The Supreme Court of India recently took a significant step to prevent defaulting promoters from exploiting a loophole through a provision of compromise or arrangement during the liquidation phase of the insolvency proceeding. This ruling, in essence, reinforces the principles of the Insolvency and Bankruptcy Code (IBC).
Background of the Case
The genesis of this development lies in a 2019 ruling by the National Company Law Appellate Tribunal (NCLAT) regarding the liquidation of a Limited Company. The NCLAT had ruled that anyone disqualified under Section 29A of the Insolvency and Bankruptcy Code (IBC) to bid for their company was also prohibited from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013. This act is a critical framework regulating various aspects of company administration like incorporation, responsibilities, and dissolution.
Section 230 of the Companies Act allows promoters or creditors of the company to propose an arrangement or compromise under which the company’s debt can be restructured.
The Supreme Court’s Recent Ruling
In this context, the Supreme Court upheld the NCLAT’s decision, asserting that while Section 230 would be applicable for promoters and creditors under normal circumstances, it would not be so if the company is undergoing liquidation under the IBC.
Justification Provided by the Supreme Court
According to the Supreme Court, it is vital to shield the company from its management and prevent ‘corporate death’. It would lead to a noticeable absurdity if people ineligible to submit a resolution plan or participate in the sale of assets or corporate debtor are allowed to propose a compromise or arrangement under Section 230 of the Companies Act, 2013.
Significance of the Judgement
Prominent implications of this judgement range from expediting the resolution process to maximizing asset value and settling conflicting judgements.
The Supreme Court’s clear stance on promoter participation in the liquidation process is expected to quicken the corporate insolvency resolution process. Furthermore, a speedy liquidation is crucial to maximizing the value of a company’s assets, given that liquidation is ordered only when no viable plans are submitted.
This judgement also settles varying previous rulings provided by different benches of the NCLT.
About the Insolvency and Bankruptcy Code, 2016
The IBC provides a time-bound process to resolve insolvencies among companies and individuals. It aims to streamline and expedite failed business resolution processes, consolidate provisions of existing legislative frameworks for debtors and creditors, and ensure completion of a stressed company’s resolution process within a maximum of 270 days.
Section 29A plays an essential role in this framework. It corners individuals who might not be suitable as potential resolution applicants. The provision restricts not only promoters but also people associated with them, targeting those responsible for the corporate debtor’s downfall or deemed unfit to run the company.
Role of Adjudicating Authorities
The framework entrusts the National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT) with adjudicating responsibilities for resolving insolvencies among companies, LLPs, and partnership firms.
About the National Company Law Appellate Tribunal
The NCLAT was established under Section 410 of the Companies Act, 2013, with the mandate to hear appeals against NCLT orders. It serves as the appellate tribunal for orders passed by the NCLT(s) under Section 61 of the IBC, 2016, and orders passed by the Insolvency and Bankruptcy Board of India (IBBI) under Sections 202 and 211 of the IBC. Aggrieved parties have the right to appeal NCLAT orders at the Supreme Court.
