The 2005 Report of the Expert Committee on Company Law had noted that an effective insolvency law:
“should strike a balance between rehabilitation and liquidation. It should provide an opportunity for genuine effort to explore restructuring/ rehabilitation of potentially viable businesses with consensus of stakeholders reasonably arrived at. Where revival / rehabilitation is demonstrated as not being feasible, winding up should be resorted to.
Where circumstances justify, the process should allow for easy conversion of proceedings from one procedure to another. This will provide opportunity to businesses in liquidation to turnaround wherever possible. Similarly, conversion to liquidation might be appropriate even after a rehabilitation plan has been approved if such a plan was procured by fraud or the plan can no longer be implemented”.
What is a scheme of arrangement?
A Scheme of Arrangement is a process used by a company in financial difficulty to reach a binding agreement with its creditors to pay back all, or part, of its debts over an agreed timeline.
Who should consider a Scheme of Arrangement?
- Companies with large debts
- Companies needing to restructure
- Companies experiencing trading difficulties
- Companies under pressure from their creditors
- Companies wanting to avoid liquidation
Relevant laws under consideration:
Section 29A of the Insolvency and Bankruptcy Code, 2016
Section-29A. Persons not eligible to be resolution applicant. – A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person—
(a) is an undischarged insolvent;
(b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949);
(c) [at the time of submission of the resolution plan has an account,] or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) [or the guidelines of a financial sector regulator issued under any other law for the time being in force,] and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor: Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non performing asset accounts before submission of resolution plan:
[Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.]
Section 230 of the Companies Act, 2013
Section-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.
Pursuant to Section 230 of the CA, 2013, a scheme of arrangement can be proposed by a creditor or member or a liquidator including one who has been appointed under the IBC. It is pertinent to state here that, Section 230 of the CA, 2013 does not restrict promoters from proposing a scheme of arrangement. However, it shall be noted that an outsider shall have no right to propose a scheme of arrangement under Section 230 of CA, 2013.
Taking into consideration Section 29A of IBC, promoters cannot propose the scheme of arrangement as Section 29A disqualifies promoters from proposing the resolution plans. In the case of Jindal Steel and Power Limited vs. Arun Kumar Jagatramka & Gujarat NRE Coke Limited, the NCLAT has held that when a scheme of arrangement is maintainable as per Section 230 of the CA, 2013 for the companies which are undergoing liquidation, the same shall not be maintainable when proposed by a person ineligible under Section 29A of IBC. It is, therefore, settled now that any member/creditor who is ineligible pursuant to Section 29A shall not be qualified to propose a scheme of arrangement under Section 230 of the CA, 2013, during liquidation process before NCLT.
The Supreme Court in the case of Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr. relying upon the judgments Chitra Sharma v. Union of India and Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors., observed that Section 29A of the IBC has been enacted keeping in mind the larger public interest and to facilitate effective corporate governance. Section 29A rectifies a loophole in the IBC, which allowed backdoor entry to the erstwhile management of corporate debtors into corporate insolvency resolution process.