Back Door Entry Closed for Defaulters: SC | 17 Mar 2021

Why in News

Recently, the Supreme Court (SC) has closed the back-door entry of defaulting promoters by using a special provision of compromise or arrangement during the liquidation phase of the insolvency proceeding.

Key Points

  • Background:
    • In a case involving the liquidation of a Limited Company, the National Company Law Appellate Tribunal (NCLAT) in 2019 held that any person who was ineligible, under Section 29A of Insolvency and Bankruptcy Code (IBC), to bid for his company, was also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act 2013.
      • The Companies Act 2013 is an Indian company law which regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company.
        • Company means a company incorporated under this Act or under any previous Company Law.
      • Section 230 of the Companies Act allows promoters or creditors of the company to propose a scheme of arrangement or compromise under which the debt of the company can be restructured.
  • Recent Ruling of the SC:
    • SC upholded NCLAT’s decision and said that while Section 230 would be applicable for promoters and creditors in the normal course of the workings of the company, it would not be applicable if the company is facing liquidation under IBC.
  • Reason Given by SC:
    • 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 Companies Act 2013.
  • Significance of the Judgement:
    • Speed up the Resolution:
    • Maximisation of the Asset Value:
      • Since the objective of the IBC is to find a suitable buyer for the company and liquidation is ordered only in cases where there are no viable plans submitted, experts believe that a quick liquidation is of utmost importance to maximise the value of assets of the company.
    • Settled Conflicting Judgements:
      • It settles down the conflicting judgments given by different benches of the NCLT, wherein these forums had, in order to follow the IBC’s principle of value of asset maximisation, allowed some of the promoters to re-bid for the company or propose some arrangement when it was sent to liquidation.

Insolvency and Bankruptcy Code, 2016

  • About:
    • It provides a time-bound process for resolving insolvency in companies and among individuals.
    • It covers all individuals, companies, Limited Liability Partnerships (LLPs) and partnership firms.
  • Objective:
    • To streamline and speed up the resolution process of failed businesses.
    • To consolidate provisions of the existing legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.
    • To stipulate that the resolution process of a stressed company will have to be completed in a maximum of 270 days.
  • Section 29A:
    • It is a restrictive provision, it specifically lists down the persons who are not eligible to be resolution applicants.
    • Section 29A in its entirety not only restricts promoters but also the people related/connected with the promoters.
    • This section was introduced to disqualify those who had contributed in the downfall of the corporate debtor or were unsuitable to run the company.
  • Adjudicating Authority:

National Company Law Appellate Tribunal

  • The NCLAT was constituted under Section 410 of the Companies Act, 2013 to hear appeals against the orders of the National Company Law Tribunal (NCLT).
    • NCLT is a quasi-judicial body that adjudicates issues relating to companies.
  • It is also the appellate tribunal for orders passed by the NCLT(s) under Section 61 of the IBC, 2016, and for orders passed by the Insolvency and Bankruptcy Board of India (IBBI) under Sections 202 and 211 of the IBC.
  • Any person aggrieved by any order of the NCLAT may file an appeal to the SC.