{"id":245675,"date":"2021-03-16T23:18:31","date_gmt":"2021-03-16T17:48:31","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=245675"},"modified":"2021-03-19T10:40:58","modified_gmt":"2021-03-19T05:10:58","slug":"ineligible-promoters-under-section-29a-ibc-cant-propose-compromise-or-arrangement-schemes-under-section-230-of-the-companies-act-2013-supreme-court","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2021\/03\/16\/ineligible-promoters-under-section-29a-ibc-cant-propose-compromise-or-arrangement-schemes-under-section-230-of-the-companies-act-2013-supreme-court\/","title":{"rendered":"Ineligible promoters under Section 29A IBC can’t propose compromise or arrangement schemes under Section 230 of the Companies Act, 2013: Supreme Court"},"content":{"rendered":"

Supreme Court:<\/strong> The bench of Dr. DY Chandrachud*<\/strong> and MR Shah, JJ has held that a person who is ineligible under Section 29A of the Insolvency Bankruptcy Code, 2016 (IBC) to submit a resolution plan, is also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013.<\/p>\n

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\u201cSection 29A has been construed to be a crucial link in ensuring that the objects of the IBC are not defeated by allowing \u201cineligible persons\u201d, including but not confined to those in the management who have run the company aground, to return in the new avatar of resolution applicants.\u201d<\/span><\/p>\n<\/blockquote>\n

IBC liquidation and Section 230 scheme: Legislative history<\/strong><\/span><\/h3>\n

Explaining the legislative history behind the scheme of compromise or arrangement proposed under Section 230, the Court noticed that there is no reference in the body of the IBC this scheme, Sub-section (1) of Section 230 was however amended with effect from 15 November 2016 so as to allow for a scheme of compromise or arrangement being proposed on the application of a liquidator who has been appointed under the provisions of the IBC.<\/p>\n

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\u201cWhile there is no direct recognition of the provisions of Section 230 of the Act of 2013 in the IBC, a decision was rendered by the NCLAT on 27 February 2019 in Y Shivram Prasad v. S Dhanapal, 2019 SCC OnLine NCLAT 172<\/a><\/strong>. NCLAT in the course of its decision observed that during the liquidation process the steps which are required to be taken by the liquidator include a compromise or arrangement in terms of Section 230 of the Act of 2013, so as to ensure the revival and continuance of the corporate debtor by protecting it from its management and from “a death by liquidation”. The decision by NCLAT took note of the fact that while passing the order under Section 230, the Adjudicating Authority would perform a dual role: one as the Adjudicating Authority in the matter of liquidation under the IBC and the other as a Tribunal for passing an order under Section 230 of the Act of 2013. Following the decision of NCLAT, an amendment was made on 25 July 2019 to the Liquidation Process Regulations by the IBBI so as to refer to the process envisaged under Section 230 of the Act of 2013.\u201d<\/span><\/p>\n<\/blockquote>\n

The three modes in which a revival is contemplated under the provisions of the IBC<\/strong><\/span><\/h3>\n

The first mode<\/strong> of revival is in the form of the CIRP elucidated in the provisions of Chapter II of the IBC.<\/p>\n

The second mode<\/strong> is where the corporate debtor or its business is sold as a going concern within the purview of clauses (e) and (f) of Regulation 32.<\/p>\n

The third mode<\/strong> is when a revival is contemplated through the modalities provided in Section 230 of the Act of 2013.<\/p>\n

Scope of Section 230 of the Companies Act, 2013<\/strong><\/span><\/h3>\n

Section 230 of the Act of 2013 is wider in its ambit in the sense that it is not confined only to a company in liquidation or to corporate debtor which is being wound up under Chapter III of the IBC. Obviously, therefore, the rigors of the IBC will not apply to proceedings under Section 230 of the Act of 2013 where the scheme of compromise or arrangement proposed is in relation to an entity which is not the subject of a proceeding under the IBC. But, when the process of invoking the provisions of Section 230 of the Act of 2013 traces its origin or, as it may be described, the trigger to the liquidation proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony. <\/em><\/strong><\/p>\n

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“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 because the scheme is proposed in respect of an entity which is undergoing liquidation under Chapter III of the IBC.”<\/span><\/p>\n<\/blockquote>\n

Effect of linkage of IBC with Section 230 of the Act of 2013<\/strong><\/span><\/h3>\n

In the case of a company which is undergoing liquidation pursuant to the provisions of Chapter III of the IBC, a scheme of compromise or arrangement proposed under Section 230 is a facet of the liquidation process. The object of the scheme of compromise or arrangement is to revive the company. Liquidation of the company under the IBC is a matter of last resort. <\/em><\/strong><\/p>\n

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 the following important consequences:<\/p>\n