ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD. & ANR.

POWER LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]

amounts. That is something which besides being commercially imprudent would also be morally unacceptable. That is the real rationale behind this particular Bill:.” (emphasis supplied)

45Copy pinpoint45. The Report of the Insolvency Law Committee dated 3 March 2018 states that the intent behind introducing Section 29A was to prevent unscrupulous persons from gaining control over the affairs of the company. These persons included those who by their misconduct have contributed to the defaults of the company or are otherwise undesirable. The Committee observed: “14.1. Section 29A was added to the Code by the Amendment C Act. Owing to this provision, persons, who by their misconduct contributed to the defaults of the corporate debtor or are otherwise undesirable, are prevented from gaining or regaining control of the corporate debtor. This provision protects creditors of the company by preventing unscrupulous persons from rewarding themselves at the expense of creditors and undermining the processes laid down in the Code.”

46Copy pinpoint46. Significantly, the ineligibility which was engrafted by the amending legislation was incorporated in both the provisions of Chapter II dealing with the CIRP as well as in Chapter III dealing with the liquidation process. Section 29A stipulates the category of persons who “shall not be eligible to submit a resolution plan”. The proviso to Section 35(1)(f) incorporates the same norm in the liquidation process, when it stipulates that the liquidator shall not sell the immovable and movable or actionable claims of the corporate debtor in liquidation “to any person who is not eligible to be a resolution applicant”. These words in Section F 35(1)(f) are clearly referable to the ineligibility which is set up in Section 29A. Judicial understanding Chitra Sharma G

47Copy pinpoint47. The underlying purpose of introducing Section 29A was adverted to in a judgment of this court in Chitra Sharma v. Union of India31.One of us (Justice DY Chandrachud) speaking for a Bench of 31 (2018) 18 SCC 575; hereinafter, referred to as “Chitra Sharma” H

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A three learned judges took note of the Statement of Objects and Reasons accompanying the Bill and emphasised the purpose of Section 29A thus: “[…]

38. Parliament has introduced Section 29A into IBC with a specific purpose. The provisions of Section 29A are intended to ensure that among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process. The Statement of Objects and Reasons appended to the Insolvency and Bankruptcy Code (Amendment) Bill, 2017, which was ultimately enacted as Act 8 of 2018, states thus: “2. The provisions for insolvency resolution and liquidation of a corporate person in the Code did not restrict or bar any person from submitting a resolution plan or participating in the acquisition process of the assets of a company at the time of liquidation. Concerns have been raised that persons who, with their misconduct contributed to defaults of companies or are otherwise undesirable, may misuse this situation due to lack of prohibition or restrictions to participate in the resolution or liquidation process, and gain or regain control of the corporate debtor. This may undermine the processes laid down in the Code as the unscrupulous person would be seen to be rewarded at the expense of creditors. In addition, in order to check that the undesirable persons who may have submitted their resolution plans in the absence of such a provision, responsibility is also being entrusted on the committee of creditors to give a reasonable period to repay overdue amounts and become eligible.” F (emphasis supplied) Parliament was evidently concerned over the fact that persons whose misconduct has contributed to defaults on the part of debtor companies misuse the absence of a bar on their participation in the resolution process to gain an G entry. Parliament was of the view that to allow such persons to participate in the resolution process would undermine the salutary object and purpose of the Act. It was in this background that Section 29A has now specified a list of persons who are not eligible to be resolution applicants.” H (emphasis supplied)

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48Copy pinpoint48. The Court held that “Section 29A has been enacted in the A larger public interest and to facilitate effective corporate governance”. The Court further observed that “Parliament rectified a loophole in the Act which allowed backdoor entry to erstwhile managements in the CIRP”. Arcelormittal B

49Copy pinpoint49. In Arcelormittal India Private Limited v. Satish Kumar Gupta& Ors.32, Justice Rohinton F Nariman, speaking for himself and Justice Indu Malhotra, reiterated the same principle when he underscored the need to impart a purposive interpretation to Section 29A “depending both on the text and context in which the provision was C enacted”: “30. A purposive interpretation of Section 29A, depending both on the text and the context in which the provision was enacted, must, therefore, inform our interpretation of the same. We are concerned in the present matter with clauses (c), (f), (i) and (j) D thereof.” The decision adverts to Section 29A as “a typical instance of a ‘see-through provision’ so that one is able to arrive at persons who are actually in ‘control’, whether jointly or in concert with other persons 33. E 32 (2019) 2 SCC 1; hereinafter, referred to as “Arcelormittal” 3 “32. The opening lines of Section 29A of the Amendment Act refer to a de facto as opposed to a de jure position of the persons mentioned therein. This is a typical instance of a “see-through provision”, so that one is able to arrive at persons who are actually in “control”, whether jointly, or in concert, with other persons. A wooden, literal, interpretation would obviously not permit a tearing of the corporate veil when it comes to the “person” whose eligibility is to be gone into. However, a purposeful and contextual interpretation, such as is the felt necessity of interpretation of such a provision as Section 29A, alone governs. For example, it is well settled that a shareholder is a separate legal entity from the company in which he holds shares. This may be true generally speaking, but when it comes to a corporate vehicle that is set up for the purpose of submission of a resolution plan, it is not only permissible but imperative for the competent authority to find out as to who are the constituent elements that make up such a company. In such cases, the principle laid down in Salomon v. A. Salomon & Co. Ltd.[Salomon v. A. Salomon & Co. Ltd., 1897 AC 22 (HL)] will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set up such a corporate vehicle for the purpose of submission of a resolution plan.”

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A Swiss Ribbons

50Copy pinpoint50. In Swiss Ribbons (supra), the constitutionality of certain provisions of the IBC was challenged. Justice Rohinton F Nariman emphasised the object of the IBC in the following observations: “27. As is discernible, the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. Unless such reorganization is effected in a time-bound manner, the value of the assets of such persons will deplete. Therefore, maximization of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme—workers are paid, the creditors in the long run will be repaid in full, and shareholders/investors are able to maximize their investment. Timely resolution of a corporate debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come back into the economy, business then eases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. (See ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] at para 83, fn 3).

28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and

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from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor’s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.”

51Copy pinpoint51. While adverting to the earlier decision in Chitra Sharma and D Arcelormittal(supra), which had elucidated the object underlying Section 29A, this Court in Swiss Ribbons (supra) held that the norm underlying Section 29A “continues to permeate” Section 35(1)(f) “when it applies not merely to resolution applicants, but to liquidation also”. Rejecting the plea that Section 35(1)(f) is ultra vires,this Court held: E “102. According to the learned counsel for the petitioners, when immovable and movable property is sold in liquidation, it ought to be sold to any person, including persons who are not eligible to be resolution applicants as, often, it is the erstwhile promoter who alone may purchase such properties piecemeal by public auction or by private contract. The same rationale that has been provided earlier in this judgment will apply to this proviso as well — there is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable and movable property of the corporate debtor in liquidation. Further, given the categories of persons who are ineligible under Section 29A, which includes persons who are malfeasant, or persons who have fallen foul of the law in some way, and persons who are unable to pay their debts in the grace period allowed, are further, by this proviso, interdicted from purchasing assets of the corporate debtor whose debts they have either willfully not paid or have been unable to pay. The legislative H

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A purpose which permeates Section 29A continues to permeate the section when it applies not merely to resolution applicants, but to liquidation also. Consequently, this plea is also rejected.” A Purposive Interpretation

52Copy pinpoint52. This line of decisions, beginning with Chitra Sharma B (supra)and continuing to Arcelormittal (supra) and Swiss Ribbons (supra) is significant in adopting a purposive interpretation of Section 29A. Section 29A has been construed to be a crucial link in ensuring that the objects of the IBC are not defeated by allowing “ineligible persons”, including but not confined to those in the management who have run the company aground, to return in the new avatar of resolution applicants. Section 35(1)(f) is placed in the same continuum when the Court observes that the erstwhile promoters of a corporate debtor have no vested right to bid for the property of the corporate debtor in liquidation. The values which animate Section 29A continue to provide sustenance to the rationale underlying the exclusion of the same category of persons from the process of liquidation involving the sale of assets, by virtue of the provisions of Section 35(1)(f). More recent precedents of this Court continue to adopt a purposive interpretation of the provisions of the IBC. (See in this context the judgments in Phoenix ARC Private Limited v. Spade Financial Service34 , Ramesh Kymal v. M/s Siemens Gamesa Renewable E Power Pvt Ltd.35 and Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited36.) Sustainable revival

53Copy pinpoint53. The purpose of the ineligibility under Section 29A is to achieve a sustainable revival and to ensure that a person who is the cause of the problem either by a design or a default cannot be a part of the process of solution. Section 29A, it must be noted, encompasses not only conduct in relation to the corporate debtor but in relation to other companies as well. This is evident from clause (c) (“an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as a non-performing asset”), and clauses (e), (f), (g), (h) and (i) which have widened the net beyond the conduct in relation to the corporate debtor.

34 2021 SCC OnLine SC 51 at paragraphs 103-104 35 C.A. No. 4050 of 2020, decided on 9 February 2021, at paragraphs 23 and 25 36 H (2020) 8 SCC 401, at paras 28.4 and 28.5

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54Copy pinpoint54. The prohibition which has been enacted under Section 29A A has extended, as noted above, to Chapter III while being incorporated in the proviso to Section 35(1)(f). Under the Liquidation Process Regulations, Chapter VI deals with the realization of assets. Regulation 32 is in the following terms: “32. Sale of Assets, etc. B The liquidator may sell- (a) an asset on a standalone basis; (b) the assets in a slump sale; (c) a set of assets collectively; C (d) the assets in parcels; (e) the corporate debtor as a going concern; or (f) the business(s) of the corporate debtor as a going concern: Provided that where an asset is subject to security interest, it shall not be sold under any of the clauses (a) to (f) unless the security D interest therein has been relinquished to the liquidation estate.” Clauses (a) to (d) of Regulation 32 deal with the sale of assets on a stand-alone basis in a slump sale collectively or in parcels. Clauses (e) and (f) deal with the sale of the corporate debtor or its business as a going concern. E

55Copy pinpoint55. Regulation 32-A(1) then stipulates: “32A. Sale as a going concern. (1) Where the committee of creditors has recommended sale under clause (e) or (f) of regulation 32 or where the liquidator is of the opinion that sale under clause (e) or (f) of regulation 32 shall F maximize the value of the corporate debtor, he shall endeavor to first sell under the said clauses.” Regulation 32-A(1) emphasizes the importance placed on the transfer of the corporate debtor or its business on a going concern basis. G

56Copy pinpoint56. Regulation 44 allows for a period of one year for the liquidation of the corporate debtor from the liquidation commencement date. Its proviso, however, allows for an additional period up to ninety days where the sale is attempted under sub-Regulation (1) of Regulation 32A. Regulation 44 is as follows: H

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A “44. Completion of liquidation. (1) The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under Chapter III of Part II of the Code, before the B Adjudicating Authority or any action thereof: Provided that where the sale is attempted under sub-regulation (1) of regulation 32A, the liquidation process may take an additional period up to ninety days.] (2) If the liquidator fails to liquidate the corporate debtor within C 29[one year], he shall make an application to the Adjudicating Authority to continue such liquidation, along with a report explaining why the liquidation has not been completed and specifying the additional time that shall be required for liquidation.” D.2 Interplay : IBC liquidation and Section 230 of the Act D of 2013

57Copy pinpoint57. Section 230 of the Act of 2013 is incorporated in Chapter XV which is titled “compromise, arrangement and amalgamations”. Sub- section (1) of Section 230 provides as follows: “230. Power to compromise or make arrangements with creditors and members.— (1) Where a compromise or arrangement is proposed— (a) between a company and its creditors or any class of them; or (b) between a company and its members or any class of them, the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs. G Explanation.—For the purposes of this sub-section, arrangement includes a reorganization of the company‘s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods.” H

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58Copy pinpoint58. A compromise or arrangement under Sub-section (1) of Section A 230 may take place: (i) between a company and its creditors or any subset of creditors; or (ii) between a company and its members or subset of members. B

59Copy pinpoint59. Liquidation is one of the factual situations in which the provisions of Section 230 can be invoked. Section 230(1) can also be invoked in the case of a company which is wound up, as is evident from the statutory provision itself, which contemplates that an application may be submitted to the NCLT, acting as the Tribunal, by the liquidator. C

60Copy pinpoint60. Sub-section (1) of Section 230 was amended by Act 31 of 2016 with effect from 15 November 2016. Prior to the amendment, an application for compromise or arrangement could be moved before the Tribunal by: (i) the company; D (ii) a creditor; (iii) a member of the company; and (iv) in the case of a company which is being wound up, by the liquidator. E Following the amendment, Section 230(1) envisages that an application in the case of a company which is being wound up may be presented by a liquidator who has been appointed under the Act of 2013 or under the IBC. Interestingly, Section 230 (except Sub-sections (11) and (12)) came into force on 7 December 2016. Where a compromise has been entered into with only a class of creditors, it will bind that class under the provisions of Section 230(6), which reads thus: “(6) Where, at a meeting held in pursuance of sub-section (1), majority of persons representing three fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case H

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A may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.”

61Copy pinpoint61. Under Sub-section (6) of Section 230, the comprise or arrangement has to be agreed to by a “majority of persons representing 3/4th in value” of the creditors, members or a class of them. Upon the B sanctioning of the compromise or arrangement by the NCLT, it binds the company, all the creditors or members or a class of them, as may be, or in the case of a company being wound up, the liquidator appointed under the Act of 2013 or the IBC and the contributories. The Companies’ Act 1956 : Section 391 and Meghal Homes

62Copy pinpoint62. Prior to the enforcement of the Act of 2013, the erstwhile legislation - the Act of 1956 - contained an analogous provision in Section 391.

63Copy pinpoint63. The provisions of Section 391 came up for interpretation in a decision of this Court in Meghal Homes (supra). Justice PK D Balasubramanyan, speaking for the two judge Bench of this Court, adverted to the earlier decision in Miheer H Mafatlal v. Mafatlal Industries Ltd.37 which had dealt with the jurisdiction of the Company Court (or the Company Law Board as it then was) while sanctioning a scheme of merger or amalgamation of two companies. The earlier E decision, as this Court noted, did not involve either a transferor or transferee in liquidation. Hence, this Court did not have occasion to consider whether “any additional tests have to be satisfied when the company concerned is in liquidation and a compromise or arrangement in respect of it is proposed”. Dealing specifically with a company which has been ordered to be wound up, this Court observed that the Company F Court (before whom the jurisdiction under the erstwhile Section 391 was vested at the material time) had “necessarily to see whether the scheme contemplates revival of the business of the company”. In that context, this Court observed: “47. When a company is ordered to be wound up, the assets of it G are put in possession of the Official Liquidator. The assets become custodia legis. The follow-up, in the absence of a revival of the company, is the realisation of the assets of the company by the Official Liquidator and distribution of the proceeds to the creditors, workers and contributories of the company ultimately 37 H (1997) 1 SCC 579

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resulting in the death of the company by an order under Section A 481 of the Act, being passed. But, nothing stands in the way of the Company Court, before the ultimate step is taken or before the assets are disposed of, to accept a scheme or proposal for revival of the Company. In that context, the court has necessarily to see whether the scheme contemplates revival of the business B of the company, makes provisions for paying off creditors or for satisfying their claims as agreed to by them and for meeting the liability of the workers in terms of Section 529 and Section 529A of the Act. Of course, the court has to see to the bona fides of the scheme and to ensure that what is put forward is not a ruse to dispose of the assets of the company in liquidation.” C Moreover, the Court held that in the case of a company which has been wound up it would have to perceive aspects of public interest, commercial morality and the existence of a bona fide intent to revive the company, while considering whether a compromise or arrangement put forward under Section 391 should be accepted. While the Court D would not sit in appeal over the commercial wisdom of the shareholders, “it will certainly consider whether there is a genuine attempt to revive the company that has gone into liquidation and whether such revival is in public interest and conforms to commercial morality”. On the facts of the case, the Court found that it was difficult to hold that “it is a scheme for revival of the Company, the clear statutory intention behind entertaining a proposal under Section 391”. These observations of the two judge Bench in Meghal Homes (supra) have a significant bearing on the nature of a compromise or arrangement which fell within the purview of Section 391 of the Act of 1956. This Court emphasized that where a company is in liquidation, its assets are custodia legis, the liquidator being the custodian for the distribution of the liquidation estate. A compromise or arrangement in respect of a company in liquidation must foster a revival of the company, this being (as the Court termed it ) “the clear statutory intention behind entertaining a proposal under Section 391” in respect of a company in liquidation. G IBC liquidation and Section 230 scheme : a statutory continuum

64Copy pinpoint64. Now, there is no reference in the body of the IBC to a scheme of compromise or arrangement under Section 230 of the Act of 2013. Sub-section (1) of Section 230 was however amended with effect from H

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A 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. The substratum of the submission of Mr Sandeep Bajaj, learned Counsel for the appellants, is that Section 230 is not regulated by the IBC but is a provision independent of it, though after the amendment of Sub-section (1), a compromise or arrangement can be proposed by the liquidator appointed under the IBC. Aligned to this submission, he urged that the decision in Meghal Homes (supra) recognises that the liquidator is an additional person who may submit an application under Section 391 of the Act of 1956 (corresponding to Section 230 of the Act of 2013). The submission of Mr Bajaj however misses the crucial interface between the provisions of Section 230 of the Act of 2013 in their engagement with a company in respect of which the provisions of the IBC have been invoked, resulting in an order of liquidation under Section 33 of the IBC. Liquidation of the company under the IBC, as emphasized by this Court in its previous decisions, is a matter of last resort. Section 33 requires the NCLT, acting as the D Adjudicating Authority, to pass an order for the liquidation of the corporate debtor where: (i) before the expiry of the insolvency resolution process period or the maximum period contemplated for its completion a resolution plan has not been received under Sub-section E (6) of Section 30; or (ii) the resolution plan has been rejected under Section 31 for non-compliance with the requirements of the provision.

65Copy pinpoint65. Under Sub-Section (2) of Section 33, the Adjudicating Authority F has to pass a liquidation order where the resolution professional, during the CIRP but before the confirmation of the resolution plan, intimates the Adjudicating Authority of the decision of the CoC approved by not less than 66 per cent of the voting shares to liquidate the corporate debtor. Under Section 34, upon the Adjudication Authority passing an order for liquidation of the corporate debtor under Section 33, the resolution professional appointed for the CIRP under Chapter II is to act as a liquidator for the purpose of liquidation. Section 35 proceeds to stipulate that subject to the directions of the Adjudicating Authority, the liquidator shall have the powers and duties enumerated in the provision.

66Copy pinpoint66. What emerges from the above discussion is that the provisions of the IBC contain a comprehensive scheme, first, for the initiation of

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the CIRP at the behest of financial creditor under Section 7 or at the A behest of the operational creditor under Section 9 or the corporate debtor under Section 10. Chapter II provides for the appointment of an interim resolution professional38 in Section 17 and the constitution of a CoC under Section 21. Chapter II contemplates the submission of a resolution plan in Section 30 and the approval of the plan in Section 31. Liquidation B forms a part of a distinct Chapter - Chapter III. Liquidation under Section 33 is contemplated in specific eventualities which are adverted to in Sub-Section (1) and Sub-section (2) as noted above.

67Copy pinpoint67. Now, it is in this backdrop that it becomes necessary to revisit, in the context of the above discussion the three modes in which a revival is contemplated under the provisions of the IBC. The first of those modes C of revival is in the form of the CIRP elucidated in the provisions of Chapter II of the IBC. The second mode 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. The third is when a revival is contemplated through the modalities provided in Section 230 of the Act of 2013. A D scheme of compromise or arrangement under Section 230, in the context of a company which is in liquidation under the IBC, follows upon an order under Section 33 and the appointment of a liquidator under Section

34. While 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 Dhanapal39. NCLAT in E 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”. F 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 G Regulations by the IBBI so as to refer to the process envisaged under Section 230 of the Act of 2013.

38 “IRP” 39 2019 SCC OnLine NCLAT 172; herein, referred to as “Y Shivram Prasad” H

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68Copy pinpoint68. 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 for the outcome of the controversy in the present case. The first point is that a liquidation under Chapter III of the IBC follows upon the entire gamut of proceedings contemplated under that statute. The second point to be B noted is that one of the modes of revival in the course of the liquidation process is envisaged in the enabling provisions of Section 230 of the Act of 2013, to which recourse can be taken by the liquidator appointed under Section 34 of the IBC. The third point is that the statutorily contemplated activities of the liquidator do not cease while inviting a C scheme of compromise or arrangement under Section 230. The appointment of the liquidator in an IBC liquidation is provided in Section 34 and their duties are specified in Section 35. In taking recourse to the provisions of Section 230 of the Act of 2013, the liquidator appointed under the IBC is , above all, to attempt a revival of the corporate debtor so as to save it from the prospect of a corporate death. The consequence D of the approval of the scheme of revival or compromise, and its sanction thereafter by the Tribunal under Sub-section (6), is that the scheme attains a binding character upon stakeholders including the liquidator who has been appointed under the IBC. In this backdrop, it is difficult to accept the submission of Mr Bajaj that Section 230 of the Act of 2013 is a E standalone provision which has no connect with the provisions of the IBC. Undoubtedly, 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, as in the present case, 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. A harmonious construction between the two statutes40 would ensure that while on the 40 G.P. Singh, Principles of Statutory Interpretation (1 st edn., Lexis Nexis 2015) which notes that “Further, these principles [referring to the principle of harmonious construction] have also been applied in resolving a conflict between two different Acts” and providing the following examples – “Jogendra Lal Saha v. State of Bihar, 1991 H Supp (2) SCC 654 (Sections 82 and 83 of the Forest Act, 1927 are special provisions

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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. As such, the company has to be protected from its management and a corporate death. 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.

69Copy pinpoint69. The IBC has made a provision for ineligibility under Section C 29A which operates during the course of the CIRP. A similar provision is engrafted in Section 35(1)(f) which forms a part of the liquidation provisions contained in Chapter III as well. In the context of the statutory linkage provided by the provisions of Section 230 of the Act of 2013 with Chapter III of the IBC, where a scheme is proposed of a company D which is in liquidation under the IBC, it would be far-fetched to hold that the ineligibilities which attach under Section 35(1)(f) read with Section 29A would not apply when Section 230 is sought to be invoked. Such an interpretation would result in defeating the provisions of the IBC and must be eschewed. E

70Copy pinpoint70. An argument has also been advanced by the appellants and the petitioners that attaching the ineligibilities under Section 29A and Section 35(1)(f) of the IBC to a scheme of compromise and arrangement under Section 230 of the Act of 2013 would be violative of Article 14 of the Constitution as the appellant would be “deemed ineligible” to submit F which prevail over the provisions in the Sale of Goods Act ); Jasbir Singh v. Vipin Kumar Jaggi, (2001) 8 SCC 289 (Section 64 of NDPS Act will pre vail over section 307 CrPC 1974 as it is a special provision in a Special Act which is also later); P.V. Hemlatha v. Kattam Kandi Puthiya Maliackal Saheeda, (2002) 5 SCC 548 (conflict between section 23 of the Travancore Cochin High Court Act and section 98(3) Civil Procedure Code resolved by holding the latter to be special law); Talchar Municipality v. Talcher Regulated Market Committee, (2004) 6 SCC 178 (Section 4(4) of the G Orissa Agricultural Produce Markets Act, 1956 was held to prevail over section 295 of the Orissa Municipalities Act, 1950 as the former was a special provision and also started with a non-obstante clause); and Iridium India Telecom Ltd. v. Motorola Inc, (2005) 2 SCC 145 (Letters Patent and rules made under it constitute special law for the High Court concerned and are not displaced by the general provisions of the Civil Procedure Code)” H

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A a proposal under Section 230 of the Act of 2013. We find no merit in this contention. As explained above, the stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back- door entry in the company and are hence, ineligible to participate during B these stages. Proposing a scheme of compromise or arrangement under Section 230 of the Act of 2013, while the company is undergoing liquidation under the provisions of the IBC lies in a similar continuum. Thus, the prohibitions that apply in the former situations must naturally also attach to the latter to ensure that like situations are treated equally. C D.3 The ‘Clean Slate’

71Copy pinpoint71. A crucial limb of the submissions which have been urged by Mr Sandeep Bajaj and Mr Shiv Shankar Banerjee, learned Counsel appearing for the appellants and the petitioner is that both Section 12-A of the IBC and Section 230 of the Act of 2013 belong to what is described as the “settlement mechanism” which is distinct from the “resolution mechanism”. The corporate debtor, it has been urged, will proceed to liquidation if no resolution is possible. Section 29A was designed to prevent a back-door entry to a class of persons considered to be ineligible to participate in the resolution process. Section 35(1)(f) extends the ineligibility where the liquidator is conducting a sale of the assets of the corporate debtor in liquidation. It has been submitted in this context that where an application for withdrawal under Section 12-A is allowed, the company reverts to the promoter. Placing a scheme under Section 230 of the Act of 2013 on the same pedestal, it has been urged that there is no reason to prevent a person who falls in the class of those ineligible under Section 29A from submitting a scheme of compromise or arrangement under Section 230 of the Act of 2013. In order to amplify the line of submissions as recorded above, the following points have been urged: (i) Though eight amendments have been brought about to the G IBC between November 2017 and September 2020, the ineligibility contemplated by Section 29A and Section 35(1)(f) has not been expressly incorporated in Section 230 of the Act of 2013 even after the amendment to the IBC; (ii) Under Section 230, the persons competent to submit a H scheme are

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(a) the company or its liquidator; A (b) the creditors; or (c) a member. Section 230 does not prohibit a promoter or a person belonging to the ex-management, from proposing a scheme of compromise or arrangement. This creates a “front door opportunity” to the erstwhile management to come forth and save the company; (iii) Under Section 30(1) of the IBC, a resolution plan can be submitted by a person who is not ineligible with reference to Section 29A. Under Sub-section (4) of Section 30, for the approval of the resolution plan, a 66 per cent voting share only of the financial creditors is required. Sub-section 2(b) of Section 30 requires the resolution professional to examine whether the resolution plan provides for the payment of the debt of operational creditors which shall not be less than the amount which is payable to them in the event of liquidation. On the other hand, the provisions of Section 230 of the Act of 2013 are far more stringent in that they require a voting share of 75 per cent and, where the company is in liquidation, a settlement with all creditors including the operational creditors; (iv) Section 35(1)(f) applies to the liquidator but does not apply to the NCLT, acting as either the Adjudicating Authority or as the Tribunal; (v) A resolution plan upon being approved becomes binding on all stakeholders and is attended with all benefits unlike Section 230 of the Act of 2013; (vi) Under Regulation 32 of the Liquidation Process Regulations, two modes are contemplated for the sale of the corporate debtor as a ‘going concern’, while four modes are contemplated for the sale of the assets of the corporate debtor. The prohibition under Section 35(1)(f) will apply only to a sale which is governed by Regulation 32, and will have no application to a scheme of compromise or arrangement which is proposed under Section 230; and H

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A (vii) There is no mechanism in the IBC for effecting a compromise or arrangement, and since the only provision is contained in Section 230, there is no inconsistency with the IBC. Withdrawal of application

72Copy pinpoint72. Section 12A41 of the IBC was inserted with effect from 6 June 2018 by Amending Act 26 of 2018. Under Section 12A, the Adjudicating Authority may allow the withdrawal of an application which is admitted under Sections 7, 9 and 10, on an application made by the applicant with the approval of a 90 per cent voting share of the CoC in such manner as may be specified. Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 42, on the other hand, contemplates that the NCLT, functioning as the Adjudicating Authority, may permit a withdrawal of an application made under Rule 4 (by the financial creditor), Rule 6 (by the operational creditor) or Rule 7 (by the corporate applicant) on the request made by the applicant before its admission. Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 contains provisions for the withdrawal of an application. Under Regulation 30-A43 , as it originally stood, an application 41 “12A. Withdrawal of application admitted under section 7, 9 or 10 - The E Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.” 42 “Adjudicating Authority Rules” 43 “30A. Withdrawal of Application- (1) An application for withdrawal under section 12A shall be submitted to the interim resolution professional or the resolution professional, as the case may be, in Form FA of the Schedule before issue of invitation for expression of interest under regulation 36A. (2) The application in sub-regulation (1) shall be accompanied by a bank guarantee towards estimated cost incurred for purposes of clauses (c) and (d) of regulation 31 till the date of application. (3) The committee shall consider the application made under sub-regulation (1) within seven days of its constitution or seven days of receipt of the application, whichever is later. (4) Where the application is approved by the committee with ninety percent voting share, the resolution professional shall submit the application under sub-regulation (1) to the Adjudicating Authority on behalf of the applicant, within three days of such approval. (5) The Adjudicating Authority may, by order, approve the application submitted under sub-regulation (4).”

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for withdrawal under Section 12-A was required to be submitted before A the issuance of an invitation for the expression of interest under Regulation 36-A. In the decision of this Court in Swiss Ribbons (supra), which was rendered on 25 January 2019, it was contemplated that an application for withdrawal may be presented between the period commencing from the admission of the application and the date of the constitution of the B CoC. This led to the substitution of the Regulation 30-A44 on 25 July

2019. As substituted, Regulation 30-A stipulates that an application for withdrawal under Section 12-A may be made to the adjudicating authority: 44 “30A. Withdrawal of Application- (1) An application for withdrawal under section 12A may be made to the Adjudicating Authority- (a) before the constitution of the committee, by the applicant through the interim C resolution professional; (b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be: Provided that where the application is made under clause (b) after the issue of invitation for expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation. (2) The application under sub-regulation (1) shall be made in Form FA of the Schedule D accompanied by a bank guarantee- (a) towards estimated expenses incurred on or by the interim resolution professional for purposes of regulation 33, till the date of filing of the application under clause (a) of sub-regulation (1); or (b) towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application under clause (b) of sub- regulation (1). E (3) Where an application for withdrawal is under clause (a) of sub-regulation (1), the interim resolution professional shall submit the application to the Adjudicating Authority on behalf of the applicant, within three days of its receipt. (4) Where an application for withdrawal is under clause (b) of sub-regulation (1), the committee shall consider the application, within sev en days of its receipt. (5) Where the application referred to in sub-regulation (4) is approved by the committee with ninety percent voting share, the resolution professional shall submit such application along with the approval of the committee, to the Adjudicating Authority on behalf of the applicant, within three days of such approval. (6) The Adjudicating Authority may, by order, approve the application submitted under sub-regulation (3) or (5). (7) Where the application is approved under sub-regulation (6), the applicant shall deposit an amount, towards the actual expenses incurred for the purposes referred to in clause (a) or clause (b) of sub-regulation (2) till the date of approval by the Adjudicating Authority, as determined by the interim resolution professional or resolution professional, as the case may be, within three days of such approval, in the bank account of the corporate debtor, failing which the bank guarantee received under sub-regulation (2) shall be invoked, without prejudice to any other action permissible against the applicant under the Code.” H

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A (a) before the constitution of the CoC, by the applicant through the IRP; and (b) after the constitution of the CoC, by the applicant through the IRP or the RP as the case may be. However, where the application under clause (b) is made after the issuance of the invitation for expression of interest, the applicant has to state the reasons justifying withdrawal after the issuance of the invitation. In the decision of this Court in Brilliant Alloys (supra), it has been held that a withdrawal may be contemplated even after the issuance of invitation of expression of interest. In Swiss Ribbons (supra),the provisions of Section 12-A were upheld against the challenge that they violated Article 14 of the Constitution. Justice Rohinton F Nariman, while adverting to the decision in Brilliant Alloys (supra), noted that Regulation 30-A(1) has been held not to be mandatory but directory because in a given case an application for withdrawal may be allowed for exceptional reasons even after issuance of an invitation for expression of interest under Section 36-A. Dealing with the provisions of Section 12-A, this Court observed: “82. It is clear that once the Code gets triggered by admission of a creditor’s petition under Sections 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is E a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a Committee of Creditors is constituted (as per the timelines that are specified, a Committee of Creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case.

83. The main thrust against the provision of Section 12-A is the fact that ninety per cent of the Committee of Creditors has to H

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allow withdrawal. This high threshold has been explained in the A ILC Report as all financial creditors have to put their heads together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into . This explains why ninety per cent, which is substantially all the financial creditors, have to grant their approval to an individual withdrawal or settlement. In any case, the figure of ninety per cent, in the absence of anything further to show that it is arbitrary, must pertain to the domain of legislative policy, which has been explained by the Report (supra). Also, it is clear, that under Section 60 of the Code, the Committee of Creditors do not have the last word on the subject. If the Committee of Creditors arbitrarily rejects a just settlement and/or withdrawal claim, NCLT, and thereafter, NCLAT can always set aside such decision under Section 60 of the Code. For all these reasons, we are of the view that Section 12-A also passes constitutional muster.” Distinction between a withdrawal simpliciter and scheme of arrangement

73Copy pinpoint73. The submission is that on the withdrawal of the application under Sections 7, 9 and 10, as the case may be, the company goes back to the same promoter in spite of such a promoter being ineligible under Section 29A for submitting a resolution plan. As such, it was urged that there is no reason or justification then to preclude a promoter from presenting a scheme of compromise or arrangement under Section 230.

74Copy pinpoint74. There is a fundamental fallacy in the submission. An application for withdrawal under Section 12-A is not intended to be a culmination of the resolution process. This, as the statutory scheme would indicate, is at the inception of the process. Rule 8 of the Adjudicating Authority Rules, as we have seen earlier, contemplates a withdrawal before admission. Section 12-A subjects a withdrawal of an application, which has been admitted under Sections 7, 9 and 10, to the requirement of an approval of ninety per cent voting shares of the CoC. The decision of this Court in Swiss Ribbons (para 82 extracted above) stipulates that where the CoC has not yet been constituted, the NCLT, functioning as the Adjudicating Authority, may be moved directly for withdrawal which, in the exercise of its inherent powers under Rule 11 of the Adjudicating Authority Rules, may allow or disallow the application for withdrawal or settlement after hearing the parties and considering the relevant factors H

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A on the facts of each case. A withdrawal in other words is by the applicant. The withdrawal leads to a status quo ante in respect of the liabilities of the corporate debtor. A withdrawal under Section 12-A is in the nature of settlement, which has to be distinguished both from a resolution plan which is approved under Section 31 and a scheme which is sanctioned under Section 230 of the Act of 2013. A resolution plan upon approval B under Section 31(1) of the IBC is binding on the corporate debtor, its employees, members, creditors (including the central and state governments), local authorities, guarantors and other stakeholders. The approval of a resolution plan under Section 31 results in a “clean slate,” as held in the judgment of this Court in Committee of Creditors of C Essar Steel India Limited v. Satish Kumar Gupta45. Justice Rohinton F Nariman, speaking for the three judge Bench of this Court, observed: “105. Section 31(1) of the Code makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all stakeholders, including guarantors. This is for the D reason that this provision ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were. In SBI v. V. Ramakrishnan [SBI v. V. Ramakrishnan, (2018) 17 SCC 394 : (2019) 2 SCC (Civ) 458] , this Court relying upon Section 31 of the Code has held: (SCC p. 411, para 25) E “25. Section 31 of the Act was also strongly relied upon by the respondents. This section only states that once a resolution plan, as approved by the Committee of Creditors, takes effect, it shall be binding on the corporate debtor as well as the guarantor. This is for the reason that otherwise, under Section 133 of the Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety’s consent, would relieve the guarantor from payment. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the resolution plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been 45 H (2020) 8 SCC 531

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given in relation to the debts of the corporate debtor. Far A from supporting the stand of the respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him.”” In the same vein, the Court observed: B “107. For the same reason, the impugned NCLAT judgment [Standard Chartered Bank v. Satish Kumar Gupta, 2019 SCC OnLine NCLAT 388] in holding that claims that may exist apart from those decided on merits by the resolution professional and by the Adjudicating Authority/Appellate Tribunal can now be C decided by an appropriate forum in terms of Section 60(6) of the Code, also militates against the rationale of Section 31 of the Code. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a D prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, NCLAT judgment must also be set aside on this count.”

75Copy pinpoint75. The benefit under Section 31, following upon the approval of the resolution plan, is that the successful resolution applicant starts running the business of the corporate debtor on “a fresh slate”. The scheme of compromise or arrangement under Section 230 of the Act of 2013 cannot certainly be equated with a withdrawal simpliciter of an application, as is contemplated under Section 12-A of the IBC. A scheme of compromise or arrangement, upon receiving sanction under Sub-section (6) of Section 230, binds the company, its creditors and members or a class of persons or creditors as the case may be as well as the liquidator (appointed under the Act of 2013 or the IBC). Both, the resolution plan upon being approved under Section 31 of the IBC and a scheme of compromise or arrangement upon being sanctioned under Sub-section (6) of Section 230, represent the culmination of the process. This must be distinguished H

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A from a mere withdrawal of an application under Section 12-A. There is a clear distinction between these processes, in terms of statutory context and its consequences and the latter cannot be equated with the former.

76Copy pinpoint76. Additionally, there is no merit in the submission that Section 35(1)(f) applies only to a liquidator who conducts a sale of the property B of the corporate debtor in liquidation but not to the NLCT, acting as the Tribunal, when it exercises its powers under Section 230 of the Act of

2013. The liquidator appointed under the provisions of Chapter III of the IBC is entrusted with several powers and duties. Sections 37 to 42 of the IBC are illustrative of the powers of the liquidator in the course of the liquidation. The liquidator exercises several functions which are of a C quasi-judicial in nature and character. Section 35(1) itself enunciates that the powers and duties which are entrusted to the liquidator are “subject to the directions of the adjudicating authority”. The liquidator, in other words, exercises functions which have been made amenable to the jurisdiction of the NCLT, acting as the Adjudicating Authority. To D hold therefore that the ineligibility prescribed under the provisions of Section 35(1)(f) can be disregarded by the Tribunal for the purpose of considering an application for a scheme of compromise or arrangement under Section 230 of the Act of 2013, in respect of a company which is under liquidation under the IBC, would not be a correct construction of the provisions of law. E D.4 Constitutional validity of Regulation 2B - Liquidation Process Regulations

77Copy pinpoint77. Regulation 2B(1) introduced on 25 July 2019 provides that where a compromise or arrangement is proposed under Section 230 of F the Act of 2013, it shall be completed within ninety days of the order of liquidation under sub-Sections (1) and (4) of Section 33. The proviso to Regulation 2B has been inserted with effect from 6 January 2020 to stipulate that a person who is not eligible under the IBC to submit a resolution plan for insolvency resolution of the corporate debtor shall not be a party in any manner to such compromise or arrangement. G IBBI discussion papers

78Copy pinpoint78. IBBI initially brought out a discussion paper on 27 April 2019. Para 3.1 of the discussion paper noted thus: “3.1 Compromise or arrangement under Section 230 of the H Companies Act 2013. If there is a proposal for a compromise or

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arrangement, a member, a creditor or the Liquidator may make an application to the NCLT under the Compromise Act 2013 (Act) (not the Adjudicating Authority under the Code) and then proceed in the manner directed by the NCTL in accordance with the Act. While compromise or arrangement under Section 230 of the Act is proposed, it must be utilize first and only on its closure/ failure, liquidation under the Code may commence. The Code read with regulations may provide that where a credible proposal is made to the Liquidator under Section 230 of the Act for compromise or arrangement of the CD within seven days of the order under Section 33 of the Code for liquidation, the Liquidator shall file an application under the said section within ten days of the order of liquidation under Section 33 of the Code. A member or a creditor may file an application under Section 230 of the Act within 10 days of the order of liquidation. If approved by the NCLT, the Liquidator shall complete the process under Section 230 within 90 days of the order of liquidation. The Regulations may provide that liquidation process under the Coe shall commence at the earlier of the four events: (a) there is no proposal for compromise or arrangement within ten days; (b) the NCLT does not approve the application under Section E 230 of the Act, (c) the process under Section 230 is not completed within 90 days or such extended period as may be allowed by the NCLT, or (d) the process under Section 230 is not sanctioned under F Section 230(6) of the Act. A tight time schedule is necessary for conclusion of the process for compromise or arrangement to ensure that the liquidation process is concluded without undue delay.” G

79Copy pinpoint79. IBBI noted in its discussion paper that the introduction of ineligibilities stipulated under Section 29-A of the IBC to Section 230 of the Act of 2013 would pose practical difficulties in its implementation. IBBI observed:

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A “3.3.3 Ineligibility: Proviso to section 35(1)(f) of the Code mandates that the Liquidator shall not sell the immovable and movable property or actionable claims of the CD in liquidation to any person who is not eligible to be a resolution applicant. This prohibits GCS to persons ineligible under section 29A. However, the law does not prohibit such ineligible persons to participate in compromise or arrangement under section 230 of the Act. It may be necessary to harmonise the provisions in the Code and the Act to provide level playing field. Some stakeholders feel that the ineligibility norms under section 29A of the Code may also apply to compromise or arrangement under section 230 of the Act. Other stakeholders feel that unlike liquidation under the Code, which is mostly Liquidator driven, the compromise or arrangement under the Act is mostly driven by the Tribunal. Further, section 29A of the Code has several exceptions, while section 230 of the Act deals with all kinds of companies in all situations. There will be practical difficulties in implementation of ineligibility for the purposes of section 230 of the Act. Therefore, it is proposed that the ineligibility norms under section 29A of the Code may not apply to compromise or arrangement under section 230 of the Act.” Be that as it may, the IBBI solicited public comments on its proposals. The IBBI evolved its view on the issue of whether Section E 29-A should be made applicable to Section 230 of the Act of 2013 in its subsequent discussion paper.

80Copy pinpoint80. The discussion paper brought out on 3 November 2019 by IBBI discussed the applicability of Section 29A of the IBC to a compromise and arrangement under Section 230 of the Act of 2013. F The discussion paper notes that there were many instances where the NCLAT had allowed the application under Section 230 of the Act of

2013. In that context, the discussion paper notes thus: “21. Section 29 A of the Code prohibits certain persons from becoming a resolution applicant/ submitting a resolution plan in a G CIRP. Proviso to section 35(1)(f) of the Code mandates that a Liquidator shall not sell the immoveable and moveable property or actionable claims of the CD in liquidation to any person who is not eligible to be a resolution applicant. These provisions were inserted in the Code with effect from 23rd November, 2017, while H section 230 of the Act was amended along with the enactment of

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the Code. There is no explicit prohibition on persons ineligible to A submit resolution plans under section 29A from proposing compromise or arrangement made under Section 230 of the Act, which may result in person ineligible under section 29A acquiring control of the CD. Thus, while section 29A of the Code is applicable to a CD when it is under CIRP and when it is under Liquidation B Process, it is not applicable to the same CD when it is undergoing compromise or arrangement, in between CIR process and liquidation process. This has created an anomaly that section 29A is applicable during the stage before and the stage after compromise and arrangement and not during compromise and arrangement. C

22. Section 29A of the Code keeps out a person, who is a wilfull defaulter, who has an account with non-performing assets for a long period, etc. and therefore, is likely to be a risk to a successful resolution of insolvency of a company. This rationale equally applies to the stage of compromise or arrangement. Non-applicability of D section 29A at the stage of compromise or arrangement may undermine the process and may reward unscrupulous persons at the expense of creditors. Thus, it may be necessary to harmonise the provisions in the Code and the Act to provide level playing field.” E

81Copy pinpoint81. The discussion paper also notes that it was necessary to have a discussion on the following amongst other issues: “f. Should the persons ineligible under section 29A of the Code to be a resolution applicant be barred from becoming a party in compromise or arrangements under section 230 of the Companies F Act, 2013? g. Or, should applicability of section 230 of the companies act, 2013 during liquidation process under the Coe be reviewed?”

82Copy pinpoint82. Thereafter, public comments were invited. The discussion paper is what it professes to be – a matter for discussion in the public G realm. This cannot be held to constitute an admission of IBBI that an applicant who is ineligible under Section 29A may submit a scheme of compromise or arrangement under Section 230 of the Act of 2013. The validity of the provisions of Regulation 2B, more specifically the proviso, has to be considered on their own footing. H

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A Section 196 of the IBC

83Copy pinpoint83. The powers and functions entrusted to IBBI are specified in Section 196 of the IBC. Section 196(1)(t) provides IBBI with the power to frame regulations, as follows: “(t) make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under this Code, including mechanism for time bound disposal of the assets of the corporate debtor or debtor; and” Clause (t) empowers IBBI to make regulations and guidelines on matters relating to insolvency and bankruptcy, as may be required under the IBC. Section 240 Section 240(1) empowers IBBI with the power to make regulations in the following terms: D “(1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.” Under Sub-Section (1) of Section 240, the power to frame regulations is conditioned by two requirements: first, the regulations have E to be consistent with the provisions of the IBC and the rules framed by the Central Government; and second, the regulations must be to carry out the provisions of the IBC. Regulation 2B meets both the requirements, of being consistent with the provisions of IBC and of being made in order to carry out the provisions of the IBC, for the reasons discussed earlier in this judgment. F A clarificatory exercise

84Copy pinpoint84. The principal ground of challenge to Regulation 2B is that the regulation transgressed the authority of IBBI by introducing a disqualification or ineligibility in regard to the presentation of an application G for a scheme of compromise or arrangement under Section 230 of the Act of 2013. It has been urged that IBBI, as an entity constituted by the IBC, had no statutory jurisdiction to amend the provisions of Section 230 of the Act of 2013 or to impose a restriction which operates under the purview of Section 230. The position in our view can be considered from two perspectives, independent of the provisions of Regulation 2B. H

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We have indicated in the discussion earlier that even in the absence of the Regulation 2B, a person ineligible under Section 29A read with Section 35(1)(f) is not permitted to propose a scheme for revival under Section 230, in the case of a company which is undergoing a liquidation under the IBC. We have come to the conclusion, as noted for the reasons indicated earlier, that 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. The principle was enunciated in the decision in Meghal Homes (supra) while construing the provisions of erstwhile Section 391. The same rationale which permeates the resolution process under Chapter II (by virtue of the provisions of Section 29A) permeates the liquidation process under Chapter III (by virtue of the provisions of Section 35(1)(f)). That being the position, there can be no manner of doubt that the proviso to Regulation 2B is clarificatory in nature. Even absent the proviso, a person who is ineligible under Section D 29A would not be permitted to propose a compromise or arrangement under Section 230 of the Act of 2013.We therefore do not find any merit in the challenge to the validity of Regulation 2B. E Epilogue

85Copy pinpoint85. In paragraph 24 of our judgment, we noted the two issues which had been framed by the NCLAT in the impugned judgment in the first of the appeals. The first issue was “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 [Act of 2013]”. While we noted in paragraph 25, that no challenge has been made by the appellant in regard to the finding of the NCLAT on this issue, it is imperative for us to make some remarks in relation to this issue and the larger issue of judicial intervention by the NCLT and NCLAT while adjudicating disputes under the IBC.

86Copy pinpoint86. To begin with, we would like to take note of the observations made by the Insolvency Law Committee in its Report of February 202046. G The Committee began by acknowledging that the floating of schemes of compromise or arrangement under Sections 230 to 232 of the Act, even for companies undergoing liquidation, was not part of the framework 46 Available at <https://ibbi.gov.in/uploads/ resourcesc6cb71c9f69f66858830630da08e45b4.pdf> accessed on 10 March 2021 H

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A under the IBC. This, the Committee noted, had led to a multiplicity of issues including, but not limited to, the duality of the role of the NCLT (as a supervisory Adjudicatory Authority under the IBC versus the driving Tribunal under the Act of 2013) and indeed the very question before us in this case, whether the disqualification under Section 29A and proviso to Section 35(1)(f) of the IBC also attaches to Section 230 of the Act of B

2013. However, the Committee notes that judicial intervention by the NCLAT along with the IBBI’s introduction of new regulations have led to some alignment in the two frameworks.

87Copy pinpoint87. The Committee thereafter notes that the introduction of such schemes into the framework of the IBC may be worrisome since it will alter the incentives during the CIRP and lead to destructive delays, which often plagued the process under the Sick Industrial Companies (Special Provisions) Act, 1985.47 However, it nonetheless also acknowledges the benefits such schemes may have to offer48. Even so, the Committee concludes by noting that such schemes, if at all they are to be brought in, should not be under the Act of 2013 but the IBC itself. The Report notes thus: “4.6…However, the Committee was of the view that such a process for compromise or settlement need not be effected only through the schemes mechanism under the Companies Act, 2013, E and felt that the liquidator could be given the power to effect a compromise or settlement with specific creditors with respect to their claims against the corporate debtor under the Code. 4.7 Given the incompatibility of schemes of arrangement and the liquidation process, the Committee recommended that recourse to Section 230 of the Companies Act, 2013 for effecting schemes of arrangement or compromise should not be available during liquidation of the corporate debtor under the Code. However, the Committee felt that an appropriate process to allow the liquidator to effect a compromise or settlement with specific creditors should be devised under the Code.” (emphasis in original) 47 Ibid, at para 4.5. 48 Ibid, para 4.6; In the Indian context, see Umakanth Varottil, ‘The Scheme of Arrangement as a Debt Restructuring Tool in India: Problems and Prospects’ (March H 2017) NUS Working Paper 2017/005 available at <http://law.nus.edu.sg/wp>

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POWER LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]

88Copy pinpoint88. Due to the ambiguity in the application of the two frameworks, A it became imperative that a clarification be issued in this regard. 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. B

89Copy pinpoint89. At this juncture, it is important to remember that 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 C 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. As we have noted earlier in the judgment, the IBC was introduced in order to overhaul the insolvency and bankruptcy regime in India. As such, it is a carefully considered and well thought out piece of legislation which sought to shed away the practices of the past. The legislature has also been working hard to ensure that the efficacy of this legislation remains robust by constantly amending it based on its experience. Consequently, the need for judicial intervention or innovation from the NCLT and NCLAT should be kept at its bare minimum and should not disturb the foundational principles of the IBC. This conscious shift in their role has been noted in the report of the Bankruptcy Law Reforms Committee (2015) in the following terms: “An adjudicating authority ensures adherence to the process At all points, the adherence to the process and compliance with all applicable laws is controlled by the adjudicating authority. The adjudicating authority gives powers to the insolvency professional to take appropriate action against the directors and management of the entity, with recommendations from the creditors committee. All material actions and events during the process are recorded at the adjudicating authority. The adjudicating authority can assess and penalise frivolous applications. The adjudicator hears allegations of violations and fraud while the process is on. The adjudicating authority will adjudicate on fraud, particularly during the process resolving bankruptcy. Appeals/actions against the H

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A behaviour of the insolvency professional are directed to the Regulator/Adjudicator.”

90Copy pinpoint90. Once again, we must clarify that our observations here are not on the merits of the issue, which has not been challenged before us, but only limited to serve as guiding principles to the benches of NCLT B and NCLAT adjudicating disputes under the IBC, going forward. F Conclusion

91Copy pinpoint91. 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 C 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. For the above reasons, we have come to the conclusion that there is no merit in the appeals and the writ petition. The D civil appeals and writ petition are accordingly dismissed.

92Copy pinpoint92. Pending application(s), if any, stand disposed of.

Nidhi Jain Appeals and writ petition dismissed.