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SC denies defaulting promoters back-door entry in insolvency process

The apex court said that a promoter, who is barred from bidding for his company undergoing insolvency proceeding, cannot also take control of the company back by using the provision of 'scheme of arrangement' under Section 230 of the Companies Act

twitter-logoDipak Mondal | March 16, 2021 | Updated 13:59 IST
SC denies defaulting promoters back-door entry in insolvency process

The Supreme Court 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.  The apex court said that a promoter, who is barred from bidding for his company undergoing insolvency proceeding, cannot also take control of the company back by using the provision of 'scheme of arrangement'.

The Supreme Court dismissed a petition filed by ex-promoter of Gujarat NRE Coke Arun Kumar Jagatramka, who had moved the court against an order of National Company Law Appellate Tribunal (NCLAT) making the former ineligible for proposing the scheme of arrangement.

A scheme of arrangement under Section 230 of the Companies Act allows a defaulting company to enter into a compromise with the creditors. The same provision was incorporated in the liquidation regulations under the Insolvency and Bankruptcy Code (IBC). The Supreme Court in its order said that Section 230 of the Companies Act is not an independent provision when used in cases of liquidation under IBC.  

"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," said the Supreme Court in its order.

The court, therefore, maintained that under the scheme of arrangement, an applicant barred under IBC should not be allowed to apply.

Section 29A of the IBC bars a person from the bidding process if they have been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the NCLT.

The promoter of Gujarat NRE Coke had voluntarily admitted the company under insolvency proceedings in April 2017. Later it had submitted a resolution plan in November 2017, and was to be put to vote by the committee of creditors on 23-24 November. However, the government inserted Section 29A in the IBC on 23 November with retrospective effect, making the promoter of Gujarat NRE Coke ineligible for bidding for the company under the insolvency process.

NCLT in January 2018 ordered liquidation of the Gujarat NRE Coke. The promoter, however, moved NCLAT against the order.  

During the same time, Jagatramka moved an application under Sections 230 -232 of the Companies Act of 2013 before the NCLT proposing a scheme for compromise and arrangement between the promoters and creditors. This application was allowed by the NCLT through its order dated 15 May 2018.

Jindal Steel and Power, an operational creditor, had filed appeal in NCLAT against NCLT's 15 May 2018 order. NCLAT upheld JSPL's petition and denied ex-promoter of Gujarat NRE Coke an opportunity from proposing a scheme of arrangement/compromise. Following this, Jagatramka filed moved SC.

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