NCLAT | Law on maintainability of Compromise and Arrangement application by Promoter during pendency of Liquidation under IBC clarified

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice S.J. Mukhopadhyay, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), set aside the order of the National Company Law Tribunal, Kolkata, for failure to notice the correct position of law regarding maintainability of application under Sections 230 to 232 of the Companies Act, 2013, during pendency of Liquidation proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

By an earlier order of the Appellate Tribunal, the Liquidation proceedings had already commenced against the Corporate Debtor. During the pendency of Liquidation proceedings, an application under the aforesaid sections was preferred by the Promoter of the Corporate Debtor, on which, the NCLT had passed the impugned order directing for taking of steps for the Financial Scheme of Compromise and Arrangement between the Promoter and the Corporate Debtor. 

It is noteworthy at this stage, that earlier, the Resolution Plan submitted by the Promoter was not accepted as he was ineligible to be Resolution Applicant under Section 29-A IBC for committing default. 

Jindal Steel and Power Ltd., one of the unsecured creditors of the Corporate Debtor, preferred the instant appeal under Section 421 of the Companies Act. The challenge was on the following two questions:

(i) Whether in a liquidation proceeding under IBC, the Scheme for Compromise and Arrangement can be made in terms of Sections 230 to 232 of the Companies Act?

(ii) If so permissible, whether the Promoter is eligible to file an application for Compromise and Arrangement, while he is ineligible under Section 29-A IBC to submit a ‘Resolution Plan’?

The Appellate Tribunal answered the first question in affirmative. It relied on the earlier decision in T. Shivram Prasad v. Dhanapal, Company Appeal (AT) (Insolvency) No. 224 of 2018, decided on 27-2-2019, to hold that: “In a Liquidation proceeding under IBC, a petition under Sections 230 to 232 of the Companies Act is maintainable.”.

For answering the second question, the Appellate Tribunal relied on the decision of the Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India, Writ Petition (Civil) No. 99 of 2019, and held that: “Even during the period of Liquidation, for the purpose of Sections 230 to 232 of the Companies Act, the Corporate Debtor is to be saved from its own management, meaning thereby — the Promoters, who are ineligible under Section 29-A, are not entitled to file application for Compromise and Arrangement in their favour under Sections 230 to 232 of the Companies Act.”.

Reference was also made to the proviso to clause (f) of Section 35 IBC, which makes it clear that the Promoter, if ineligible under Section 29-A, cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or the actionable claims of the Corporate Debtor.

The Appellate Tribunal was of the opinion that the NCLT, by its impugned order, though ordered to proceed under Sections 230 to 232 of the Companies Act, failed to notice that such application was not maintainable at the instance of Promoter, who was ineligible under Section 29-A to be a Resolution Applicant.

In such circumstances, the Appellate Tribunal allowed the appeal to set aside the impugned order, and remitted the matter to the Liquidator. [Jindal Steel and Power Ltd. v. Arun Kumar Jagatramka, 2019 SCC OnLine NCLAT 759, decided on 24-10-2019]