take into custody and control of all the assets, property, effects and actionable claims of the ‘corporate debtor’, carry on the business of the ‘corporate debtor’ for its beneficial liquidation etc. as prescribed under Section 35 of the I&B Code. The Liquidator will access information under Section 33 and will consolidate the claim under Section 38 and after verification of claim in terms of Section 39 will either admit or reject the claim, as required under Section 40. Before taking steps to sell the assets of the ‘corporate debtor(s)’ (companies herein), the Liquidator will take steps in terms of Section 230 of the Companies Act, 2013. The Adjudicating Authority, if so required, will pass appropriate order. Only on failure of revival, the Adjudicating Authority and the Liquidator will first proceed with the sale of company’s assets wholly and thereafter, if not possible to sell the company in part and in accordance with law. 

[ Link - Synopsis ]

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Ruling of Hon’ble Supreme Court in respect of examination of Resolution Plan in light of Section 29A. Role of Liquidator in examination of Compromise proposal (under section 230 of Companies Act) during liquidation process will be akin to RP in CIRP.

Supreme Court of India (04.10.2018) in ArcelorMittal India Private Limited Vs. Satish Kumar Gupta and Ors.(Civil Appeal Nos. 9402 – 9405 of 2018) ruled on the issues relating to disqualification of Resolution Applicant under section 29A.


Role of Resolution Professional, Committee of Creditors &  Scope of interference by NCLT. 

# 77. However, it must not be forgotten that a Resolution Professional is only to “examine” and “confirm” that each resolution plan conforms to what is provided by Section 30(2). Under Section 25(2)(i), the Resolution Professional shall undertake to present all resolution plans at the meetings of the Committee of Creditors. This is followed by Section 30(3), which states that the Resolution Professional shall present to the Committee of Creditors, for its approval, such resolution plans which confirm the conditions referred to in sub-section (2). This provision has to be read in conjunction with Section 25(2)(i), and with the second proviso to Section 30(4), which provides that where a resolution applicant is found to be ineligible under Section 29A(c), the resolution applicant shall be allowed by the Committee of Creditors such period, not exceeding 30 days, to make payment of overdue amounts in accordance with the proviso to Section 29A(c). A conspectus of all these provisions would show that the Resolution Professional is required to examine that the resolution plan submitted by various applicants is complete in all respects, before submitting it to the Committee of Creditors. The Resolution Professional is not required to take any decision, but merely to ensure that the resolution plans submitted are complete in all respects before they are placed before the Committee of Creditors, who may or may not approve it. The fact that the Resolution Professional is also to confirm that a resolution plan does not contravene any of the provisions of law for the time-being in force, including Section 29A of the Code, only means that his prima facie opinion is to be given to the Committee of Creditors that a law has or has not been contravened. Section 30(2)(e) does not empower the Resolution Professional to “decide” whether the resolution plan does or does not contravene the provisions of law.

 

# 78. Thus, the importance of the Resolution Professional is to ensure that a resolution plan is complete in all respects, and to conduct a due diligence in order to report to the Committee of Creditors whether or not it is in order. Even though it is not necessary for the Resolution Professional to give reasons while submitting a resolution plan to the Committee of Creditors, it would be in the fitness of things if he appends the due diligence report carried out by him with respect to each of the resolution plans under consideration, and to state briefly as to why it does or does not conform to the law.

 

# 80. It is the Committee of Creditors which will approve or disapprove a resolution plan, given the statutory parameters of Section 30. Under Regulation 39 of the CIRP Regulations, sub-clause (3) thereof provides:-

  • “(3) The committee shall evaluate the resolution plans received under sub-regulation (1) strictly as per the evaluation matrix to identify the best resolution plan and may approve it with such modifications as it deems fit:

  • Provided that the committee shall record the reasons for approving or rejecting a resolution plan.”

This regulation shows that the disapproval of the Committee of Creditors on the ground that the resolution plan violates the provisions of any law, including the ground that a resolution plan is ineligible under Section 29A, is not final. The Adjudicating Authority, acting quasi-judicially, can determine whether the resolution plan is violative of the provisions of any law, including Section 29A of the Code, after hearing arguments from the resolution applicant as well as the Committee of Creditors, after which an appeal can be preferred from the decision of the Adjudicating Authority to the Appellate Authority under Section 61.


[ Link - Synopsis ]

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