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 ...
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[2021] 3 S.C.R. 114
ARUN KUMAR JAGATRAMKA
v.
JINDAL STEEL AND POWER LTD. & ANR.
(Civil Appeal No. 9664 of 2019)
MARCH 15, 2021
[DR. DHANANJAYA Y CHANDRACHUD* AND
M. R. SHAH, JJ.]
Insolvency and Bankruptcy Code, 2016:
s. 29A – Person not eligible to be resolution applicant – Eligibility
of promoter to file application for compromise and arrangement,
while he is ineligible u/s. 29A to submit ‘Resolution Plan’ – On facts,
application by GNCL, corporate debtor for initiating the Corporate
Insolvency Resolution Process admitted and the appellant-promoter
of GNCL submitted a resolution plan for GNCL – However, due
to insertion of s. 29A, which disqualifies a person from being
a resolution applicant if they have been a promoter or in the
management or control of a corporate debtor, appellant became
ineligible to submit a resolution plan – No resolution plan approved
by the CoC and in absence thereof, the order of liquidation by NCLT
– During the pendency of the appeal before NCLAT, application
u/ss. 230 to 232 of the Act of 2013 by appellant-promoter of
GNCL before the NCLT proposing a scheme for compromise and
arrangement between the erstwhile promoters and creditors and the
same was allowed – Appeal thereagainst by respondent-unsecured
creditor of the corporate debtor – NCLAT holding that promoters
ineligible u/s. 29A to submit a resolution plan, also barred from
proposing a scheme of compromise and arrangement u/s.230
of the Act of 2013 – On appeal, held: Prohibition placed by the
Parliament in s. 29A and s. 35(1)(f) must also attach itself to a
scheme of compromise or arrangement u/s. 230 of the 2013 Act,
when the company is undergoing liquidation under the auspices
of the IBC – As such, Reg 2B, specifically the proviso to Reg
2B(1), is also constitutionally valid – Even in the absence of the
Reg 2B, a person ineligible u/s. 29A read with s. 35(1)(f) is not
permitted to propose a scheme for revival u/s. 230, in the case of
a company which is undergoing a liquidation under the IBC – In
* Author
[2021] 3 S.C.R. 115ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
the case of a company undergoing liquidation under the IBC, a
scheme of compromise or arrangement proposed u/s. 230 is a facet
of the liquidation process – Object of the scheme of compromise
or arrangement is to revive the company – Same rationale which
permeates the resolution process u/s. 29A permeates the liquidation
process u/s. 35(1)(f) – Insolvency and Bankruptcy Board of India
(Liquidation Process) Regulations, 2016 – Reg 2B – Companies
Act, 2013 – ss. 230 to 232.
Enactment of – Salutary objectives of good corporate governance
and respect for and adherence to the rule of law; and re-organization
and resolution of insolvencies under – Held: Can be achieved if
the integrity of the resolution process is placed at the forefront –
Purposive interpretation is required by the courts, while infusing
meaning and content to its provisions, to ensure that the problems
which beset the earlier regime do not enter through the backdoor
through disingenuous stratagems.
s. 29A – Person not eligible to be resolution applicant – Purpose
of the ineligibility under – Held: 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 – s. 29A encompasses not only conduct in relation to
the corporate debtor but in relation to other companies as well.
ss. 29A, 35(1)(f) – Interplay between the proposal of a scheme
of compromise and arrangement u/s.230 of the Act of 2013 and
liquidation proceedings initiated under IBC – Held: s. 230 of the Act
of 2013 is wider in its ambit – 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 – Thus, the rigors of the IBC will not apply
to proceedings u/s. 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 – However,
where s. 230 of the Act of 2013 traces its origin to the liquidation
proceedings initiated under IBC, harmonious construction is needed
between the two statutes which would ensure that a scheme of
compromise or arrangement u/s. 230 is being pursued, in a manner
consistent with the underlying principles of the IBC – 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
116 [2021] 3 S.C.R.SUPREME COURT REPORTS
the company in liquidation, are somehow permitted to propose a
compromise or arrangement u/s. 230 of the Act of 2013 – IBC has
made a provision for ineligibility u/s. 29A which operates during
the course of the CIRP – Similar provision, s. 35(1)(f) 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
s. 230 of the Act of 2013 with Chapter III of the IBC, it would be
far-fetched to hold that the ineligibilities which attach u/s. 35(1)(f)
r/w s. 29A would not apply when s. 230 is sought to be invoked –
Such an interpretation would result in defeating the provisions of
the IBC and must be eschewed – 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 these stages – Proposing a scheme
of compromise or arrangement u/s. 230 of the Act of 2013, while
the company is undergoing liquidation under the provisions of
the IBC lies in a similar continuum – Companies Act, 2013 – ss.
230 to 232.
ss. 6 to 32A – Modes of revival of a company under the provisions
of the IBC – Explained.
s. 12A - Withdrawal of application – Withdrawal of the application
admitted u/ss. 7, 9 and 10 – Discussed.
Insolvency and Bankruptcy Board of India (Liquidation
Process) Regulations, 2016: Reg 2B - Constitutional validity of –
Held: Reg 2 B provides that where a compromise or arrangement
is proposed u/s. 230 of the Act of 2013, it shall be completed
within ninety days of the order of liquidation under sub-Sections
(1) and (4) of s. 33 – Proviso to Reg 2B provides 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 – Reg 2B,
specifically the proviso to Reg 2B(1) is constitutionally valid.
Dismissing the appeals and writ petition, the Court Held:
1.1 The prohibition placed by the Parliament in Section 29A and
Section 35(1)(f) of the Insolvency and Bankruptcy Code,
2016 must also attach itself to a scheme of compromise or
[2021] 3 S.C.R. 117ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
arrangement under Section 230 of the Companies Act 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. [Para 91]
2. 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). [Para 52]
Chitra Sharma v. Union of India (2018) 18 SCC 575 :
[2018] 12 SCR 1044; Arcelormittal India Private Limited
v. Satish Kumar Gupta & Ors (2019) 2 SCC 1 : [2018]
12 SCR 362; Phoenix ARC Private Limited v. Spade
Financial Service 2021 SCC OnLine SC 51; Ramesh
Kymal v. M/s Siemens Gamesa Renewable Power Pvt
Ltd. [2021] 3 SCC 224; Anuj Jain, Interim Resolution
Professional for Jaypee Infratech Limited v. Axis Bank
Limited (2020) 8 SCC 401 – relied on.
3. 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 encompasses
not only conduct in relation to the corporate debtor but in
relation to other companies as well. [Para 53]
4.1 Section 230 of the Act of 2013 is incorporated in Chapter XV
which is titled “compromise, arrangement and amalgamations”.
A compromise or arrangement under Sub-section (1) of Section
230 may take place: between a company and its creditors or any
subset of creditors; or between a company and its members or
118 [2021] 3 S.C.R.SUPREME COURT REPORTS
subset of members. 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. Upon the
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. [Para 57-59, 61]
5.1 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 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. It was submitted by the appellant
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; that the decision in Meghal
Homes’s case 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 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 is a matter of last resort. Section
33 requires the NCLT, acting as the Adjudicating Authority,
to pass an order for the liquidation of the corporate debtor
where: 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 (6)
of Section 30; or the resolution plan has been rejected under
Section 31 for non-compliance with the requirements of the
provision. [Para 64]
[2021] 3 S.C.R. 119ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
Meghal Homes Pvt. Ltd. v Shree Niwas Girni K. K.
Samiti (2007) 7 SCC 753 : [2007] 9 SCR 330; Miheer
H Mafatlal v. Mafatlal Industries Ltd. (1997) 1 SCC 579 :
[1996] 6 Suppl. SCR 1 – referred to.
5.2 Under Sub-Section (2) of Section 33, the Adjudicating
Authority 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. [Para 65]
5.3 There are three modes in which a revival is contemplated under
the provisions of the IBC. The first of those modes 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 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 in Y Shivram Prasad v. S Dhanapal’s case wherein
NCLAT took note of the fact that while passing the order u/s.
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
u/s. 230 of the Act of 2013. Following the decision of NCLAT,
an amendment was made on 25 July 2019 to the Liquidation
Process Regulations by the IBBI so as to refer to the process
envisaged under Section 230 of the Act of 2013. [Para 67]
120 [2021] 3 S.C.R.SUPREME COURT REPORTS
Y Shivram Prasad v. S Dhanapal 2019 SCC OnLine
NCLAT 172 – approved.
5.4 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
instant 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
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 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 , to attempt a revival of the corporate
debtor so as to save it from the prospect of a corporate death.
The consequence 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 that Section 230 of the Act of 2013 is a 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 instant
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
[2021] 3 S.C.R. 121ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
initiated under the IBC, it becomes necessary to read both
sets of provisions in harmony. A harmonious construction
between the two statutes would ensure that while on the 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. [Para 68]
5.5 The IBC has made a provision for ineligibility under Section
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 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. [Para 69]
5.6 There is no merit in the submission 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 a proposal under Section 230 of the Act of 2013.
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
122 [2021] 3 S.C.R.SUPREME COURT REPORTS
to participate during 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. [Para 70]
6. Section 12A 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, 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-A, as it originally stood,
an application for withdrawal under Section 12-A was required
to be submitted before the issuance of an invitation for the
expression of interest under Regulation 36-A. The decision in
Swiss Ribbons led to substitution of the Regulation 30-A which
stipulates that an application for withdrawal under Section
12-A may be made to the adjudicating authority: before the
constitution of the CoC, by the applicant through the IRP; and
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. [Para 72]
Swiss Ribbons Private Limited v. Union of India (2019)
4 SCC 17 : [2019] 3 SCR 535; Brilliant Alloys (P) Ltd. v.
S Rajagopal 2018 SCC OnLine SC 3154 – referred to.
[2021] 3 S.C.R. 123ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
7.1 There is a fundamental fallacy in the submission 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, there
is no reason or justification then to preclude a promoter from
presenting a scheme of compromise or arrangement under
Section 230. 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 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. 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 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 u/s. 31 results
in a “clean slate,”. [Para 73, 74]
Swiss Ribbons Private Limited v. Union of India (2019)
4 SCC 17 : [2019] 3 SCR 535; Committee of Creditors
of Essar Steel India Limited v. Satish Kumar Gupta
(2020) 8 SCC 531 : [2019] 16 SCR 275 – referred to.
7.2 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
124 [2021] 3 S.C.R.SUPREME COURT REPORTS
(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 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. [Para 75]
7.3 There is no merit in the submission that Section 35(1)(f) applies
only to a liquidator who conducts a sale of the property 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 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 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. [Para 76]
8. Regulation 2B(1) introduced on 25 July 2019 provides that
where a compromise or arrangement is proposed under
Section 230 of 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
[2021] 3 S.C.R. 125ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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. [Para 77]
9. 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. The IBBI solicited public comments
on its proposals. The IBBI evolved its view on the issue of
whether Section 29-A should be made applicable to Section
230 of the Act of 2013 in its subsequent discussion paper.
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. The discussion paper notes that there were many
instances where the NCLAT had allowed the application under
Section 230 of the Act of 2013. Thereafter, public comments
were invited. The discussion paper is what it professes to
be-a matter for discussion in the public 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. [Para 79, 80, 82]
10. 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. 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(1) empowers IBBI with the power to make
regulations. Under Sub-Section (1) of Section 240, the power
to frame regulations is conditioned by two requirements: first,
the regulations have 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. [Para 83]
126 [2021] 3 S.C.R.SUPREME COURT REPORTS
11. 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 for a scheme of compromise or arrangement
under Section 230 of the Act of 2013. It was submitted 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 can be considered from
two perspectives, independent of the provisions of Regulation
2B. 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. 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 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 29A would
not be permitted to propose a compromise or arrangement
under Section 230 of the Act of 2013. Thus, there is no merit
in the challenge to the validity of Regulation 2B. [Para 84]
Meghal Homes Pvt. Ltd. v Shree Niwas Girni K. K. Samiti
(2007) 7 SCC 753 : [2007] 9 SCR 330 – referred to.
12.1 The Insolvency Law Committee in its report 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 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 whether the
[2021] 3 S.C.R. 127ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
disqualification under Section 29A and proviso to Section 35(1)
(f) of the IBC also attaches to Section 230 of the Act of 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. [Para 86]
<https://ibbi.gov.in/uploads/resources
c6cb71c9f69f66858830630da08e45b4.pdf> accessed
on 10 March 2021 – referred to.
12.2 The Committee thereafter, notes that the introduction of such
schemes into the framework of the IBC may be worrisome
since it would 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.
However, it nonetheless also acknowledges the benefits
such schemes may have to offer. 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. [Para 87]
Umakanth Varottil, ‘The Scheme of Arrangement as
a Debt Restructuring Tool in India: Problems and
Prospects’ (March 2017) NUS Working Paper 2017/005
available at <http://law.nus.edu.sg/wp> - referred to.
12.3 Due to the ambiguity in the application of the two frameworks,
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. [Para 88]
12.4 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’s case.
Since the efficacy of this arrangement is not challenged in
this case, this Court cannot comment on its merits. However,
the NCLT and NCLAT are cautioned as regards, functioning as
the Adjudicatory Authority and Appellate Authority under the
IBC respectively, from judicially interfering in the framework
envisaged under the IBC. The IBC was introduced in order to
overhaul the insolvency and bankruptcy regime in India. As
128 [2021] 3 S.C.R.SUPREME COURT REPORTS
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). [Para 89]
Y Shivram Prasad v. S Dhanapal 2019 SCC OnLine
NCLAT 172 – approved.
Jogendra Lal Saha v. State of Bihar, 1991 Supp (2)
SCC 654; Jasbir Singh v. Vipin Kumar Jaggi, (2001) 8
SCC 289 : [2001] 1 Suppl. SCR 598; P.V. Hemlatha
v. Kattam Kandi Puthiya Maliackal Saheeda, (2002) 5
SCC 548 : [2002] 3 SCR 1098; Talchar Municipality v.
Talcher Regulated Market Committee, (2004) 6 SCC
178 : [2004] 3 Suppl. SCR 167; Iridium India Telecom
Ltd. v. Motorola Inc, (2005) 2 SCC 145 : [2005] 1 SCR
73 – referred to.
Salomon v. A. Salomon & Co. Ltd. 1897 AC 22 (HL)
– referred to.
CIVIL APPELLATE/ORIGINAL JURISDICTION : Civil Appeal No.
9664 of 2019.
From the Judgment and Order dated 24.10.2019 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal
(AT) No. 221 of 2018.
With
Writ Petition (C) No. 269 Of 2020 And Civil Appeal No. 2719 Of 2020.
Tushar Mehta, SG, Balbir Singh, ASG, Gopal Jain, Amit Sibal, Sr.
Advs., Sandeep Bajaj, Soayib Qureshi, Nidhi Mohan Parashar, Ms.
Aditi Pundhir, Ms. Sangya Gupta, Shiv Shankar Banerjee, Ms. Richa
Kapoor, Kunal Anand, Anupa Banerjee, Ms. Ayushi Rajput, Charu
[2021] 3 S.C.R. 129ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
Shangari, Shalya Agarwal, Ms. Surabhi Katyal, Ms. Shivani Sharma,
Kanu Agrawal, Saurabh Mishra, Ankur Talwar, Chinamyee Chandra,
Shyam Gopal, Arvind Kumar Sharma, Alok Dhir, Karan Batura, Ms.
Priyal Chaturvedi, Nikhar Luthra, T. V. S. Raghavendra Sreyas, Ms.
Gayatri Gulati, Siddharth Vasudev, Sidhartha Sharma, Arjun Asthana,
Sumit Binani, Arup Banerjee, Ms. Misha, Anoop Rawat, Siddhant
Kant, Sagar Dhawan, Nikhil Mathur, Ms. Prabhsimran Kaur, S. S.
Shroff, Vikas Mehta, Advs. for the appearing parties.
The Judgment of the Court was delivered by
DR. DHANANJAYA Y CHANDRACHUD, J.
This judgment has been divided into the following sections to facilitate
analysis:
A Factual Background
A.1 Civil Appeal 9664 of 2019
A.2 Civil Appeal 2719 of 2020
A.3 Liquidation Process Regulations, 2016
A.4 Article 32 Petition
B Issues
C Submissions
D Analysis of the Legal Framework
D.1 Ineligibility during the resolution process and
liquidation
D.2 Interplay : IBC liquidation and Section 230 of the Act
of 2013
D.3 The ‘Clean Slate’
D.4 Constitutional Validity of Regulation 2B - Liquidation
Process Regulations
E Epilogue
F Conclusion
130 [2021] 3 S.C.R.SUPREME COURT REPORTS
A Factual Background
A.1 Civil Appeal 9664 of 2019
1
1. By its judgment dated 24 October 2019, the National Company Law
Appellate Tribunal
2
held that a person who is ineligible under Section
29A of the Insolvency Bankruptcy Code, 2016
3
to submit a resolution
plan, is also barred from proposing a scheme of compromise and
arrangement under Section 230 of the Companies Act, 2013
4
. The
judgment was rendered in an appeal
5
filed by Jindal Steel and Power
Limited
6
, an unsecured creditor of the corporate debtor, Gujarat NRE
Coke Limited
7
. The appeal was preferred against an order passed
by the National Company Law Tribunal
8
in an application
9
under
Sections 230 to 232 of the Act of 2013, preferred by Mr Arun Kumar
Jagatramka, who is a promoter of GNCL. The NCLT had allowed
the application and issued directions for convening a meeting of the
shareholders and creditors. In its decision dated 24 October 2019,
the NCLAT reversed this decision and allowed the appeal by JSPL.
The decision of the NCLAT dated 24 October 2019 is challenged in
the appeal before this Court.
2. Mr Arun Kumar Jagatramka, assails the order dated 24 October 2019
of the NCLAT, inter alia, on the ground that Section 230 of the Act
of 2013 does not place any embargo on any person for the purpose
of submitting a scheme. According to the appellant, in the absence
of a disqualification, the NCLAT could not have read the ineligibility
under Section 29A of the IBC into Section 230 of the Act of 2013.
This would, in the submission, amount to a judicial reframing of
legislation by the NCLAT, which is impermissible.
3. Before we advert to the submissions of the counsels on questions
of law, it will be useful to outline the salient facts of this dispute to
1 “First Appeal”
2 “NCLAT”
3 “IBC”
4 the “Act of 2013 ”
5 Company Appeal (AT) No. 221 of 2018
6 “JSPL”
7 “GNCL”
8 “NCLT”
9 C.A. (CAA) No. 198/KB/2018
[2021] 3 S.C.R. 131ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
understand the contours of the controversy. GNCL, the corporate
debtor, moved an application under Section 10 of the IBC before the
NCLT for initiating the Corporate Insolvency Resolution Process
10
.
The application was admitted on 7 April 2017.
4. Mr Arun Kumar Jagatramka submitted a resolution plan for GNCL
on 1 November 2017, which was presented by the Resolution
Professional
11
before the Committee of Creditors
12
. The plan was
to be put to a vote in a meeting of the CoC scheduled on 23-24
November 2017.
5. The IBC was amended by the Insolvency and Bankruptcy Code
(Amendment) Act, 2018. Section 29A which was inserted with
retrospective effect from 23 November 2017 provides a list of persons
who are ineligible to be resolution applicants. Sub-section (g) of
Section 29A disqualifies a person from being a resolution applicant
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 under the IBC. A second amendment was made to various
provisions of IBC, including Section 29A, under the Insolvency and
Bankruptcy Code (Second Amendment) Act, 2018, effective from 6
June 2018. A proviso was added to sub-Section (g) of Section 29A.
Section 29A of the IBC in its present form reads as follows:
“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);
10 “CIRP” or “resolution process”
11 “RP”
12 “CoC”
132 [2021] 3 S.C.R.SUPREME COURT REPORTS
(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.
Explanation I.— For the purposes of this proviso, the expression
“related party” shall not include a financial entity, regulated by
a financial sector regulator, if it is a financial creditor of the
corporate debtor and is a related party of the corporate debtor
solely on account of conversion or substitution of debt into
equity shares or instruments convertible into equity shares or
completion of such transactions as may be prescribed, prior to
the insolvency commencement date.
Explanation II.— For the purposes of this clause, where a
resolution applicant 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 and such account was acquired pursuant to a prior
resolution plan approved under this Code, then, the provisions
of this clause shall not apply to such resolution applicant for a
period of three years from the date of approval of such resolution
plan by the Adjudicating Authority under this Code;
(d) has been convicted for any offence punishable with
imprisonment—
[2021] 3 S.C.R. 133ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
(i) for two years or more under any Act specified under the
Twelfth Schedule; or
(ii) for seven years or more under any other law for the time
being in force:
Provided that this clause shall not apply to a person after the
expiry of a period of two years from the date of his release
from imprisonment:
Provided further that this clause shall not apply in relation to
a connected person referred to in clause (iii) of Explanation I;
(e) is disqualified to act as a director under the Companies Act,
2013 (18 of 2013);
Provided that this clause shall not apply in relation to a connected
person referred to in clause (iii) of Explanation I;
(f) is prohibited by the Securities and Exchange Board of India
from trading in securities or accessing the securities markets;
(g) has 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 Adjudicating
Authority under this Code;
Provided that this clause shall not apply if a preferential
transaction, undervalued transaction, extortionate credit
transaction or fraudulent transaction has taken place prior
to the acquisition of the corporate debtor by the resolution
applicant pursuant to a resolution plan approved under this
Code or pursuant to a scheme or plan approved by a financial
sector regulator or a court, and such resolution applicant
has not otherwise contributed to the preferential transaction,
undervalued transaction, extortionate credit transaction or
fraudulent transaction;
(h) has executed a guarantee in favour of a creditor in respect
of a corporate debtor against which an application for
insolvency resolution made by such creditor has been
134 [2021] 3 S.C.R.SUPREME COURT REPORTS
admitted under this Code and such guarantee has been
invoked by the creditor and remains unpaid in full or part;
(i) is subject to any disability, corresponding to clauses (a) to (h),
under any law in a jurisdiction outside India; or
(j) has a connected person not eligible under clauses (a) to (i).
Explanation I — For the purposes of this clause, the expression
“connected person” means—
(i) any person who is the promoter or in the management or
control of the resolution applicant; or
(ii) any person who shall be the promoter or in management
or control of the business of the corporate debtor during
the implementation of the resolution plan; or
(iii) the holding company, subsidiary company, associate
company or related party of a person referred to in clauses
(i) and (ii):
Provided that nothing in clause (iii) of Explanation I shall apply
to a resolution applicant where such applicant is a financial
entity and is not a related party of the corporate debtor:
Provided further that the expression “related party” shall not
include a financial entity, regulated by a financial sector regulator,
if it is a financial creditor of the corporate debtor and is a related
party of the corporate debtor solely on account of conversion or
substitution of debt into equity shares or instruments convertible
into equity shares 9[or completion of such transactions as may
be prescribed], prior to the insolvency commencement date;
Explanation II.— For the purposes of this section, “financial
entity” shall mean the following entities which meet such criteria
or conditions as the Central Government may, in consultation
with the financial sector regulator, notify in this behalf, namely:—
(a) a scheduled bank;
(b) any entity regulated by a foreign central bank or a securities
market regulator or other financial sector regulator of a
jurisdiction outside India which jurisdiction is compliant
[2021] 3 S.C.R. 135ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
with the Financial Action Task Force Standards and is a
signatory to the International Organisation of Securities
Commissions Multilateral Memorandum of Understanding;
(c) any investment vehicle, registered foreign institutional
investor, registered foreign portfolio investor or a foreign
venture capital investor, where the terms shall have the
meaning assigned to them in regulation 2 of the Foreign
Exchange Management (Transfer or Issue of Security by
a Person Resident Outside India) Regulations, 2017 made
under the Foreign Exchange Management Act, 1999 (42
of 1999);
(d) an asset reconstruction company registered with the
Reserve Bank of India under Section 3 of the Securitisation
and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (54 of 2002);
(e) an Alternate Investment Fund registered with the Securities
and Exchange Board of India;
(f) such categories of persons as may be notified by the
Central Government.”
(emphasis supplied)
Due to the insertion of Section 29A, Mr Arun Kumar Jagmatramka
became ineligible to submit a resolution plan.
6. No further resolution plan was approved by the CoC due to the
paucity of time. In the absence of a resolution plan, the NCLT passed
an order of liquidation on 11 January 2018, after the expiry of 270
days. The order of the NCLT ordering liquidation was challenged
in appeal
13
by Mr Arun Kumar Jagatramka before the NCLAT. The
appeal was dismissed by the NCLAT by its order dated 10 July 2018.
The dismissal of the appeal by the NCLAT was assailed before this
Court, which issued notice to GNCL on 19 July 2019.
7. During the pendency of the appeal before NCLAT, where the order
of liquidation passed by the NCLT was assailed, Mr Arun Kumar
13 Company Appeal (IB) No. 55-56 of 2018
136 [2021] 3 S.C.R.SUPREME COURT REPORTS
Jagatramka moved an application under Sections 230 to 232 of the
Act of 2013 before the NCLT proposing a scheme for compromise
and arrangement between the erstwhile promoters and creditors.
This application was allowed by the NCLT through its order dated
15 May 2018, and a direction was issued for convening of a meeting
of shareholders, secured creditors, unsecured creditors and FCCB
holders for approval of the scheme of compromise and arrangement.
8. JSPL, an operational creditor of GNCL, preferred an appeal against
the order of the NCLT dated 15 May 2018 before the NCLAT. The
NCLAT allowed the appeal by its judgement dated 24 October 2019,
holding that promoters who are ineligible to propose a resolution plan
under Section 29A of the IBC are not entitled to file an application
for compromise and arrangement under Sections 230 to 232 of the
Act of 2013. The basis of this finding is contained in paragraphs 10
to 12 of the impugned judgement which is extracted below:
“10. As noticed above, the Hon’ble Supreme Court in Swiss Ribbons
Pvt. Ltd. & Anr. Vs. Union of India & Ors. - Writ Petition (Civil)
No.99 of 2019 held 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 from a
corporate death by liquidation’.
11. The aforesaid judgment makes it clear that even during the
period of Liquidation, for the purpose of Section 230 to 232 of the
Companies Act, the ‘Corporate Debtor’ is to be saved from its own
management, meaning thereby the Promoters, who are ineligible
under Section 29A, are not entitled to file application for Compromise
and Arrangement in their favour under Section 230 to 232 of the
Companies Act. Proviso to Section 35(f) prohibits the Liquidator to
sell the immovable and movable property or actionable claims of the
‘Corporate Debtor’ in Liquidation to any person who is not eligible
to be a Resolution Applicant, quoted below: -
“35. Powers and duties of Liquidator.-(1) Subject to the directions
of the Adjudicating Authority, the liquidator shall have the following
powers and duties,
namely:—
xxx xxx xxx
[2021] 3 S.C.R. 137ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
(f) subject to section 52, to sell the immovable and movable property
and actionable claims of the corporate debtor in liquidation by public
auction or private contract, with power to transfer such property to
any person or body corporate, or to sell the same in parcels in such
manner as may be specified.
Provided that the liquidator shall not sell the immovable and movable
property or actionable claims of the corporate debtor in liquidation to
any person who is not eligible to be a resolution applicant.”
12. From the aforesaid provision, it is clear that the Promoter,
if ineligible under Section 29A cannot make an application for
Compromise and Arrangement for taking back the immovable and
movable property or actionable claims of the ‘Corporate Debtor’.”
(emphasis in original)
9. The judgment and order of the NCLAT is the subject of the appeal.
A.2 Civil Appeal 2719 of 2020
14
10. This appeal has been filed for assailing an order dated 19 December
2019 of the NCLAT in which it relied on the judgment dated 24
October 2019 impugned in the earlier appeal, to hold that an individual
ineligible for proposing a resolution plan under Section 29A of the
IBC, is also ineligible to propose a scheme of compromise and
arrangement under Section 230 of the Act of 2013.
11. The appellant - Mr Kunwer Sachdev - was the promoter and
director (since suspended) of Su-Kam Power Systems Limited
15
. An
application
16
under Section 7 of the IBC was filed by one of the financial
creditors of Su-Kam, which was admitted by the NCLT through its
order dated 5 April 2018. The CIRP was initiated against Su-Kam.
12. When the RP invited applications for resolution plans for Su-Kam, Mr
Kunwar Sachdev submitted a plan along with Phoenix ARC Private
Limited on 15 November 2018. However, Mr Kunwar Sachdev was
informed by an email dated 27 December 2018 issued by the RP,
that the CoC had found him to be ineligible under Section 29A(h) of
the IBC and consequently annulled his resolution plan.
14 “Second Appeal”
15 “Su-Kam”
16 CP (IB)/540 (PB)/2017)
138 [2021] 3 S.C.R.SUPREME COURT REPORTS
13. This decision was challenged by filing an application
17
before the
NCLT. However, this was dismissed by the NCLT through its order
dated 2 April 2019. This order was not challenged.
14. In the interim, due to the absence of any other resolution plan, the
NCLT passed an order dated 3 April 2019, under Section 34(1)
of the IBC, directing the liquidation of Su-Kam and appointing a
Liquidator. The appointment of the Liquidator was challenged before
the NCLAT in an appeal
18
, which was disposed of by an order dated
29 April 2019 upholding the appointment of the Liquidator. The
Liquidator was also directed to accept applications for schemes
of compromise and arrangement under Sections 230 to 232 of
the Act of 2013.
15. When the Liquidator invited expressions of interest for submitting
schemes of compromise and arrangement, Mr Kunwar Sachdev
again expressed his interest. Emails were exchanged between the
Liquidator and Mr Kunwar Sachdev, during the course of which
Mr Kunwar Sachdev was invited to present his plan to the lenders
of Su-Kam. However, before this could materialise, Mr Kunwar
Sachdev was informed by the Liquidator through an email dated
19 September 2019, that he was ineligible to propose a scheme
under Section 230 of the Act of 2013 in view of his ineligibility under
Section 29A(h) of the IBC.
16. Mr Kunwar Sachdev challenged this decision in an application
19
filed
before the NCLT, which was dismissed by an order dated 31 October
2019 relying on the judgment dated 24 October 2019 impugned in
the earlier appeal, and on the basis of Section 29A and Section
35(1)(f) of the IBC.
17. Mr Kunwar Sachdev then filed an appeal
20
against this order dated
31 October 2019 before the NCLAT, which dismissed it by an order
dated 19 December 2019. Mr Kunwar Sachdev now comes before
this Court in appeal.
17 CA. 58(PB)/2019
18 Company Appeal (AT) (Ins) No.451 of 2019
19 CA-2335(PB)/2019
20 Company Appeal (AT) (Insolvency) No. 1498 of 2019
[2021] 3 S.C.R. 139ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
A.3 Liquidation Process Regulations, 2016
18. Before averting to Writ Petition (Civil) No 269 of 2020, it is important
to first understand the controversy surrounding the Insolvency and
Bankruptcy Board of India (Liquidation Process) Regulations, 2016
21
.
19. The Liquidation Process Regulations have been issued by the
Insolvency and Bankruptcy Board of India
22
, constituted under Part
IV of the IBC, in exercise of the powers conferred by Sections 5,
33, 34, 35, 37, 38, 39, 40, 41, 43, 45, 49, 50, 51, 52, 54, 196 and
208 read with Section 240 of the IBC.
20. The Liquidation Process Regulations were amended by the IBBI by
a notification
23
dated 25 July 2019, which inserted Regulation 2B.
Sub-section (1) of Regulation 2B provides that a compromise or
arrangement proposed under Section 230 of the Act of 2013 shall
have to be completed within 90 days of the order of liquidation issued
under sub-sections (1) and (4) of Section 33 of the IBC. Further,
Sub-section (2) provides that the time taken in a compromise or
arrangement, not exceeding 90 days, shall not be included within
the liquidation period. Finally, Sub-section (3) provides that any cost
which is incurred by the Liquidator in relation to the compromise
or arrangement shall be borne by the corporate debtor, if such
compromise or arrangement is sanctioned by the NCLT under
Section 230(6). However, a proviso to Sub-section (3) notes that if
such compromise or arrangement is not sanctioned by the NCLT
under Section 230(6), the cost shall be borne by the parties who
proposed the compromise or arrangement.
21. Regulation 2B was amended by a notification
24
dated 6 January 2020,
by which a proviso was added to Sub-section (1) of Regulation 2B,
which provides that a party ineligible to propose a resolution plan
under the IBC cannot be a party to a compromise or arrangement.
Regulation 2B, in its present form, reads as follows:
21 “Liquidation Process Regulations”
22 “IBBI”
23 Noti. No. IBBI/2019-20/GN/REG047
24 Noti. No. IBBI/2019-20/GN/REG053
140 [2021] 3 S.C.R.SUPREME COURT REPORTS
“2-B. Compromise or arrangement.—(1) Where a compromise or
arrangement is proposed under Section 230 of the Companies Act,
2013 (18 of 2013), it shall be completed within ninety days of the
order of liquidation under sub-sections (1) and (4) of Section 33:
Provided that a person, who is not eligible under the Code
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.
(2) The time taken on compromise or arrangement, not exceeding
ninety days, shall not be included in the liquidation period.
(3) Any cost incurred by the liquidator in relation to compromise or
arrangement shall be borne by the corporate debtor, where such
compromise or arrangement is sanctioned by the Tribunal under
sub-section (6) of Section 230:
Provided that such cost shall be borne by the parties who proposed
compromise or arrangement, where such compromise or arrangement
is not sanctioned by the Tribunal under sub-section (6) of Section 230.”
(emphasis supplied)
A.4 Article 32 Petition
22. Writ Petition (Civil) No 269 of 2020 has been filed by Mr Arun Kumar
Jagatramka, also the appellant in the First Appeal, assailing the
notifications dated 25 July 2019 and 6 January 2020 issued by the
IBBI, through which it inserted Regulation 2B into the Liquidation
Process Regulations, and subsequently amended it. As the petitioner,
he contends that Regulation 2B is ultra vires the IBC and the Act of
2013, and also violates Articles 14, 19 and 21 of the Constitution.
The prayer in the writ petition has been extracted below:
“In the premises set forth above, the Petitioner prays that this Hon’ble
Court may be pleased to issue:
a. Writ, Order or Direction more particularly in the nature of WRIT OF
DECLARATION declaring that the provisions of Notifications dated
25.07.2019 and 06.01.2020 issued by the Insolvency and Bankruptcy
Board of India are ultra vires the Insolvency and Bankruptcy Code,
2016 as well as the Companies Act, 2013 and violative of Article 14,
19, 21 of the Constitution of India.”
[2021] 3 S.C.R. 141ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
B Issues
23. Having detailed the factual background of these petitions, we shall
now turn to the issues before this Court and the submissions of
counsels.
24. The NCLAT formulated two principal issues in the first of its judgments
in appeal:
“(i) Whether in a liquidation proceeding under Insolvency and
Bankruptcy Code, 2016 (hereinafter referred to as the ‘l&B
Code’)the Scheme for Compromise and Arrangement can be
made in terms of Sections 230 to 232 of the Companies Act;
(ii) If so permissible, whether the Promoter is eligible to file application
for Compromise and Arrangement, while he is ineligible under
Section 29A of the I&B to submit a ‘Resolution Plan’.”
25. The first of the above issues has been answered in the affirmative
by the NCLAT, to which, as Mr Sandeep Bajaj, learned Counsel for
the appellant noted, there is no challenge. The real bone of dispute
relates to the second issue. In the submission of Mr Sandeep Bajaj,
what the NCLAT determined while addressing itself to the issue in
dispute is whether the ineligibility under Section 29A of the IBC can
be read into the provisions of Section 230 of the Act of 2013. In
essence, Mr Bajaj’s approach to the issue is that a disqualification
which is not provided by the legislature cannot be introduced by a
judicial determination. In the present case, he submitted, Section
29A does not expressly provide that it extends to Section 230 of the
Act of 2013. Section 230, in his submission, is a ‘different section
in different enactment’ to which the ineligibility under Section 29A
of the IBC cannot be attracted.
26. Mr Amit Sibal, learned Senior Counsel appearing for the respondent
in the Second Appeal, on the other hand, submitted that the correct
question to pose is whether a person who is ineligible under Section
29A of the IBC is permitted to propose a scheme for revival under
Section 230 of the Act of 2013 at the stage of liquidation either
themselves or in concert with others.
27. The nuanced manner in which the contesting sides have prefaced
their submissions is indicative of the broad nature of the contest. On
142 [2021] 3 S.C.R.SUPREME COURT REPORTS
one hand, Mr Bajaj submits that the ineligibility under Section 29A of
the IBC attaches to the proceedings under the IBC alone, involving
the submission of a resolution plan. On the other hand, what Mr
Sibal urges is that when an order of liquidation has been passed
under and in pursuance of proceedings which were initiated under
the IBC, Section 230 of the Act of 2013 expressly contemplates that
the liquidator appointed under the IBC may move the NCLT where
a compromise or arrangement is proposed. Hence, the proposal
for a compromise or arrangement under Section 230, where a
company is in liquidation under the IBC, is in continuation of that
liquidation process. Hence, according to Mr Sibal, a person who is
ineligible under Section 29A cannot propose a scheme for revival
under Section 230.
C Submissions
28. Having thus elucidated the battle lines of legal conflict, we proceed
to enumerate the submissions.
29. Mr Sandeep Bajaj, learned Counsel appearing on behalf of the
appellant in the First Appeal and the Petition under Article 32
submitted that:
(i) Chapter II of the IBC indicates that the CIRP can be invoked
in three modes:
(a) By a financial creditor under Section 7;
(b) By an operational creditor under Section 9; and
(c) By a corporate debtor under Section 10.
(ii) The IBC and its regulations indicate that there is a clear
distinction between:
(a) the settlement mechanism which allows for a settlement
upon which the corporate debtor would stand restored to
the promoter together with all its assets and liabilities; and
(b) the resolution mechanism under which, upon the
acceptance of a resolution plan, the company moves over
to the control of the acquirer on a clean slate for a fixed
consideration, consequent to the provisions of Section 31;
[2021] 3 S.C.R. 143ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
(iii) Section 29A is a part of the resolution mechanism, the object
and purpose of which is to prevent a back-door entry to the
promoter who should not be allowed to have advantage of
their own wrong;
(iv) Though the appellant falls in the prohibited category under
Section 29A, the purpose of the prohibition is to prevent the
promoter from submitting a resolution plan with reference to
the provisions of Sections 30 and 31 of the IBC;
(v) Chapter III of the IBC, commencing with Section 33, deals with
the liquidation process and Regulation 32 of the Liquidation
Process Regulations deals with “sale of assets etc. by the
liquidator”. In the course of the liquidation under Chapter III,
the liquidation estate is to be formed under Section 36 and the
sale under Regulation 32 is an intrinsic part of the liquidation
estate. The consequence is that acquirer begins on a clean
slate. The ineligibility under Section 29A which attaches for
the purpose of Chapter II, in the context of a resolution plan,
has been extended under Section 35(1)(f) to Chapter III on the
basis of the above rationale, i.e., that the liquidator shall not sell
the moveable or immoveable property of the corporate debtor
or its actionable claims in liquidation to any person who is not
eligible to be a resolution applicant;
(vi) Rule 8 of the Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016 contemplates that the NCLT,
in its role as the Adjudicating Authority, may permit withdrawal
of an application by the financial creditor, operational creditor or
corporate applicant on a request made by the applicant before
its admission. This is indicative of the position that the NCLAT
does not have an inherent power to allow for withdrawal of the
application after admission;
(vii) Section 12-A was inserted in the IBC by Amending Act 26 of
2018 with retrospective effect from 6 June 2018 so as to permit
the NCLT to allow the withdrawal of an application which has
been admitted under Sections 7, 9 or 10 on an application
made by the applicant, with the approval of ninety per cent of a
voting share of the CoC in such a manner as may be specified;
144 [2021] 3 S.C.R.SUPREME COURT REPORTS
(viii) Regulation 30-A of the Insolvency and Bankruptcy Board of
India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016 (which was inserted on 3 July 2018) allowed
for the withdrawal under Section 12-A before the issuance of an
invitation for expression of interest under Regulation 36-A. In
the decision of this Court in Swiss Ribbons Private Limited v.
Union of India
25
which was rendered on 25 January 2019, the
Court held that a withdrawal of an application can be permitted
between admission of the application and the constitution of
the CoC. Following up on this, Regulation 30-A was substituted
on 25 July 2019 to allow an application for withdrawal under
Section 12-A both before and after the constitution of the CoC.
However, where the application is made after the constitution of
the CoC (under Regulation 30-A(1)(b)), and after the issuance
of the invitation for expression of interest, the reasons justifying
the withdrawal are required to be stated;
(ix) The decision in Brilliant Alloys (P) Ltd. v. S Rajagopal
26
would indicate that a withdrawal can be permitted even after the
expression of interest, as a consequence of which Regulation
30-A is directory in nature;
(x) The consequence of a withdrawal of the application under
Sections 7, 9 or 10 is that the corporate debtor stands restored
to the promoter. As such, Section 29A does not operate as an
ineligibility on the settlement mechanism. On the withdrawal
of the application the corporate debtor goes back to the same
promoter, even if they are ineligible under Section 29A for the
submission of the resolution plan;
(xi) The ineligibility under Section 29A, which forms a part of Chapter
II of the IBC, is only during the resolution process;
(xii) The rationale for imposing an ineligibility under Section 29A in
the resolution process is that the successful resolution applicant
under Section 31 of the IBC obtains the company on a clean
slate, as indicated in the decision of this Court in Committee
25 (2019) 4 SCC 17; herein, referred to as “Swiss Ribbons ”
26 2018 SCC OnLine SC 3154; hereinafter, referred to as “Brilliant Alloys”
[2021] 3 S.C.R. 145ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
of Creditors of Essar Steel India Limited v. Satish Kumar
Gupta
27
. This benefit is not available where an application is
simpliciter withdrawn under Section 12-A;
(xiii) Section 230 of the Act of 2013 is a part of the settlement
mechanism and is at par with the provisions of Section 12-A. The
impact of a compromise or arrangement is also that company
is restored to the promoters with all its liabilities. While Section
12-A of the IBC permits withdrawal of an application, Sections
230 and 230-A of the Act of 2013 envisage a compromise or
arrangement. As such, they both form a part of the settlement
mechanism and are not part of the resolution mechanism, to
which alone the ineligibility under Section 29A applies. Hence,
this ineligibility cannot now be engrafted into Section 230;
(xiv) Section 230 was amended on 15 November 2016 and under
Sub-Section (6), the compromise or arrangement becomes
binding if 3/4
th
in value of the creditors or class of creditors or
members agree to it, and if it is sanctioned by the NCLT. The
compromise or arrangement then becomes binding on the
liquidator appointed under the IBC as a whole. The provisions
of Section 230 are, however, not restricted to liquidation. They
are not regulated by the IBC. Section 230 operates in an area
independent of the IBC. Following the amendment of Section
230(1) on 15 November 2016, the application for a compromise
can also be proposed by the liquidator appointed under the IBC.
However, the right of the liquidator to make an application under
Section 230(1) is in addition to the others enumerated therein
and not exclusive, in view of the principle which was laid down
by this Court while construing the corresponding provisions of
Section 391 of the Companies Act, 1956
28
;
(xv) The discussion papers circulated by the IBBI in April and
November 2019 clearly demonstrate that IBBI was aware of the
fact that the ineligibility which attaches to the resolution process
under Section 29A will not attach to Section 230 of the Act of
2013. The proviso to Regulation 2B was notified by the IBBI on 6
27 (2020) 8 SCC 531
28 the “Act of 1956 ”
146 [2021] 3 S.C.R.SUPREME COURT REPORTS
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 to such compromise
or arrangement. Regulation 2B is ultra vires the provisions of
Section 230 of the Act of 2013. IBBI had no statutory authority
to make the Regulation 2B, through which it has effectively
provided a disqualification under the Act of 2013, even though
the mandate of IBBI is confined only to the IBC; and
(xvi) Regulation 2B is violative of Articles 14, 19 and 21 of the
Constitution as it seeks to import an ineligibility under the
provisions of the IBC to a dissimilar provision in the Act of 2013.
Moreover, when ineligibility is not attracted under Section 12-A
of the IBC, imposing this ineligibility under Section 230 of the
Act of 2013 is arbitrary.
30. Adopting the submissions which were urged by Mr Sandeep Bajaj,
Mr Shiv Shankar Banerjee, learned Counsel appearing on behalf of
the appellant in the Second Appeal, submitted that:
(i) A complete procedure has been stipulated under the provisions
of the IBC for liquidation;
(ii) Where a sale of the assets of the corporate debtor or sale of
the business of the corporate debtor takes place in the course
of the liquidation, Section 35(1)(f) of the IBC stipulates that
the assets cannot be sold to a person who is ineligible under
Section 29A. The object is to ensure that liquidation should
not be used to allow the promoter to get the assets free from
encumbrances;
(iii) In contrast to a successful resolution applicant under Chapter II
or the person who benefits from the sale of assets in liquidation
under Chapter III of the IBC, the person who proposes a
compromise or arrangement under Section 230 under the Act
of 2013 does not have the benefit of acquiring the company
free of encumbrances. There is thus no reason or justification to
exclude the promoter from invoking the provisions of Section 230;
(iv) Section 230(1) makes a reference to a liquidator appointed under
the IBC because when the provision of Sections 7, 9 or 10 have
[2021] 3 S.C.R. 147ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
been invoked, and an order of admission has been passed,
liquidation, if required, will take place under the provisions of
Section 35 of the IBC;
(v) The mischief which was sought to be remedied by the adoption
of Section 29A is restricted to the resolution process, its object
being that persons should not take advantage of their own wrong.
It is justifiable if a defaulter is excluded from the resolution
process which may result in the creditors taking a haircut of
their outstanding claims. Moreover, a successful resolution
applicant begins on a clean slate. In contrast, under Section
230, the scheme has to be sanctioned by the NCLT only upon
which it will pass muster; and
(vi) The insertion of the proviso in Regulation 2B of the Liquidation
Process Regulations is a clear indicator of the fact that a
disqualification or ineligibility under Section 29A is not a part
of Section 230 of the Act of 2013.
31. The above submissions have been contested by Mr Amit Sibal,
learned Senior Counsel appearing on behalf of the respondents in
the Second Appeal. Learned Senior Counsel submitted that:
(i) A proposal under Section 230 of the Act of 2013 need not result
in the revival of the company. The proposal may apply only to a
class of creditors or shareholders. Even prior to its amendment,
this Court had held that additional conditions apply when a
plan under the erstwhile provisions of Section 391 of the Act of
1956 is propounded at the time of liquidation of the company;
(ii) Section 29A has several ineligibilities apart from those that
attach to promoters. To allow a person who is ineligible under
Section 29A from submitting a compromise or arrangement
under Section 230 at the liquidation stage is contrary to the
letter and spirit of the IBC;
(iii) The NCLT while dealing with an application for a compromise
or arrangement under Section 230 of the Act of 2013, in respect
of a company which is being liquidated under the IBC, performs
a dual role: firstly, as an Adjudicating Authority under the IBC
and as a Tribunal under the Act of 2013. Therefore, it can insist
on adherence to additional conditions namely that:
148 [2021] 3 S.C.R.SUPREME COURT REPORTS
(a) The proposed compromise or arrangement must result in
a revival of the company; and
(b) The compromise or arrangement cannot be proposed by
a person who is barred under Section 29A;
(iv) When the IBC was originally enacted there was no bar of the
nature found in Section 29A on who can propose a resolution
plan either pre or post liquidation;
(v) The ineligibility under Section 29A and Section 35(1)(f) was
introduced by a legislative amendment on 23 November 2017
29
,
both at the pre and post liquidation stages;
(vi) The purpose of the disqualification is to ensure a sustainable
revival, which means that those responsible for the state of affairs
of a company and other persons regarded by the legislature as
undesirable should be excluded from the process;
(vii) Persons who are ineligible under Section 29A or Section 35(1)
(f) cannot seek an entry:
(a) at the CIRP stage; or
(b) under Section 230 of the Act of 2013; or
(c) by purchasing the assets during liquidation.
(viii) Section 29A does not apply only to conduct in relation to the
corporate debtor, but in relation to other companies as well;
(ix) The ineligibility engrafted in Section 29A extends to Chapter
III by virtue of the provision of Section 35(1)(f). This must be
read together with Regulation 32 of the Liquidation Process
Regulations. Regulation 32 provides six modes of realization
of assets, out of which four involve the sale of assets and two
involve the transfer of the corporate debtor or its business as
a ‘going concern’;
(x) Regulation 44(1), through its proviso, allows for an additional
period of ninety days for the liquidation process where the sale
is through Regulation 32-A(1) so as to encourage a revival of
the company;
29 “Act 8 of 2018 ”
[2021] 3 S.C.R. 149ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
(xi) There is no reference in the body of the IBC to a scheme of
compromise under Section 230. Section 230 (especially sub-
Sections (1) and (6)) indicate that:
(a) a compromise can be with a sub-set of creditors;
(b) liquidation is one scenario in which Section 230 can be
invoked; and
(c) a compromise with only a class of creditors will bind only
that class under Section 230(c);
(xii) While construing the corresponding provisions of erstwhile
Section 391 of the Act of 1956, this Court held in Meghal
Homes Pvt. Ltd. v Shree Niwas Girni K. K. Samiti
30
that
where a scheme of compromise and arrangement is proposed
in respect of the company in liquidation, additional requirements
need to be established, namely that the scheme must be for
the revival of company. The impact of a scheme under Section
391, where the company is in liquidation, is that the proposers
of the scheme enter into the management with the debt having
been resolved. This makes the scheme of compromise or
arrangement under Section 230 qualitatively different from a
simpliciter withdrawal of an application under Section 12-A of
the IBC. Section 12-A does not incorporate any requirement
for the revival of the company;
(xiii) The IBC provides for three modes of revival:
(a) the CIRP under Chapter II;
(b) sale of a company in liquidation as a going concern (read
with Regulation 32(e) and (f)); and
(c) a scheme of compromise or arrangement under Section
230 of the Act of 2013, following upon an order for
liquidation being passed under Chapter III of the IBC;
The prohibition or ineligibility which applies in (a) and (b) must
necessarily attach to (c) as well. When a plan for compromise
or arrangement is proposed at the liquidation stage of IBC
30 (2007) 7 SCC 753; herein, referred to as “Meghal Homes”
150 [2021] 3 S.C.R.SUPREME COURT REPORTS
under Section 230 of the Act of 2013, it must satisfy the rigors
of the IBC. Hence, a person who is ineligible under Section
29A cannot submit a plan under Section 230 of the Act of 2013;
(xiv) In construing the provisions of Sections 29A and 35(1)(f) of the
IBC, notice must be taken of the fact that the ineligibility was
made applicable both to the resolution stage as well as the
stage of liquidation. In interpreting these provisions, the purpose
and object of the amendment must be borne in mind, which is
that a scheme of revival cannot be proposed by a person who
stands disqualified under Section 29A;
(xv) The proposal of a compromise or arrangement under Section
230 in a situation where the company is in liquidation under the
IBC is a facet of the liquidation process under the IBC. Section
230 was amended to include a liquidator appointed under the
IBC. The statutory scheme indicates that:
(a) A liquidation under the IBC follows upon the entire gamut
of proceedings under the IBC;
(b) Section 230 of the Act of 2013 provides one of the modes
of revival in the liquidation process; and
(c) Other activities of the liquidator do not cease while inviting
schemes under Section 230. The steps required to be
taken by the liquidator in liquidation include a compromise
or arrangement under Section 230. It is in this context that
the NCLT performs a dual role - that of an Adjudicating
Authority in the matter of liquidation under the IBC as
well as of a Tribunal for a scheme of compromise and
arrangement under the Act of 2013;
(xvi) The fundamental postulate of the IBC is that a corporate debtor
has to be protected from its management and corporate debt.
Hence, it would be anomalous if a compromise or arrangement
can be entertained from a person who is responsible for the
state of affairs of the corporate debtor;
(xvii) Where a company is in liquidation under the provisions of the
IBC, the submission of a compromise or arrangement under
Section 230 has distinct features of commonality with a resolution
plan namely:
[2021] 3 S.C.R. 151ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
(a) The object is to revive the company; and
(b) Once officially approved, it assumes a binding character;
These intrinsic elements of revival and of the binding nature
permeate both a resolution plan on the one hand and a
compromise or arrangement on the other, which is arrived at
in the course of liquidation;
(xviii) The introduction of the proviso to Regulation 2(B) of the
Liquidation Process Regulations with effect from 6 January
2020 is only by way of a clarification;
(xix) Dehors the provisions of the IBC, the rigors of the IBC will not
apply to a proceeding under Section 230 of the Act of 2013.
In other words, the ineligibility under Sections 29A and 35(1)(f)
applies only to a situation where a corporate debtor has come
within the purview of the IBC and has been taken into liquidation
under Chapter III. It is only where a compromise or arrangement
under Section 230 of the Act of 2013 is proposed in respect of
a company which is undergoing liquidation under the IBC that
the rigors of Section 29A and 35(1)(f) would stand attracted;
(xx) An absurdity will result if persons found to be derelict or guilty
of malfeasance, who are barred from:
(a) submitting a resolution plan;
(b) obtaining a sale of assets in liquidation; and
(c) obtaining a sale of the company as a going concern.
can still propose a compromise under Section 230 of the Act of
2013. It is a settled principle of law that an interpretation which
leads to absurdity must be avoided;
(xxi) There is a fallacy in equating the provisions of Section 230
of the Act of 2013 with an application for withdrawal under
Section 12-A of the IBC. Section 12-A is not intended to be the
culmination of the resolution process but is at the inception.
The withdrawal by an applicant leads to a status quo ante in
respect of liabilities of the corporate debtor and does not require
that the defaults in respect of all creditors are brought to an
end. In contrast:
152 [2021] 3 S.C.R.SUPREME COURT REPORTS
(a) a resolution plan under Section 31 of the IBC (as well as
the scheme under Section 230 of the Act of 2013) binds
all the stakeholders;
(b) results in a clean slate unlike Section 12-A; and
(c) constitutes a culmination of the resolution plan.
As distinct from the provisions of Section 31 of the IBC and
Section 230 of the Act of 2013, a withdrawal under Section
12-A restores the status quo ante and is hence not concerned
with ineligibilities under Section 29A; and
(xxii) Section 240 of the IBC enunciates the power to make regulations
to carry out the provisions of the Code. The insertion of the
proviso to Regulation 2(B) is valid because:
(a) the amendment is consistent with the IBC and carries out
its provisions; and
(b) it is clarificatory in nature since even in its absence, the
ineligibility under Section 29A would govern.
32. In summing up, Mr Sibal urged that:
(i) Where a company is in liquidation under Chapter III of the IBC, a
proposed scheme of compromise or arrangement under Section
230 of the Act of 2013 must comply with the requirements of
the IBC;
(ii) The specific requirements which must be fulfilled under (i)
above are that:
(a) the scheme must be for the revival of the company; and
(b) it must not be proposed by a person who is ineligible under
Section 29A of the IBC;
(iii) The above requirements are IBC specific and not inconsistent
with the provisions of Section 230 of the Act of 2013;
(iv) Sections 29A and 35(1)(f) of the IBC prohibit a certain category
of persons from proposing a revival of the company in the
course of the CIRP, liquidation process and in purchasing the
assets in the course of liquidation. To make an exception in
[2021] 3 S.C.R. 153ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
a plan for revival under Section 230 of the Act of 2013 in the
context of a scheme of compromise or arrangement will defeat
the object and intent of the amendment to the IBC and lead
to an absurdity. This would perpetrate the mischief which was
sought to be obviated;
(v) When a company is in liquidation under the IBC, a scheme
proposed under Section 230 is a facet of the liquidation process
and the same rationale which permeates the liquidation process
must also govern it; and
(vi) Section 12-A stands on a completely different footing. It provides
for a withdrawal at the inception of the CIRP and is not a
culmination of a resolution process. Nor does a Section 12-A
withdrawal bind all stakeholders.
33. Mr Gopal Jain, learned Senior Counsel appearing for the respondents
in the First Appeal, has urged submissions along the same lines as
Mr Amit Sibal. His submissions are summarized below:
(i) The commencement or the initiation process attracting the IBC
is an application under Sections 7, 9 or 10;
(ii) In the present case, an application was filed under Section
10 as a consequence of which the case has to be analyzed
through the prism of the IBC;
(iii) The IBC is an economic legislation and its key objectives are
to ensure:
(a) good corporate governance;
(b) control deviant behavior;
(c) protect the integrity of the resolution process;
(d) enhance commercial morality; and
(e) foster respect for the rule of law.
The IBC is premised on the principle that there is a significant
element of public interest in facilitating a creditor-centric regime
for achieving economic growth. Ensuring that resolution plans
are submitted by credible persons is intrinsic to the scheme
of the IBC. Speed is of the essence. The IBC has sought to
154 [2021] 3 S.C.R.SUPREME COURT REPORTS
convert a legal regime which was a debtor’s paradise into a
regime governed by corporate justness. The regime under the
IBC is dynamic, which is reflected by eight amendments which
took place between November 2017 and September 2020;
(iv) The basic principle is that an entity which is barred under Section
29A and Section 35(1)(f) should not be in control of the assets of
the corporate debtor. The objective is that defaulting promoters:
(a) should not be in the driver’s seat; and
(b) should be kept at arm’s length;
(v) In order to achieve the above objectives, the Parliament enacted
a simultaneous amendment of both Section 29A and Section
35(1)(f) to maintain a level playing field by comprehensively
catering to all situations relating to defaulting or barred promoters;
(vi) In interpreting the IBC, legal sanctity and clarity are of utmost
importance. But for Section 29A, promoters would have got
back into management after securing a haircut to lenders in
the course of the resolution plans. Section 29A which applies
to the resolution process and Section 35(1)(f) which applies to
the liquidation process were intended to plug a loophole. To
accept the submissions of the appellants would be creating a
new loophole. Section 29A is in the nature of a see-through
provision. The submissions of the appellants will in fact scare
away genuine creditors and derail the process; and
(vii) According to Section 238 of the IBC, in case of any inconsistency
between the provisions of the IBC and any other law in force,
the provisions of the IBC are to have an overriding effect.
34. Mr Tushar Mehta, learned Solicitor of General of India, defended the
validity of Regulation 2B, more specifically the proviso. The learned
Solicitor General submitted that:
(i) The trigger is the liquidation resulting from the operation of the
provisions of Section 33 of the IBC;
(ii) Regulation 2B facilitates an additional period of ninety days for
a compromise under Section 230 of the Act of 2013 because
the entire process is time specific;
[2021] 3 S.C.R. 155ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
(iii) Even if the legal position is assessed independent of Regulation
2B, the same embargo as contained in Section 29A and Section
35(1)(f) would apply to a compromise or arrangement proposed
under Section 230 of the Act of 2013 in respect of a company
which is undergoing liquidation under Chapter III of the IBC;
(iv) Regulation 2B is essentially clarificatory;
(v) The basis of Regulation 2B is the same as Sections 29A and
35(1)(f), which is that a person who is the cause of the problem
either by a design or default cannot be a part of the process
solution;
(vi) The IBC is a beneficial legislation. Prior to the enactment of
the IBC:
(a) individual creditors had individual remedies; and
(b) the debtor would remain in possession of the company
and its assets.
With the introduction of the IBC, there has been a paradigm
shift in that:
(a) under the new legal regime there is a collective effort of
all creditors even if at the behest of one of them;
(b) the creditor is in control instead of the debtor in possession;
and
(c) revival is the soul of the IBC;
(vii) Sections 196 and 240 of the IBC reflect a specific conferment of
power on the IBBI to frame regulations subject to the stipulation
that:
(i) they are not inconsistent with the provisions of the IBC; and
(ii) they carry out the purposes of the IBC.
Both these conditions are fulfilled by Regulation 2(B);
(viii) A regulation which is framed under a statute in exercise of the
authority which is conferred on the delegate can be challenged
on the ground of being:
156 [2021] 3 S.C.R.SUPREME COURT REPORTS
(a) ultra vires the parent statute; or
(b) being contrary to the provisions of Part III of the Constitution;
To suffer from unreasonableness, a regulation must be held
to be manifestly arbitrary. Regulation 2(B) is consistent with
the object and purpose of the IBC; and does not suffer from
manifest arbitrariness; and
(ix) Sections 29A and 35(1)(f) apply to liquidation pursuant to the
IBC. The principle of Section 29A stands absorbed in the hybrid
process of compromise during liquidation under the IBC, by
way of a device of incorporation by reference.
35. Mr Balbir Singh, learned Additional Solicitor General, has addressed
submissions also along the above lines.
D Analysis of the Legal Framework
36. Having narrated the submissions advanced by both sides, we now
turn to the legal position and the interplay between the proposal of
a scheme of compromise and arrangement under Section 230 of
the Act of 2013 and liquidation proceedings initiated under Chapter
III of the IBC.
D.1 Ineligibility during the resolution process and liquidation
37. Section 29A of the IBC was introduced with effect from 23 November
2017 by Act 8 of 2018. The birth of the provision is an event attributable
to the experience which was gained from the actual working of the
provisions of the statute since it was published in the Gazette of
India on 28 May 2016. The provisions of the IBC were progressively
brought into force thereafter.
The foundation
38. The IBC is a law which consolidated and amended existing legislation
relating to re-organisation and insolvency resolution of corporate
persons, partnerships and individuals. The long title to the legislation
indicates the specific objects, which it is intended to facilitate. These
objects include:
(i) A time bound process of re-organization and insolvency
resolution;
[2021] 3 S.C.R. 157ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
(ii) Maximization of the value of assets;
(iii) Promoting entrepreneurship;
(iv) Facilitating the availability of credit; and
(v) Balancing the interests of all stakeholders.
39. Some of the key drawbacks of the legal regime, as it existed prior
to the enactment of the IBC, were:
(i) The absence of a single legislation governing insolvency and
bankruptcy;
(ii) A multiplicity of laws governing insolvency and bankruptcy of
corporate entities;
(iii) The existence of multiple foraestablished to deal with the
enforcement of diverse legislative provisions; and
(iv) The complexity caused by a maze of statutes resulting in
inadequate, ineffective and delayed resolutions, occasioned
by the (then) existing framework.
These inadequacies were noticed in the Statement of Objects
and Reasons accompanying the introduction of the Bill. The IBC
reflects a fundamental change in the erstwhile legal regime. A
timely resolution of corporate insolvency was conceived as an
instrument to support the development of credit markets, encourage
entrepreneurship, enhance the ease of doing business and provide
an environment conducive to investment, setting the economy on
the path to growth and development. In resolving some of the
complex issues which arise under the new legal regime envisaged
under the IBC, it then becomes necessary to vacuum the cobwebs
of the past. Interpreting the IBC in a manner which would facilitate
the salutary objects which it is intended to achieve requires all
stakeholders to shed concepts and notions associated with the
earlier legal regime, which was largely a debtor’s paradise. The
earlier regime was one in which the debtor would largely remain in
possession of the company and its assets and individual creditors
were left to paddle their own canoe in headwinds controlled by
those in debt and default.
158 [2021] 3 S.C.R.SUPREME COURT REPORTS
40. The enactment of the IBC has marked a quantum change in corporate
governance and the rule of law. First and foremost, the IBC perceives
good corporate governance, respect for and adherence to the rule
of law as central to the resolution of corporate insolvencies. Second,
the IBC perceives corporate insolvency not as an isolated problem
faced by an individual business entities but places it in the context
of a framework which is founded on public interest in facilitating
economic growth by balancing diverse stakeholder interests. Third,
the IBC attributes a primacy to the business decisions taken by
creditors acting as a collective body, on the premise that the timely
resolution of corporate insolvency is necessary to ensure the
growth of credit markets and encourage investment. Fourth, in its
diverse provisions, the IBC ensures that the interests of corporate
enterprises are not conflated with the interests of their promoters;
the economic value of corporate structures is broader in content
than the partisan interests of their managements. These salutary
objectives of the IBC can be achieved if the integrity of the resolution
process is placed at the forefront. Primarily, the IBC is a legislation
aimed at re-organization and resolution of insolvencies. Liquidation
is a matter of last resort. These objectives can be achieved only
through a purposive interpretation which requires courts, while infusing
meaning and content to its provisions, to ensure that the problems
which beset the earlier regime do not enter through the backdoor
through disingenuous stratagems.
The amendments
41. On 23 November 2017, Parliament intervened through its amending
power to introduce Section 29A into the provisions of Chapter II and
Section 35(1)(f) into the provisions of Chapter III. Chapter II of the
IBC ,which enunciates provisions for the CIRP, has evolved over the
previous four years. Chapter III enunciates provisions in regard to
the liquidation process. Section 29A stipulates diverse categories of
persons who will not be eligible to submit a resolution plan.
42. By the same amending Act through which Section 29A was introduced,
Section 35(1)(f) was also amended with the introduction of a proviso.
Section 35 specifies the powers of the liquidator as well as their
duties, which are subject to the directions of the Adjudicating Authority.
Section 35(1)(f) provides as follows:
[2021] 3 S.C.R. 159ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
“35. Powers and duties of liquidator.—(1) Subject to the directions
of the Adjudicating Authority, the liquidator shall have the following
powers and duties, namely:—
...
(f) subject to section 52, to sell the immovable and movable property
and actionable claims of the corporate debtor in liquidation by public
auction or private contract, with power to transfer such property to
any person or body corporate, or to sell the same in parcels in such
manner as may be specified:
Provided that the liquidator shall not sell the immovable and movable
property or actionable claims of the corporate debtor in liquidation to
any person who is not eligible to be a resolution applicant.”
43. The Statement of Objects and Reasons accompanying the introduction
of the Bill proposing the amendment dated 23 November 2017,
elucidates the purpose of introducing the new provisions:
“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 beseen to be
rewarded at theexpense 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.”
44. During the course of the debate in the Lok Sabha on 29 December
2017, the Finance Minister noted that the IBC had been in operation
for about a year. The new legislation had been a “learning experience”.
The Ordinance was promulgated since a large number of cases were
“already pending resolution mechanism itself” and there was a danger
160 [2021] 3 S.C.R.SUPREME COURT REPORTS
that if the amendment was not immediately brought in, persons who
were “ineligible” would have started applying as resolution applicants.
The Finance Minister in the course of his speech highlighted the
reason for the amendments when he observed as follows:
“…What do you do with promoters who are themselves responsible
for these NPAs, that is clause C. Every creditor takes his haircut
and there is an equitable distribution in the case of dissolution.
In the case of resolution also, all type of creditors may take
some haircut and the man who created the insolvency pays
a fraction of the amount and comes back into management.
Should we allow that to continue? The overwhelming view, as
expressed by the Members, is that it should not be allowed.
This was a gap which was there in the original Bill and by bringing in
29(a) we have tried to fill in that gap. That is the objective. In order
that this provision must apply to allexisting cases of resolution which
are pending, that is the case for urgency. If we had not done this,
then all such defaulters would have rejoiced because they would
have merely walked back into these companies by paying only a
fraction of these 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)
45. 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
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.”
[2021] 3 S.C.R. 161ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
46. 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 35(1)(f) are clearly referable to the ineligibility which is
set up in Section 29A.
Judicial understanding
Chitra Sharma
47. The underlying purpose of introducing Section 29A was adverted to
in a judgment of this court in Chitra Sharma v. Union of India
31
.
One of us (Justice DY Chandrachud) speaking for a Bench of 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
31 (2018) 18 SCC 575; hereinafter, referred to as “Chitra Sharma”
162 [2021] 3 S.C.R.SUPREME COURT REPORTS
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.”
(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 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.”
(emphasis supplied)
48. The Court held that “Section 29A has been enacted in the 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
49. 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 enacted”:
32 (2019) 2 SCC 1; hereinafter, referred to as “Arcelormittal”
[2021] 3 S.C.R. 163ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
“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) 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
.
Swiss Ribbons
50. 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
33 “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.”
164 [2021] 3 S.C.R.SUPREME COURT REPORTS
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 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.”
51. While adverting to the earlier decision in Chitra Sharma and
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
[2021] 3 S.C.R. 165ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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:
“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 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
52. This line of decisions, beginning with Chitra Sharma (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
166 [2021] 3 S.C.R.SUPREME COURT REPORTS
interpretation of the provisions of the IBC. (See in this context the
judgments in Phoenix ARC Private Limited v. Spade Financial
Service
34
, Ramesh Kymal v. M/s Siemens Gamesa Renewable
Power Pvt Ltd.
35
and Anuj Jain, Interim Resolution Professional
for Jaypee Infratech Limited v. Axis Bank Limited
36
.)
Sustainable revival
53. 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.
54. The prohibition which has been enacted under Section 29A 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.
The liquidator may sell-
(a) an asset on a standalone basis;
(b) the assets in a slump sale;
(c) a set of assets collectively;
(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:
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 (2020) 8 SCC 401, at paras 28.4 and 28.5
[2021] 3 S.C.R. 167ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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 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.
55. 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 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.
56. 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:
“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
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 29[one
year], he shall make an application to the Adjudicating Authority
to continue such liquidation, along with a report explaining
168 [2021] 3 S.C.R.SUPREME COURT REPORTS
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 of 2013
57. 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.
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.”
58. A compromise or arrangement under Sub-section (1) of Section 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.
59. 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.
60. 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:
[2021] 3 S.C.R. 169ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
(i) the company;
(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.
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 may be,
or, in case of a company being wound up, on the liquidator and the
contributories of the company.”
61. Under Sub-section (6) of Section 230, the comprise or arrangement
has to be agreed to by a “majority of persons representing 3/4
th
in value” of the creditors, members or a class of them. Upon the
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
62. Prior to the enforcement of the Act of 2013, the erstwhile legislation
- the Act of 1956 - contained an analogous provision in Section 391.
170 [2021] 3 S.C.R.SUPREME COURT REPORTS
63. The provisions of Section 391 came up for interpretation in a decision
of this Court in Meghal Homes (supra). Justice PK 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 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
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
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 resulting in the death of
the company by an order under Section 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 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.”
37 (1997) 1 SCC 579
[2021] 3 S.C.R. 171ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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 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.
IBC liquidation and Section 230 scheme : a statutory continuum
64. 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 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
172 [2021] 3 S.C.R.SUPREME COURT REPORTS
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 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 (6)
of Section 30; or
(ii) the resolution plan has been rejected under Section 31 for non-
compliance with the requirements of the provision.
65. Under Sub-Section (2) of Section 33, the Adjudicating Authority 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.
66. What emerges from the above discussion is that the provisions of
the IBC contain a comprehensive scheme, first, for the initiation of
the CIRP at the behest of financial creditor under Section 7 or at the
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 professional
38
in Section 17 and the constitution
38 “IRP”
[2021] 3 S.C.R. 173ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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 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.
67. 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 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 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 Dhanapal
39
. NCLAT in 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”. 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 Regulations by the IBBI so as to refer to
the process envisaged under Section 230 of the Act of 2013.
39 2019 SCC OnLine NCLAT 172; herein, referred to as “Y Shivram Prasad”
174 [2021] 3 S.C.R.SUPREME COURT REPORTS
68. 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 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 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 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 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
[2021] 3 S.C.R. 175ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
between the two statutes
40
would ensure that while on the 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.
69. The IBC has made a provision for ineligibility under Section 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 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.
70. 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
40 G.P. Singh, Principles of Statutory Interpretation (1st 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 Supp (2) SCC 654 (Sections 82 and 83 of the Forest Act, 1927 are
special provisions 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 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)”
176 [2021] 3 S.C.R.SUPREME COURT REPORTS
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 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 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.
D.3 The ‘Clean Slate’
71. 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 IBC
between November 2017 and September 2020, the ineligibility
contemplated by Section 29A and Section 35(1)(f) has not been
[2021] 3 S.C.R. 177ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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 scheme
are
(a) the company or its liquidator;
(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
178 [2021] 3 S.C.R.SUPREME COURT REPORTS
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
(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
72. Section 12A
41
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-A
43
, as it originally
stood, an application for withdrawal under Section 12-A was required
to be submitted before the issuance of an invitation for the expression
41 “12A. Withdrawal of application admitted under section 7, 9 or 10 - The 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).”
[2021] 3 S.C.R. 179ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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 CoC. This led to the
substitution of the Regulation 30-A
44
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:
(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
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 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 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).
(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.”
180 [2021] 3 S.C.R.SUPREME COURT REPORTS
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 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 allow
withdrawal. This high threshold has been explained in the 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
[2021] 3 S.C.R. 181ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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
73. 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.
74. 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 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
182 [2021] 3 S.C.R.SUPREME COURT REPORTS
which is sanctioned under Section 230 of the Act of 2013. A resolution
plan upon approval 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 Essar Steel India Limited v.
Satish Kumar Gupta
45
. 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 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)
“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 given in relation to the
debts of the corporate debtor. Far 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.””
45 (2020) 8 SCC 531
[2021] 3 S.C.R. 183ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
In the same vein, the Court observed:
“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 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 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.”
75. 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 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.
184 [2021] 3 S.C.R.SUPREME COURT REPORTS
76. 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 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 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 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.
D.4 Constitutional validity of Regulation 2B - Liquidation Process
Regulations
77. Regulation 2B(1) introduced on 25 July 2019 provides that where a
compromise or arrangement is proposed under Section 230 of 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.
IBBI discussion papers
78. 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 Companies
Act 2013. If there is a proposal for a compromise or arrangement, a
member, a creditor or the Liquidator may make an application to the
NCLT under the Compromise Act 2013 (Act) (not the Adjudicating
[2021] 3 S.C.R. 185ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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 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 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.”
79. 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:
“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
186 [2021] 3 S.C.R.SUPREME COURT REPORTS
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 29-A
should be made applicable to Section 230 of the Act of 2013 in its
subsequent discussion paper.
80. 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. 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 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 23
rd
November, 2017, while section 230 of the Act
was amended along with the enactment of the Code. There is no
explicit prohibition on persons ineligible to submit resolution plans
under section 29A from proposing compromise or arrangement made
under Section 230 of the Act, which may result in person ineligible
[2021] 3 S.C.R. 187ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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 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.
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 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.”
81. 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 Act, 2013?
g. Or, should applicability of section 230 of the companies act, 2013
during liquidation process under the Coe be reviewed?”
82. Thereafter, public comments were invited. The discussion paper
is what it professes to be – a matter for discussion in the public
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.
Section 196 of the IBC
83. 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:
188 [2021] 3 S.C.R.SUPREME COURT REPORTS
“(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:
“(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 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.
A clarificatory exercise
84. 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 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. 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
[2021] 3 S.C.R. 189ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
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 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
85. 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.
86. To begin with, we would like to take note of the observations made
by the Insolvency Law Committee in its Report of February 2020
46
.
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 under the IBC. This, the Committee noted, had led to a
46 Available at <https://ibbi.gov.in/uploads/resourcesc6cb71c9f69f66858830630da08e45b4.pdf> accessed
on 10 March 2021
190 [2021] 3 S.C.R.SUPREME COURT REPORTS
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 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.
87. 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 offer
48
.
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, 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 2017) NUS Working Paper 2017/005
available at <http://law.nus.edu.sg/wp>
[2021] 3 S.C.R. 191ARUN KUMAR JAGATRAMKA v. JINDAL STEEL AND POWER LTD.
88. Due to the ambiguity in the application of the two frameworks, 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.
89. 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 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
192 [2021] 3 S.C.R.SUPREME COURT REPORTS
authority will adjudicate on fraud, particularly during the process
resolving bankruptcy. Appeals/actions against the behaviour of the
insolvency professional are directed to the Regulator/Adjudicator.”
90. 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
and NCLAT adjudicating disputes under the IBC, going forward.
F Conclusion
91. 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 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 civil appeals and writ petition
are accordingly dismissed.
92. Pending application(s), if any, stand disposed of.
Headnotes prepared by: Nidhi Jain Result of the case:
Appeals and writ petition dismissed.
The landmark Supreme Court judgment in A. K. Kraipak & Ors. v. Union of India stands as a cornerstone of Indian administrative law, profoundly shaping the application of the Principles of Natural Justice to Administrative Proceedings. This pivotal ruling, available on CaseOn, redefined the boundaries between administrative and quasi-judicial functions, establishing that the duty to act fairly is paramount in all state actions, irrespective of their classification.
The petitioners, a group of aggrieved forest officers, brought several critical questions before the Court, which can be summarized as follows:
The primary issue was whether the principles of natural justice, traditionally applied to judicial and quasi-judicial proceedings, were also applicable to a process that the government argued was purely administrative—in this case, the selection of officers for a civil service.
The Court had to determine if the selection process was tainted by bias, given that one of the members of the Selection Board was also a candidate for selection and participated in deliberations concerning his rivals.
A key question was whether any procedural defect at the initial stage (the Selection Board) could be cured by subsequent reviews by higher authorities like the Ministry of Home Affairs and the Union Public Service Commission (U.P.S.C.).
To address these issues, the Supreme Court revisited the foundational principles governing state action and fairness.
This Latin maxim, meaning "no one should be a judge in his own cause," is a cardinal rule of natural justice. It ensures that decision-making is impartial and free from any conflict between a person's official duty and their personal interest.
The Court acknowledged that the dividing line between administrative and quasi-judicial powers was becoming increasingly thin and difficult to define. It noted that with the rise of the welfare state, administrative bodies wield immense power that can have serious consequences for individuals. Therefore, shackling the principles of fairness only to quasi-judicial bodies was no longer tenable.
The judgment emphasized that the ultimate goal of the rules of natural justice is to secure justice and prevent its miscarriage. As such, the underlying requirement is not about classifying a function but ensuring it is discharged fairly, justly, and without arbitrariness.
The Supreme Court’s analysis of the facts provides a masterclass in applying abstract legal principles to a real-world scenario.
The case revolved around a Special Selection Board constituted to select officers for the newly formed Indian Forest Service from the state cadre of Jammu and Kashmir. Mr. Naqishbund, the Acting Chief Conservator of Forests, was a member of this Board. Crucially, he was also one of the candidates seeking selection. While he did not participate in the meeting when his own name was discussed, he was present and actively participated in the deliberations when the cases of his rivals—officers he had superseded for his current post—were considered. Ultimately, Mr. Naqishbund's name topped the selection list, while his competitors were excluded.
The Attorney-General argued that there was no proof of actual bias, and the other board members had even filed affidavits stating they were not influenced by Mr. Naqishbund. The Court rejected this argument emphatically. It held that the true test is not whether bias actually influenced the decision, but whether there was a reasonable likelihood of bias. The Court observed:
"Taking into consideration human probabilities and the ordinary course of human conduct, there was reasonable ground for believing that the Acting Chief Conservator was likely to have been biased."
The mere presence of a person in a position where their personal interest conflicts with their official duty was enough to vitiate the proceedings. His participation in discussions about his rivals and in preparing the final ranked list created an undeniable conflict of interest.
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The Court made its most groundbreaking observation by stating that the duty to act fairly extends even to administrative proceedings. It reasoned that an unjust decision in an administrative enquiry can have a more far-reaching and damaging effect than one in a quasi-judicial enquiry. Therefore, the principles of natural justice must operate in any area not covered by a valid law, supplementing the law to prevent a miscarriage of justice.
The government contended that since the Selection Board was only a recommendatory body and the final decision was made by the U.P.S.C., any initial flaw was irrelevant. The Court disagreed, stating that the Board was a high-powered body whose recommendations would carry considerable weight. The U.P.S.C.'s decision was built on the foundation laid by the Board. If the foundation itself was tainted, the entire structure built upon it must fall. The final recommendations could not be dissociated from the biased initial selection.
The Supreme Court concluded that the selection process was vitiated by a violation of the principles of natural justice. It found that it was impossible to separate the selections for senior and junior scales, as they were made from the same pool of candidates. Consequently, the Court quashed the entire selection notification and allowed the petitions.
The Supreme Court held that:
A. K. Kraipak v. Union of India is a seminal case in Indian law. For lawyers, it serves as a powerful precedent in challenging arbitrary administrative actions and reinforces the judiciary's role in ensuring fairness in governance. For law students, it is an essential lesson in the dynamic and evolving nature of law, demonstrating how courts can expand the scope of fundamental rights and principles to meet the demands of a modern welfare state. It marks the shift from a rigid, classification-based approach to a more flexible, fairness-focused review of state action, making it a must-read for anyone studying constitutional or administrative law.
Disclaimer: This article is intended for informational and educational purposes only. It does not constitute legal advice. For advice on any specific legal problem, you should consult with a qualified legal professional.
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