India - Revival Of Corporate Debtors Under The Companies Act.
Legal News & Analysis - Asia Pacific - India - Insolvency & Restructuring
5 June, 2019
On 27 April 2019, the Insolvency and Bankruptcy Board of India ("IBBI") issued a discussion paper along with draft regulations ("Discussion Paper") in relation to the corporate liquidation process under the Insolvency and Bankruptcy Code, 2016 (“Code"). One of the key proposals in the Discussion Paper is to introduce a new provision in the IBBI (Liquidation Process) Regulations, 2016 ("Liquidation Regulations”) for compromise or arrangement of the corporate debtor under the provisions of section 230 of the Companies Act, 2013 ("2013 Act") as an attempt to revive the corporate debtor as a going concern before the liquidation process commences.
The scheme of compromise or arrangement under section 230 of the 2013 Act in relation to corporate debtor facing liquidation under the Code was first proposed in the case of Gujarat NRE Coke Limited ("GNCL"). Subsequent to the passing of liquidation order of GNCL by the adjudicating authority, the promoter/director of GNCL approached the National Company Law Tribunal ("NCLT") with a scheme of compromise and arrangement under section 230 of the 2013 Act for revival of GNCL. Pursuant to the promoter's proposal, the NCLT issued necessary directions for convening and holding of separate meetings of creditors and shareholders to consider and approve the scheme of arrangement. However, the National Company Law Tribunal ("NCLAT"), in appeal filed by Jindal Steel and Power Limited, stayed convening of the meetings of stakeholders of GNCL.
The aspect of ensuring revival corporate debtor was also discussed by the Hon'ble Supreme Court in its judgement passed in Swiss Ribbons1 case. The Hon'ble Supreme Court in its order discussed the objective of the Code and stated that the Code is first and foremost a Code for reorganization and insolvency resolution of corporate debtors. The Hon'ble Supreme Court further observed that the liquidation should be availed of as a last resort only if there is no resolution plan or the resolution plans submittedarenotuptothemark.
Following the judgements passed by the Supreme Court in Meghal Homes2 and Swiss Ribbons, the NCLAT in its subsequent order in 'S.C. Sekaran vs. Amit Gupta & Ors'3 directed that the liquidator should take necessary steps in terms of Section 230 of the 2013 Act before taking steps to sell the assets of the corporate debtor. The NCLAT also directed that only in case a revival is not possible, should the NCLT and the liquidator proceed with the sale of company's assets.
While directing the liquidator to proceed for revival of corporate debtor under section 230 of the 2013 Act in the matter of 'Y Shivram Prasad vs S Dhanpal & Ors4 ('Y Shivram Prasad' case), the NCLAT held that, as the liquidation of corporate debtor would be taken up under the provisions of the Code, the arrangement of scheme should be in consonance with the statement and object of the Code only. The NCLAT also held that the scheme must ensure maximisation of the assets of the corporate debtor and balance the stakeholders without any discrimination. Before the approval of an arrangement or scheme, the NCLT should follow the same principle and should allow the liquidator to constitute a committee of creditors to find out whether the arrangement of scheme is viable, feasible and having appropriate financial matrix.
While the Hon'ble Supreme Court and the NCLAT stressed upon revival of corporate debtor, section 33 of the Code mandated the adjudicating authority to order liquidation of corporate debtors under if (a) the adjudicating authority did not receive the resolution plan before the expiry of maximum time period of two hundred and seventy (270) days (including one time of extension of ninety (90) days) or (b) the adjudicating authority had rejected the resolution plan(s) due to non-confirmation of the requirements as set out under section 31 of the Code. Further, there is no provision in the Code which gives empowered the adjudicating authority to order for revival under section 230 of the 2013 Act.
In view of the above, the orders passed by the adjudicating authority in certain cases for liquidation of corporate debtors were challenged before the NCLAT wherein the NCLAT ordered for revival of corporate debtors under section 230 of the 2013 Act. In order to address this concern, the IBBI has proposed a new regulation 12A in the Liquidation Regulations.
The proposed regulation 12A permits a liquidator to file an application for compromise or arrangement of corporate debtor under section 230 of the 2013 Act within seven (7) days of the liquidation order having been passed by the adjudicating authority. Also, members or creditors of the corporate debtor are permitted to file an application under section 230 of the 2013 Act within ten (10) days of the order of liquidation.
While the proposed regulation 12A is welcome step, as it attempts to ensure revival of the corporate debtor in the interest of all the stakeholders, certain clarifications/amendments are still required for effective implementation of the proposal:
While section 35(1)(f) of the Code prohibits sale of property of the corporate debtor in liquidation to the ineligible resolution applicants under section 29A of the Code, it is being proposed that the ineligibility norms under section 29A of the Code may not apply to scheme of compromise or arrangement under section 230 of the 2013 Act. In case the ineligibility norms are dispensed with, the proposed regulation 12A would effectively offer another lifeline to the defaulting promoters to make a bid for acquiring control and management of the corporate debtor and as such defeat the spirit of law laid down under section 35(1)(f) read with section 29A.
There is no clarity if a third party (other than promoters, members or creditors of the corporate debtor), who is willing to acquire the corporate debtor as a going concern, can approach the liquidator and propose a scheme of compromise or arrangement for acquisition of corporate debtor under section 230.
The proposed regulations do not clarify if there will be any requirement to apply for and obtain no- objection letters from the stock exchange in respect of such scheme of compromise or arrangement in case the corporate debtor is listed on any recognized stock exchange.
The NCLAT, in 'Y Shivram Prasad' case, mandated that the committee of creditors ("CoC") shall review and decide upon the viability and feasibility of the scheme of arrangement. However, the proposed regulation 12A does not have any such provision. Accordingly, the regulations should also clarify how the liquidator will decide upon and ascertain the credibility of the proposal of compromise or arrangement for corporate debtor.
The members and the operational creditors do not have a right to interfere with the decision of the CoC under the Code. But a scheme of compromise or arrangement under section 230 of the 2013 Act has to be approved by the members and the creditors of the corporate debtor with prescribed supermajority. Therefore, in case the scheme of compromise or arrangement is proposed by non-promoter entity, then, the defaulting promoters and their related parties would obstruct the scheme by not approving the same. This is on account of the fact that section 230 of the 2013 Act permits the promoters also to participate in the voting process.
For further information, please contact:
Mustafa Motiwala, Partner, Clasis Law
1 Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India- MANU/SCOR/03383/2019
2 Meghal Homes Pvt. Ltd. vs. Shree Niwas Girni K.K. Samiti & Ors.- (2007) 7 SCC 753