ARUN KUMAR JAGATRAMKA versus JINDAL STEEL AND POWER LTD. & ANR. on 15 March 2021

SUPREME COURT REPORTS

[2021] 3 S.C.R.

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ARUN KUMAR JAGATRAMKA

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JINDAL STEEL AND POWER LTD. & ANR.

(Civil Appeal No. 9664 of 2019)

BMARCH 15, 2021[DR. DHANANJAYA Y CHANDRACHUD ANDM. R. SHAH, JJ.]

Insolvency and Bankruptcy Code, 2016:

s. 29A – Person not eligible to be resolution applicant –CEligibility of promoter to file application for compromise andarrangement, while he is ineligible u/s. 29A to submit ‘ResolutionPlan’ – On facts, application by GNCL, corporate debtor forinitiating the Corporate Insolvency Resolution Process admitted andthe appellant-promoter of GNCL submitted a resolution plan forDGNCL – However, due to insertion of s. 29A, which disqualifies aperson from being a resolution applicant if they have been a promoteror in the management or control of a corporate debtor, appellantbecame ineligible to submit a resolution plan – No resolution planapproved by the CoC and in absence thereof, the order of liquidationby NCLT – During the pendency of the appeal before NCLAT,Eapplication u/ss. 230 to 232 of the Act of 2013 by appellant-promoterof GNCL before the NCLT proposing a scheme for compromise andarrangement between the erstwhile promoters and creditors andthe same was allowed – Appeal thereagainst by respondent-unsecured creditor of the corporate debtor – NCLAT holding thatFpromoters ineligible u/s. 29A to submit a resolution plan, also barredfrom proposing a scheme of compromise and arrangement u/s.230of the Act of 2013 – On appeal, held: Prohibition placed by theParliament in s. 29A and s. 35(1)(f) must also attach itself to ascheme of compromise or arrangement u/s. 230 of the 2013 Act,when the company is undergoing liquidation under the auspices ofGthe IBC – As such, Reg 2B, specifically the proviso to Reg 2B(1), isalso constitutionally valid – Even in the absence of the Reg 2B, aperson ineligible u/s. 29A read with s. 35(1)(f) is not permitted topropose a scheme for revival u/s. 230, in the case of a companywhich is undergoing a liquidation under the IBC – In the case of aH

company undergoing liquidation under the IBC, a scheme ofcompromise or arrangement proposed u/s. 230 is a facet of theliquidation process – Object of the scheme of compromise orarrangement is to revive the company – Same rationale whichpermeates the resolution process u/s. 29A permeates the liquidationprocess u/s. 35(1)(f) – Insolvency and Bankruptcy Board of India(Liquidation Process) Regulations, 2016 – Reg 2B – CompaniesAct, 2013 – ss. 230 to 232.

Enactment of – Salutary objectives of good corporategovernance and respect for and adherence to the rule of law; andre-organization and resolution of insolvencies under – Held: Canbe achieved if the integrity of the resolution process is placed at theforefront – Purposive interpretation is required by the courts, whileinfusing meaning and content to its provisions, to ensure that theproblems which beset the earlier regime do not enter through thebackdoor through disingenuous stratagems.

s. 29A – Person not eligible to be resolution applicant –Purpose of the ineligibility under – Held: Is to achieve a sustainablerevival and to ensure that a person who is the cause of the problemeither by a design or a default cannot be a part of the process ofsolution – s. 29A encompasses not only conduct in relation to thecorporate debtor but in relation to other companies as well.

ss. 29A, 35(1)(f) – Interplay between the proposal of a schemeof compromise and arrangement u/s.230 of the Act of 2013 andliquidation proceedings initiated under IBC – Held: s. 230 of theAct of 2013 is wider in its ambit – It is not confined only to a companyin liquidation or to corporate debtor which is being wound up underChapter III of the IBC – Thus, the rigors of the IBC will not apply toproceedings u/s. 230 of the Act of 2013 where the scheme ofcompromise or arrangement proposed is in relation to an entity whichis not the subject of a proceeding under the IBC – However, wheres. 230 of the Act of 2013 traces its origin to the liquidationproceedings initiated under IBC, harmonious construction is neededbetween the two statutes which would ensure that a scheme ofcompromise or arrangement u/s. 230 is being pursued, in a mannerconsistent with the underlying principles of the IBC – It would leadto a manifest absurdity if the very persons who are ineligible forsubmitting a resolution plan, participating in the sale of assets of AB

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Athe company in liquidation, are somehow permitted to propose acompromise or arrangement u/s. 230 of the Act of 2013 – IBC hasmade a provision for ineligibility u/s. 29A which operates duringthe course of the CIRP – Similar provision, s. 35(1)(f) forms a partof the liquidation provisions contained in Chapter III as well – Inthe context of the statutory linkage provided by the provisions of s.B230 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/ws. 29A would not apply when s. 230 is sought to be invoked – Suchan interpretation would result in defeating the provisions of theIBC and must be eschewed – Stages of submitting a resolution plan,Cselling assets of a company in liquidation and selling the companyas a going concern during liquidation, all indicate that the promoteror those in the management of the company must not be allowed aback-door entry in the company and are hence, ineligible toparticipate during these stages – Proposing a scheme of compromiseor arrangement u/s. 230 of the Act of 2013, while the company isDundergoing liquidation under the provisions of the IBC lies in asimilar continuum – Companies Act, 2013 – ss. 230 to 232.ss. 6 to 32A – Modes of revival of a company under theprovisions of the IBC – Explained.

Es. 12A - Withdrawal of application – Withdrawal of theapplication admitted u/ss. 7, 9 and 10 – Discussed.

Insolvency and Bankruptcy Board of India (LiquidationProcess) Regulations, 2016: Reg 2B - Constitutional validity of –Held: Reg 2 B provides that where a compromise or arrangement isFproposed u/s. 230 of the Act of 2013, it shall be completed withinninety 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 noteligible under the IBC to submit a resolution plan for insolvencyresolution of the corporate debtor shall not be a party in any mannerto such compromise or arrangement – Reg 2B, specifically the provisoGto Reg 2B(1) is constitutionally valid.

Dismissing the appeals and writ petition, the Court HELD: 1.1 The prohibition placed by the Parliament inSection 29A and Section 35(1)(f) of the Insolvency and BankruptcyCode, 2016 must also attach itself to a scheme of compromise orH

arrangement under Section 230 of the Companies Act 2013, whenthe company is undergoing liquidation under the auspices of theIBC. As such, Regulation 2B of the Liquidation ProcessRegulations, specifically the proviso to Regulation 2B(1), is alsoconstitutionally valid. [Para 91][192-C-D]

Conclusion

2. Section 29A has been construed to be a crucial link inensuring that the objects of the IBC are not defeated by allowing“ineligible persons”, including but not confined to those in themanagement who have run the company aground, to return inthe new avatar of resolution applicants. Section 35(1)(f) is placedin the same continuum when the Court observes that the erstwhilepromoters of a corporate debtor have no vested right to bid forthe property of the corporate debtor in liquidation. The valueswhich animate Section 29A continue to provide sustenance tothe rationale underlying the exclusion of the same category ofpersons from the process of liquidation involving the sale ofassets, by virtue of the provisions of Section 35(1)(f). [Para52][166-B-D]

Chitra Sharma v. Union of India (2018) 18 SCC 575 :[2018] 12 SCR 1044; Arcelormittal India Private Limitedv. Satish Kumar Gupta & Ors (2019) 2 SCC 1 : [2018]12 SCR 362; Phoenix ARC Private Limited v. SpadeFinancial Service 2021 SCC OnLine SC 51; RameshKymal v. M/s Siemens Gamesa Renewable Power PvtLtd. [2021] 3 SCC 224; Anuj Jain, Interim ResolutionProfessional for Jaypee Infratech Limited v. Axis BankLimited (2020) 8 SCC 401 – relied on.

3. The purpose of the ineligibility under Section 29A is toachieve a sustainable revival and to ensure that a person who isthe cause of the problem either by a design or a default cannot bea part of the process of solution. Section 29A encompasses notonly conduct in relation to the corporate debtor but in relation toother companies as well. [Para 53][166-F-G]

4.1 Section 230 of the Act of 2013 is incorporated in ChapterXV which is titled “compromise, arrangement andamalgamations”. A compromise or arrangement under Sub-section (1) of Section 230 may take place: between a company A

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Aand its creditors or any subset of creditors; or between a companyand its members or subset of members. Liquidation is one of thefactual situations in which the provisions of Section 230 can beinvoked. Section 230(1) can also be invoked in the case of acompany which is wound up, as is evident from the statutoryprovision itself, which contemplates that an application may beBsubmitted to the NCLT, acting as the Tribunal, by the liquidator.Upon the sanctioning of the compromise or arrangement by theNCLT, it binds the company, all the creditors or members or aclass of them, as may be, or in the case of a company being woundup, the liquidator appointed under the Act of 2013 or the IBCCand the contributories. [Para 57-59, 61][168-D; 169-A-C; 170-B-C]

5.1 There is no reference in the body of the IBC to a schemeof compromise or arrangement under Section 230 of the Act of2013. Sub-section (1) of Section 230 was however amended withDeffect from 15 November 2016 so as to allow for a scheme ofcompromise or arrangement being proposed on the applicationof a liquidator who has been appointed under the provisions ofthe IBC. It was submitted by the appellant that Section 230 isnot regulated by the IBC but is a provision independent of it,though after the amendment of Sub-section (1), a compromise orEarrangement can be proposed by the liquidator appointed underthe IBC; that the decision in Meghal Homes’s case recognisesthat the liquidator is an additional person who may submit anapplication under Section 391 of the Act of 1956 (correspondingto Section 230 of the Act of 2013). The submission however,Fmisses the crucial interface between the provisions of Section230 of the Act of 2013 in their engagement with a company inrespect 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 lastresort. Section 33 requires the NCLT, acting as the AdjudicatingGAuthority, to pass an order for the liquidation of the corporatedebtor where: before the expiry of the insolvency resolutionprocess period or the maximum period contemplated for itscompletion a resolution plan has not been received under Sub-section (6) of Section 30; or the resolution plan has been rejectedH

under Section 31 for non-compliance with the requirements ofthe provision. [Para 64][171-H; 172-A-E]

Meghal Homes Pvt. Ltd. v Shree Niwas Girni K. K.Samiti (2007) 7 SCC 753 : [2007] 9 SCR 330; MiheerH Mafatlal v. Mafatlal Industries Ltd. (1997) 1 SCC579 : [1996] 6 Suppl. SCR 1 – referred to.

5.2 Under Sub-Section (2) of Section 33, the AdjudicatingAuthority has to pass a liquidation order where the resolutionprofessional, during the CIRP but before the confirmation of theresolution plan, intimates the Adjudicating Authority of thedecision of the CoC approved by not less than 66 per cent of thevoting shares to liquidate the corporate debtor. Under Section34, upon the Adjudication Authority passing an order forliquidation of the corporate debtor under Section 33, the resolutionprofessional appointed for the CIRP under Chapter II is to act asa liquidator for the purpose of liquidation. Section 35 proceeds tostipulate that subject to the directions of the AdjudicatingAuthority, the liquidator shall have the powers and dutiesenumerated in the provision. [Para 65][172-F-H]

5.3 There are three modes in which a revival iscontemplated under the provisions of the IBC. The first of thosemodes of revival is in the form of the CIRP elucidated in theprovisions of Chapter II of the IBC. The second mode is wherethe corporate debtor or its business is sold as a going concernwithin the purview of clauses (e) and (f) of Regulation 32. Thethird is when a revival is contemplated through the modalitiesprovided in Section 230 of the Act of 2013. A scheme ofcompromise or arrangement under Section 230, in the context ofa company which is in liquidation under the IBC, follows upon anorder under Section 33 and the appointment of a liquidator underSection 34. While there is no direct recognition of the provisionsof Section 230 of the Act of 2013 in the IBC, a decision wasrendered by the NCLAT in Y Shivram Prasad v. S Dhanapal’scase wherein NCLAT took note of the fact that while passing theorder u/s. 230, the Adjudicating Authority would perform a dualrole, one as the Adjudicating Authority in the matter of liquidationunder the IBC and the other as a Tribunal for passing an order A

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Au/s. 230 of the Act of 2013. Following the decision of NCLAT, anamendment was made on 25 July 2019 to the Liquidation ProcessRegulations by the IBBI so as to refer to the process envisagedunder Section 230 of the Act of 2013. [Para 67][173-C-G]

Y Shivram Prasad v. S Dhanapal 2019 SCC OnLineBNCLAT 172 – approved.

5.4 The statutory scheme underlying the IBC and thelegislative history of its linkage with Section 230 of the Act of2013, in the context of a company which is in liquidation, hasimportant consequences for the outcome of the controversy inCthe instant case. The first point is that a liquidation under ChapterIII of the IBC follows upon the entire gamut of proceedingscontemplated under that statute. The second point to be noted isthat one of the modes of revival in the course of the liquidationprocess is envisaged in the enabling provisions of Section 230 ofthe Act of 2013, to which recourse can be taken by the liquidatorDappointed under Section 34 of the IBC. The third point is thatthe statutorily contemplated activities of the liquidator do notcease while inviting a scheme of compromise or arrangementunder Section 230. The appointment of the liquidator in an IBCliquidation is provided in Section 34 and their duties are specifiedEin Section 35. In taking recourse to the provisions of Section 230of the Act of 2013, the liquidator appointed under the IBC is , toattempt a revival of the corporate debtor so as to save it from theprospect of a corporate death. The consequence of the approvalof the scheme of revival or compromise, and its sanctionthereafter by the Tribunal under Sub-section (6), is that theFscheme attains a binding character upon stakeholders includingthe liquidator who has been appointed under the IBC. In thisbackdrop, it is difficult to accept that Section 230 of the Act of2013 is a standalone provision which has no connect with theprovisions of the IBC. Undoubtedly, Section 230 of the Act ofG2013 is wider in its ambit in the sense that it is not confined onlyto a company in liquidation or to corporate debtor which is beingwound up under Chapter III of the IBC. Obviously, therefore,the rigors of the IBC will not apply to proceedings under Section230 of the Act of 2013 where the scheme of compromise or H

arrangement proposed is in relation to an entity which is not thesubject of a proceeding under the IBC. But, when, as in the instantcase, the process of invoking the provisions of Section 230 ofthe Act of 2013 traces its origin or, as it may be described, thetrigger to the liquidation proceedings which have been initiatedunder the IBC, it becomes necessary to read both sets ofprovisions in harmony. A harmonious construction between thetwo statutes would ensure that while on the one hand a schemeof compromise or arrangement under Section 230 is beingpursued, this takes place in a manner which is consistent withthe underlying principles of the IBC because the scheme isproposed in respect of an entity which is undergoing liquidationunder Chapter III of the IBC. As such, the company has to beprotected from its management and a corporate death. It wouldlead to a manifest absurdity if the very persons who are ineligiblefor submitting a resolution plan, participating in the sale of assetsof the company in liquidation or participating in the sale of thecorporate debtor as a ‘going concern’, are somehow permittedto propose a compromise or arrangement under Section 230 ofthe Act of 2013. [Para 68][174-A-H; 175-A-C]

5.5 The IBC has made a provision for ineligibility underSection 29A which operates during the course of the CIRP. Asimilar provision is engrafted in Section 35(1)(f) which forms apart of the liquidation provisions contained in Chapter III as well.In the context of the statutory linkage provided by the provisionsof Section 230 of the Act of 2013 with Chapter III of the IBC,where a scheme is proposed of a company which is in liquidationunder the IBC, it would be far-fetched to hold that the ineligibilitieswhich attach under Section 35(1)(f) read with Section 29A wouldnot apply when Section 230 is sought to be invoked. Such aninterpretation would result in defeating the provisions of the IBCand must be eschewed. [Para 69][175-C-F]

5.6 There is no merit in the submission that attaching theineligibilities under Section 29A and Section 35(1)(f) of the IBCto a scheme of compromise and arrangement under Section 230of the Act of 2013 would be violative of Article 14 of theConstitution as the appellant would be “deemed ineligible” tosubmit a proposal under Section 230 of the Act of 2013. The stages AB

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Aof submitting a resolution plan, selling assets of a company inliquidation and selling the company as a going concern duringliquidation, all indicate that the promoter or those in themanagement of the company must not be allowed a back-doorentry in the company and are hence, ineligible to participate duringthese stages. Proposing a scheme of compromise or arrangementBunder Section 230 of the Act of 2013, while the company isundergoing liquidation under the provisions of the IBC lies in asimilar continuum. Thus, the prohibitions that apply in the formersituations must naturally also attach to the latter to ensure thatlike situations are treated equally. [Para 70][175-E-F; 176-A-C]

C6. Section 12A of the IBC was inserted with effect from 6June 2018 by Amending Act 26 of 2018. Under Section 12A, theAdjudicating Authority may allow the withdrawal of an applicationwhich is admitted under Sections 7, 9 and 10, on an applicationmade by the applicant with the approval of a 90 per cent votingDshare of the CoC in such manner as may be specified. Rule 8 ofthe Insolvency and Bankruptcy (Application to AdjudicatingAuthority) Rules, 2016, on the other hand, contemplates that theNCLT, functioning as the Adjudicating Authority, may permit awithdrawal of an application made under Rule 4 (by the financialcreditor), Rule 6 (by the operational creditor) or Rule 7 (by theEcorporate applicant) on the request made by the applicant beforeits admission. Regulation 30-A of the Insolvency and BankruptcyBoard of India (Insolvency Resolution Process for CorporatePersons) Regulations, 2016 contains provisions for the withdrawalof an application. Under Regulation 30-A, as it originally stood,Fan application for withdrawal under Section 12-A was required tobe submitted before the issuance of an invitation for theexpression of interest under Regulation 36-A. The decision inSwiss Ribbons led to substitution of the Regulation 30-A whichstipulates that an application for withdrawal under Section 12-A

may be made to the adjudicating authority: before the constitutionGof the CoC, by the applicant through the IRP; and after theconstitution of the CoC, by the applicant through the IRP or theRP as the case may be. However, where the application underclause (b) is made after the issuance of the invitation forexpression of interest, the applicant has to state the reasonsH

justifying withdrawal after the issuance of the invitation.[Para 72][178-B-E; 179-A-B; 180-A-B]

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 – referredto.

7.1 There is a fundamental fallacy in the submission that onthe withdrawal of the application under Sections 7, 9 and 10, asthe case may be, the company goes back to the same promoterin spite of such a promoter being ineligible under Section 29Afor submitting a resolution plan, as such, there is no reason orjustification then to preclude a promoter from presenting ascheme of compromise or arrangement under Section 230. Anapplication for withdrawal under Section 12-A is not intended tobe a culmination of the resolution process. This, as the statutoryscheme would indicate, is at the inception of the process. Rule 8of the Adjudicating Authority Rules contemplates a withdrawalbefore admission. Section 12-A subjects a withdrawal of anapplication, which has been admitted under Sections 7, 9 and 10,to the requirement of an approval of ninety per cent voting sharesof the CoC. A withdrawal in other words is by the applicant. Thewithdrawal leads to a status quo ante in respect of the liabilitiesof the corporate debtor. A withdrawal under Section 12-A is inthe nature of settlement, which has to be distinguished both froma resolution plan which is approved under Section 31 and a schemewhich is sanctioned under Section 230 of the Act of 2013. Aresolution plan upon approval under Section 31(1) of the IBC isbinding on the corporate debtor, its employees, members,creditors (including the central and state governments), localauthorities, guarantors and other stakeholders. The approval ofa resolution plan u/s. 31 results in a “clean slate,”. [Para 73, 74][181-D-H; 182-A-C]

Swiss Ribbons Private Limited v. Union of India (2019)4 SCC 17 : [2019] 3 SCR 535; Committee of Creditorsof Essar Steel India Limited v. Satish Kumar Gupta(2020) 8 SCC 531 : [2019] 16 SCR 275 – referred to.

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A7.2 The benefit under Section 31, following upon theapproval of the resolution plan, is that the successful resolutionapplicant starts running the business of the corporate debtor on“a fresh slate”. The scheme of compromise or arrangement underSection 230 of the Act of 2013 cannot certainly be equated with awithdrawal simpliciter of an application, as is contemplated underBSection 12-A of the IBC. A scheme of compromise orarrangement, upon receiving sanction under Sub-section (6) ofSection 230, binds the company, its creditors and members or aclass of persons or creditors as the case may be as well as theliquidator (appointed under the Act of 2013 or the IBC). Both,Cthe resolution plan upon being approved under Section 31 of theIBC and a scheme of compromise or arrangement upon beingsanctioned under Sub-section (6) of Section 230, represent theculmination of the process. This must be distinguished from amere withdrawal of an application under Section 12-A. There is aclear distinction between these processes, in terms of statutoryDcontext and its consequences and the latter cannot be equatedwith the former. [Para 75][183-F-H; 184-A]

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 ofthe corporate debtor in liquidation but not to the NLCT, actingEas the Tribunal, when it exercises its powers under Section 230of the Act of 2013. The liquidator appointed under the provisionsof Chapter III of the IBC is entrusted with several powers andduties. Sections 37 to 42 of the IBC are illustrative of the powersof the liquidator in the course of the liquidation. The liquidator

Fexercises several functions which are of a quasi-judicial in natureand character. Section 35(1) itself enunciates that the powers andduties which are entrusted to the liquidator are “subject to thedirections of the adjudicating authority”. The liquidator, in otherwords, exercises functions which have been made amenable tothe jurisdiction of the NCLT, acting as the Adjudicating Authority.GTo hold therefore that the ineligibility prescribed under theprovisions of Section 35(1)(f) can be disregarded by the Tribunalfor the purpose of considering an application for a scheme ofcompromise or arrangement under Section 230 of the Act of 2013,in respect of a company which is under liquidation under the IBC,H

would not be a correct construction of the provisions of law.[Para 76][184-B-E]

8. Regulation 2B(1) introduced on 25 July 2019 providesthat where a compromise or arrangement is proposed underSection 230 of the Act of 2013, it shall be completed within ninetydays of the order of liquidation under sub- Sections (1) and (4) ofSection 33. The proviso to Regulation 2B has been inserted witheffect from 6 January 2020 to stipulate that a person who is noteligible under the IBC to submit a resolution plan for insolvencyresolution of the corporate debtor shall not be a party in anymanner to such compromise or arrangement. [Para 77][184-F-G]

9. IBBI noted in its discussion paper that the introductionof ineligibilities stipulated under Section 29-A of the IBC toSection 230 of the Act of 2013 would pose practical difficulties inits implementation. The IBBI solicited public comments on itsproposals. The IBBI evolved its view on the issue of whetherSection 29-A should be made applicable to Section 230 of the Actof 2013 in its subsequent discussion paper. The discussion paperbrought out on 3 November 2019 by IBBI discussed theapplicability of Section 29A of the IBC to a compromise andarrangement under Section 230 of the Act of 2013. The discussionpaper notes that there were many instances where the NCLAThad allowed the application under Section 230 of the Act of 2013.Thereafter, public comments were invited. The discussion paperis what it professes to be-a matter for discussion in the publicrealm. This cannot be held to constitute an admission of IBBIthat an applicant who is ineligible under Section 29A may submita scheme of compromise or arrangement under Section 230 ofthe Act of 2013. The validity of the provisions of Regulation 2B,more specifically the proviso, has to be considered on their ownfooting. [Para 79, 80, 82][185-G-H; 186-E-F; 187-G-H]

10. The powers and functions entrusted to IBBI arespecified in Section 196 of the IBC. Section 196(1)(t) providesIBBI with the power to frame regulations. Clause (t) empowersIBBI to make regulations and guidelines on matters relating toinsolvency and bankruptcy, as may be required under the IBC.Section 240(1) empowers IBBI with the power to make A

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Aregulations. Under Sub-Section (1) of Section 240, the power toframe regulations is conditioned by two requirements: first, theregulations have to be consistent with the provisions of the IBCand 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 consistentBwith the provisions of IBC and of being made in order to carryout the provisions of the IBC. [Para 83][188-A-E]

11. The principal ground of challenge to Regulation 2B isthat the regulation transgressed the authority of IBBI byintroducing a disqualification or ineligibility in regard to theCpresentation of an application for a scheme of compromise orarrangement under Section 230 of the Act of 2013. It wassubmitted that IBBI, as an entity constituted by the IBC, had nostatutory jurisdiction to amend the provisions of Section 230 ofthe Act of 2013 or to impose a restriction which operates under

Dthe purview of Section 230. The position can be considered fromtwo perspectives, independent of the provisions of Regulation2B. Even in the absence of the Regulation 2B, a person ineligibleunder Section 29A read with Section 35(1)(f) is not permitted topropose a scheme for revival under Section 230, in the case of acompany which is undergoing a liquidation under the IBC. In theEcase of a company which is undergoing liquidation pursuant tothe provisions of Chapter III of the IBC, a scheme of compromiseor arrangement proposed under Section 230 is a facet of theliquidation process. The object of the scheme of compromise orarrangement is to revive the company. The same rationale whichFpermeates the resolution process under Chapter II (by virtue ofthe provisions of Section 29A) permeates the liquidation processunder Chapter III (by virtue of the provisions of Section 35(1)(f)).That being the position, there can be no manner of doubt that theproviso to Regulation 2B is clarificatory in nature. Even absent the proviso, a person who is ineligible under Section 29A wouldGnot be permitted to propose a compromise or arrangement underSection 230 of the Act of 2013. Thus, there is no merit in thechallenge to the validity of Regulation 2B. [Para 84][188-F-H;189-A-D]

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Meghal Homes Pvt. Ltd. v Shree Niwas Girni K. K.Samiti (2007) 7 SCC 753 : [2007] 9 SCR 330 – referredto.

12.1 The Insolvency Law Committee in its report began byacknowledging that the floating of schemes of compromise orarrangement under Sections 230 to 232 of the Act, even forcompanies undergoing liquidation, was not part of the frameworkunder the IBC. This, the Committee noted, had led to amultiplicity of issues including, but not limited to, the duality ofthe role of the NCLT (as a supervisory Adjudicatory Authorityunder the IBC versus the driving Tribunal under the Act of 2013)and indeed the very question whether the disqualification underSection 29A and proviso to Section 35(1)(f) of the IBC alsoattaches to Section 230 of the Act of 2013. However, theCommittee notes that judicial intervention by the NCLAT alongwith the IBBI’s introduction of new regulations have led to somealignment in the two frameworks. [Para 86][189-G-H; 190-A-B]

< h t t p s : / / i b b i . g o v. i n / u p l o a d s / r e s o u r c e sc6cb71c9f69f66858830630da08e45b4.pdf> accessed on 10March 2021 – referred to.

12.2 The Committee thereafter, notes that the introductionof such schemes into the framework of the IBC may be worrisomesince it would alter the incentives during the CIRP and lead todestructive delays, which often plagued the process under theSick Industrial Companies (Special Provisions) Act, 1985.However, it nonetheless also acknowledges the benefits suchschemes may have to offer. Even so, the Committee concludesby 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][190-C-D]

Umakanth Varottil, ‘The Scheme of Arrangement as a DebtRestructuring Tool in India: Problems and Prospects’ (March2017) 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 twoframeworks, it became imperative that a clarification be issuedin this regard. The introduction of the proviso to Regulation 2B

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Awas a step in this direction which sought to clarify the positionwith respect to the applicability of the disqualifications set out inSection 29A of the IBC to Section 230 of the Act of 2013 in tandemwith the legislative intendment. [Para 88][191-A-B]

12.4 The explicit recognition of the schemes under SectionB230 into the liquidation process under the IBC was through thejudicial intervention of the NCLAT in Y Shivram Prasad’s case.Since the efficacy of this arrangement is not challenged in thiscase, this Court cannot comment on its merits. However, theNCLT and NCLAT are cautioned as regards, functioning as theAdjudicatory Authority and Appellate Authority under the IBCCrespectively, from judicially interfering in the framework envisagedunder the IBC. The IBC was introduced in order to overhaul theinsolvency and bankruptcy regime in India. As such, it is acarefully considered and well thought out piece of legislationwhich sought to shed away the practices of the past. TheDlegislature has also been working hard to ensure that the efficacyof this legislation remains robust by constantly amending it basedon its experience. Consequently, the need for judicial interventionor innovation from the NCLT and NCLAT should be kept at itsbare minimum and should not disturb the foundational principlesof the IBC. This conscious shift in their role has been noted inEthe report of the Bankruptcy Law Reforms Committee (2015).[Para 89][191-B-E]

Y Shivram Prasad v. S Dhanapal 2019 SCC OnLineNCLAT 172 – approved.

FJogendra Lal Saha v. State of Bihar, 1991 Supp (2)SCC 654; Jasbir Singh v. Vipin Kumar Jaggi, (2001) 8SCC 289 : [2001] 1 Suppl. SCR 598; P.V. Hemlatha v.Kattam Kandi Puthiya Maliackal Saheeda, (2002) 5SCC 548 : [2002] 3 SCR 1098; Talchar Municipalityv. Talcher Regulated Market Committee, (2004) 6 SCCG178 : [2004] 3 Suppl. SCR 167; Iridium India TelecomLtd. v. Motorola Inc, (2005) 2 SCC 145 : [2005] 1 SCR73 – referred to.

Salomon v. A. Salomon & Co. Ltd. 1897 AC 22 (HL) –referred to.

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ARUN KUMAR JAGATRAMKA v. JINDAL STEEL ANDPOWER LTD.

Case Law Reference

CIVIL APPELLATE/ORIGINAL JURISDICTION : CivilAppeal No. 9664 of 2019.

From the Judgment and Order dated 24.10.2019 of the NationalCompany 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. AditiPundhir, Ms. Sangya Gupta, Shiv Shankar Banerjee, Ms. Richa Kapoor,Kunal Anand, Anupa Banerjee, Ms. Ayushi Rajput, Charu Shangari,Shalya Agarwal, Ms. Surabhi Katyal, Ms. Shivani Sharma, KanuAgrawal, Saurabh Mishra, Ankur Talwar, Chinamyee Chandra, ShyamGopal, Arvind Kumar Sharma, Alok Dhir, Karan Batura, Ms. PriyalChaturvedi, Nikhar Luthra, T. V. S. Raghavendra Sreyas, Ms. GayatriGulati, Siddharth Vasudev, Sidhartha Sharma, Arjun Asthana, Sumit A

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ABinani, Arup Banerjee, Ms. Misha, Anoop Rawat, Siddhant Kant, SagarDhawan, Nikhil Mathur, Ms. Prabhsimran Kaur, S. S. Shroff, VikasMehta, Advs. for the appearing parties.

The Judgment of the Court was delivered by DR. DHANANJAYA Y CHANDRACHUD, J.BThis judgment has been divided into the following sections tofacilitate analysis:

AFactual Background

A.1Civil Appeal 9664 of 2019

A.2Civil Appeal 2719 of 2020

C

A.3Liquidation Process Regulations, 2016

A.4Article 32 Petition

BIssues

CSubmissions

D

DAnalysis of the Legal Framework

D.1Ineligibility during the resolution process andliquidation D.2Interplay : IBC liquidation and Section 230 ofEthe Act of 2013

D.3The ‘Clean Slate’

D.4Constitutional Validity of Regulation 2B -Liquidation Process Regulations FEEpilogue FConclusion A Factual Background A.1 Civil Appeal 9664 of 2019[1]

1. By its judgment dated 24 October 2019, the National CompanyGLaw Appellate Tribunal[2] held that a person who is ineligible under Section29A of the Insolvency Bankruptcy Code, 2016[3] to submit a resolutionplan, is also barred from proposing a scheme of compromise and 1 “First Appeal”2 “NCLAT”H3 “IBC”

arrangement under Section 230 of the Companies Act, 2013[4]. Thejudgment was rendered in an appeal[5] filed by Jindal Steel and PowerLimited[6], an unsecured creditor of the corporate debtor, Gujarat NRECoke Limited[7]. The appeal was preferred against an order passed bythe National Company Law Tribunal[8] in an application[9] under Sections230 to 232 of the Act of 2013, preferred by Mr Arun Kumar Jagatramka,who is a promoter of GNCL. The NCLT had allowed the applicationand issued directions for convening a meeting of the shareholders andcreditors. In its decision dated 24 October 2019, the NCLAT reversedthis decision and allowed the appeal by JSPL. The decision of the NCLATdated 24 October 2019 is challenged in the appeal before this Court.

2. Mr Arun Kumar Jagatramka, assails the order dated 24 October2019 of the NCLAT, inter alia, on the ground that Section 230 of theAct of 2013 does not place any embargo on any person for the purposeof submitting a scheme. According to the appellant, in the absence of adisqualification, the NCLAT could not have read the ineligibility underSection 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 theNCLAT, which is impermissible.

3. Before we advert to the submissions of the counsels on questionsof law, it will be useful to outline the salient facts of this dispute tounderstand the contours of the controversy. GNCL, the corporate debtor,moved an application under Section 10 of the IBC before the NCLT forinitiating the Corporate Insolvency Resolution Process[10]. The applicationwas admitted on 7 April 2017.

4. Mr Arun Kumar Jagatramka submitted a resolution plan forGNCL on 1 November 2017, which was presented by the ResolutionProfessional[11] before the Committee of Creditors[12]. The plan was to beput to a vote in a meeting of the CoC scheduled on 23-24 November2017.

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

10 “CIRP” or “resolution process”

11 “RP”

12 “CoC”

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A5. The IBC was amended by the Insolvency and Bankruptcy Code(Amendment) Act, 2018. Section 29A which was inserted withretrospective effect from 23 November 2017 provides a list of personswho are ineligible to be resolution applicants. Sub-section (g) of Section29A disqualifies a person from being a resolution applicant if they havebeen a promoter or in the management or control of a corporate debtorBin which a preferential transaction, undervalued transaction, extortionatecredit transaction or fraudulent transaction has taken place and in respectof which an order has been made by the NCLT under the IBC. A secondamendment was made to various provisions of IBC, including Section29A, under the Insolvency and Bankruptcy Code (Second Amendment)CAct, 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 formreads as follows:

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“29A. Persons not eligible to be resolution applicant:

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“29A. Persons not eligible to be resolution applicant:

A person shall not be eligible to submit a resolution plan, if suchDperson, or any other person acting jointly or in concert with suchperson—

(a) is an undischarged insolvent;

(b) is a wilful defaulter in accordance with the guidelines of theEReserve Bank of India issued under the Banking Regulation Act,1949 (10 of 1949);

(c) at the time of submission of the resolution plan has an account,or an account of a corporate debtor under the management orcontrol of such person or of whom such person is a promoter,Fclassified as non-performing asset in accordance with the guidelinesof the Reserve Bank of India issued under the Banking RegulationAct, 1949 (10 of 1949) or the guidelines of a financial sectorregulator 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 suchclassification till the date of commencement of the corporateGinsolvency resolution process of the corporate debtor:

Provided that the person shall be eligible to submit a resolutionplan if such person makes payment of all overdue amounts withinterest thereon and charges relating to non-performing assetaccounts before submission of resolution plan; H

Provided further that nothing in this clause shall apply to a resolutionapplicant where such applicant is a financial entity and is not arelated 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 afinancial sector regulator, if it is a financial creditor of the corporatedebtor and is a related party of the corporate debtor solely onaccount of conversion or substitution of debt into equity shares orinstruments convertible into equity shares or completion of suchtransactions as may be prescribed, prior to the insolvencycommencement date.

Explanation II.— For the purposes of this clause, where aresolution applicant has an account, or an account of a corporatedebtor under the management or control of such person or ofwhom such person is a promoter, classified as non-performingasset and such account was acquired pursuant to a prior resolutionplan approved under this Code, then, the provisions of this clauseshall not apply to such resolution applicant for a period of threeyears from the date of approval of such resolution plan by theAdjudicating Authority under this Code; (d) has been convicted for any offence punishable withimprisonment—

(i) for two years or more under any Act specified under the TwelfthSchedule; or

(ii) for seven years or more under any other law for the timebeing in force:

Provided that this clause shall not apply to a person after theexpiry of a period of two years from the date of his release fromimprisonment:

Provided further that this clause shall not apply in relation to aconnected 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 connectedperson referred to in clause (iii) of Explanation I; AB

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(f) is prohibited by the Securities and Exchange Board of Indiafrom trading in securities or accessing the securities markets; A

(g) has been a promoter or in the management or controlof a corporate debtor in which a preferential transaction,undervalued transaction, extortionate credit transaction orBfraudulent transaction has taken place and in respect ofwhich an order has been made by the Adjudicating Authorityunder this Code;

Provided that this clause shall not apply if a preferential transaction,undervalued transaction, extortionate credit transaction orfraudulent transaction has taken place prior to the acquisition ofCthe corporate debtor by the resolution applicant pursuant to aresolution plan approved under this Code or pursuant to a schemeor plan approved by a financial sector regulator or a court, andsuch resolution applicant has not otherwise contributed to thepreferential transaction, undervalued transaction, extortionateDcredit transaction or fraudulent transaction; (h) has executed a guarantee in favour of a creditor in respectof a corporate debtor against which an application forinsolvency resolution made by such creditor has beenadmitted under this Code and such guarantee has beeninvoked by the creditor and remains unpaid in full or part;E

(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—

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(i) any person who is the promoter or in the management or controlof the resolution applicant; or

(ii) any person who shall be the promoter or in management orcontrol of the business of the corporate debtor during theimplementation of the resolution plan; or G

(iii) the holding company, subsidiary company, associate companyor related party of a person referred to in clauses (i) and (ii):

Provided that nothing in clause (iii) of Explanation I shall apply toa resolution applicant where such applicant is a financial entityand is not a related party of the corporate debtor:

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Provided further that the expression “related party” shall notinclude a financial entity, regulated by a financial sector regulator,if it is a financial creditor of the corporate debtor and is a relatedparty of the corporate debtor solely on account of conversion orsubstitution of debt into equity shares or instruments convertibleinto equity shares 9[or completion of such transactions as may beprescribed], 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 orconditions as the Central Government may, in consultation withthe financial sector regulator, notify in this behalf, namely:—

(a) a scheduled bank;

(b) any entity regulated by a foreign central bank or a securitiesmarket regulator or other financial sector regulator of a jurisdictionoutside India which jurisdiction is compliant with the FinancialAction Task Force Standards and is a signatory to the InternationalOrganisation of Securities Commissions Multilateral Memorandumof Understanding;

(c) any investment vehicle, registered foreign institutional investor,registered foreign portfolio investor or a foreign venture capitalinvestor, where the terms shall have the meaning assigned to themin regulation 2 of the Foreign Exchange Management (Transferor Issue of Security by a Person Resident Outside India)Regulations, 2017 made under the Foreign Exchange ManagementAct, 1999 (42 of 1999); (d) an asset reconstruction company registered with the ReserveBank of India under Section 3 of the Securitisation andReconstruction of Financial Assets and Enforcement of SecurityInterest Act, 2002 (54 of 2002); (e) an Alternate Investment Fund registered with the Securitiesand Exchange Board of India; (f) such categories of persons as may be notified by the CentralGovernment.”

Due to the insertion of Section 29A, Mr Arun Kumar Jagmatramkabecame ineligible to submit a resolution plan.

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A6. No further resolution plan was approved by the CoC due to thepaucity of time. In the absence of a resolution plan, the NCLT passed anorder 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 wasdismissed by the NCLAT by its order dated 10 July 2018. The dismissalBof the appeal by the NCLAT was assailed before this Court, whichissued notice to GNCL on 19 July 2019.

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7. During the pendency of the appeal before NCLAT, where theorder of liquidation passed by the NCLT was assailed, Mr Arun KumarJagatramka moved an application under Sections 230 to 232 of the ActCof 2013 before the NCLT proposing a scheme for compromise andarrangement between the erstwhile promoters and creditors. Thisapplication was allowed by the NCLT through its order dated 15 May2018, and a direction was issued for convening of a meeting ofshareholders, secured creditors, unsecured creditors and FCCB holdersDfor approval of the scheme of compromise and arrangement.

8. JSPL, an operational creditor of GNCL, preferred an appealagainst the order of the NCLT dated 15 May 2018 before the NCLAT.The NCLAT allowed the appeal by its judgement dated 24 October2019, holding that promoters who are ineligible to propose a resolutionEplan under Section 29A of the IBC are not entitled to file an applicationfor compromise and arrangement under Sections 230 to 232 of the Actof 2013. The basis of this finding is contained in paragraphs 10 to 12 ofthe impugned judgement which is extracted below:

“10. As noticed above, the Hon’ble Supreme Court in SwissFRibbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. - WritPetition (Civil) No.99 of 2019 held that the ‘primary focus ofthe legislation is to ensure revival and continuation of the corporatedebtor by protecting the corporate debtor from its ownmanagement and from a corporate death by liquidation’.

G11. The aforesaid judgment makes it clear that even during theperiod of Liquidation, for the purpose of Section 230 to 232 of theCompanies Act, the ‘Corporate Debtor’ is to be saved from itsown management, meaning thereby the Promoters, who areineligible under Section 29A, are not entitled to file application for H13 Company Appeal (IB) No. 55-56 of 2018

Compromise and Arrangement in their favour under Section 230to 232 of the Companies Act. Proviso to Section 35(f) prohibitsthe Liquidator to sell the immovable and movable property oractionable claims of the ‘Corporate Debtor’ in Liquidation to anyperson who is not eligible to be a Resolution Applicant, quotedbelow: - “35. Powers and duties of Liquidator.-(1) Subject to thedirections of the Adjudicating Authority, the liquidator shallhave the following powers and duties, namely:—

xxxxxxxxx

(f) subject to section 52, to sell the immovable and movableproperty and actionable claims of the corporate debtor inliquidation by public auction or private contract, with powerto transfer such property to any person or body corporate,or to sell the same in parcels in such manner as may bespecified.

Provided that the liquidator shall not sell the immovable andmovable property or actionable claims of the corporate debtorin liquidation to any person who is not eligible to be aresolution applicant.”

12. From the aforesaid provision, it is clear that the Promoter, ifineligible under Section 29A cannot make an application forCompromise and Arrangement for taking back the immovable andmovable 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 19December 2019 of the NCLAT in which it relied on the judgment dated24 October 2019 impugned in the earlier appeal, to hold that an individualineligible for proposing a resolution plan under Section 29A of the IBC, 14 “Second Appeal”

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Ais also ineligible to propose a scheme of compromise and arrangementunder Section 230 of the Act of 2013.

11. The appellant - Mr Kunwer Sachdev - was the promoter anddirector (since suspended) of Su-Kam Power Systems Limited[15]. Anapplication[16] under Section 7 of the IBC was filed by one of the financialBcreditors of Su-Kam, which was admitted by the NCLT through its orderdated 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 ARCPrivate Limited on 15 November 2018. However, Mr Kunwar SachdevCwas 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 theIBC and consequently annulled his resolution plan.

13. This decision was challenged by filing an application[17] beforethe NCLT. However, this was dismissed by the NCLT through its orderDdated 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) ofthe IBC, directing the liquidation of Su-Kam and appointing a Liquidator.The appointment of the Liquidator was challenged before the NCLATEin an appeal[18], which was disposed of by an order dated 29 April 2019upholding the appointment of the Liquidator. The Liquidator was alsodirected to accept applications for schemes of compromise andarrangement under Sections 230 to 232 of the Act of 2013.

15. When the Liquidator invited expressions of interest forFsubmitting schemes of compromise and arrangement, Mr KunwarSachdev again expressed his interest. Emails were exchanged betweenthe Liquidator and Mr Kunwar Sachdev, during the course of which MrKunwar Sachdev was invited to present his plan to the lenders of Su-Kam. However, before this could materialise, Mr Kunwar Sachdev wasinformed by the Liquidator through an email dated 19 September 2019,Gthat he was ineligible to propose a scheme under Section 230 of the Actof 2013 in view of his ineligibility under Section 29A(h) of the IBC.

15 “Su-Kam”16 CP (IB)/540 (PB)/2017)17 CA. 58(PB)/2019H18 Company Appeal (AT) (Ins) No.451 of 2019

16. Mr Kunwar Sachdev challenged this decision in an application[19]filed before the NCLT, which was dismissed by an order dated 31 October2019 relying on the judgment dated 24 October 2019 impugned in theearlier appeal, and on the basis of Section 29A and Section 35(1)(f) ofthe IBC.

17. Mr Kunwar Sachdev then filed an appeal[20] against this orderdated 31 October 2019 before the NCLAT, which dismissed it by anorder dated 19 December 2019. Mr Kunwar Sachdev now comes beforethis Court in appeal.

A.3 Liquidation Process Regulations, 2016

18. Before averting to Writ Petition (Civil) No 269 of 2020, it isimportant to first understand the controversy surrounding the Insolvencyand Bankruptcy Board of India (Liquidation Process) Regulations, 2016[21].

19. The Liquidation Process Regulations have been issued by theInsolvency and Bankruptcy Board of India[22], constituted under Part IVof 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 withSection 240 of the IBC.

20. The Liquidation Process Regulations were amended by theIBBI by a notification[23] dated 25 July 2019, which inserted Regulation2B. Sub-section (1) of Regulation 2B provides that a compromise orarrangement proposed under Section 230 of the Act of 2013 shall haveto be completed within 90 days of the order of liquidation issued undersub-sections (1) and (4) of Section 33 of the IBC. Further, Sub-section(2) provides that the time taken in a compromise or arrangement, notexceeding 90 days, shall not be included within the liquidation period.Finally, Sub-section (3) provides that any cost which is incurred by theLiquidator in relation to the compromise or arrangement shall be borneby the corporate debtor, if such compromise or arrangement is sanctionedby the NCLT under Section 230(6). However, a proviso to Sub-section(3) notes that if such compromise or arrangement is not sanctioned bythe NCLT under Section 230(6), the cost shall be borne by the partieswho proposed the compromise or arrangement.

19 CA-2335(PB)/2019

20 Company Appeal (AT) (Insolvency) No. 1498 of 2019

21 “Liquidation Process Regulations”

22 “IBBI”

23 Noti. No. IBBI/2019-20/GN/REG047

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A21. Regulation 2B was amended by a notification[24] dated 6 January2020, by which a proviso was added to Sub-section (1) of Regulation2B, which provides that a party ineligible to propose a resolution planunder the IBC cannot be a party to a compromise or arrangement.Regulation 2B, in its present form, reads as follows:

B“2-B. Compromise or arrangement.—(1) Where a compromiseor arrangement is proposed under Section 230 of the CompaniesAct, 2013 (18 of 2013), it shall be completed within ninety days ofthe order of liquidation under sub-sections (1) and (4) of Section33:

CProvided that a person, who is not eligible under the Codeto submit a resolution plan for insolvency resolution of thecorporate debtor, shall not be a party in any manner to suchcompromise or arrangement.

(2) The time taken on compromise or arrangement, not exceedingDninety days, shall not be included in the liquidation period.

(3) Any cost incurred by the liquidator in relation to compromiseor arrangement shall be borne by the corporate debtor, wheresuch compromise or arrangement is sanctioned by the Tribunalunder sub-section (6) of Section 230:

EProvided that such cost shall be borne by the parties who proposedcompromise or arrangement, where such compromise orarrangement is not sanctioned by the Tribunal under sub-section(6) of Section 230.”

FA.4 Article 32 Petition

22. Writ Petition (Civil) No 269 of 2020 has been filed by MrArun Kumar Jagatramka, also the appellant in the First Appeal, assailingthe notifications dated 25 July 2019 and 6 January 2020 issued by theIBBI, through which it inserted Regulation 2B into the Liquidation ProcessGRegulations, and subsequently amended it. As the petitioner, he contendsthat Regulation 2B is ultra vires the IBC and the Act of 2013, and alsoviolates Articles 14, 19 and 21 of the Constitution. The prayer in the writpetition has been extracted below:

“In the premises set forth above, the Petitioner prays that thisHon’ble Court may be pleased to issue:

a. Writ, Order or Direction more particularly in the nature of WRITOF DECLARATION declaring that the provisions of Notificationsdated 25.07.2019 and 06.01.2020 issued by the Insolvency andBankruptcy Board of India are ultra vires the Insolvency andBankruptcy Code, 2016 as well as the Companies Act, 2013 andviolative of Article 14, 19, 21 of the Constitution of India.”

B Issues

23. Having detailed the factual background of these petitions, weshall now turn to the issues before this Court and the submissions ofcounsels.

24. The NCLAT formulated two principal issues in the first of itsjudgments in appeal:

“(i) Whether in a liquidation proceeding under Insolvency andBankruptcy Code, 2016 (hereinafter referred to as the ‘l&BCode’)the Scheme for Compromise and Arrangement can bemade in terms of Sections 230 to 232 of the Companies Act;

(ii) If so permissible, whether the Promoter is eligible to fileapplication for Compromise and Arrangement, while he is ineligibleunder Section 29A of the I&B to submit a ‘Resolution Plan’.”

25. The first of the above issues has been answered in theaffirmative by the NCLAT, to which, as Mr Sandeep Bajaj, learnedCounsel for the appellant noted, there is no challenge. The real bone ofdispute relates to the second issue. In the submission of Mr SandeepBajaj, what the NCLAT determined while addressing itself to the issuein dispute is whether the ineligibility under Section 29A of the IBC canbe 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 notprovided by the legislature cannot be introduced by a judicialdetermination. In the present case, he submitted, Section 29A does notexpressly provide that it extends to Section 230 of the Act of 2013.Section 230, in his submission, is a ‘different section in differentenactment’ to which the ineligibility under Section 29A of the IBC cannotbe attracted.

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A26. Mr Amit Sibal, learned Senior Counsel appearing for therespondent in the Second Appeal, on the other hand, submitted that thecorrect question to pose is whether a person who is ineligible underSection 29A of the IBC is permitted to propose a scheme for revivalunder Section 230 of the Act of 2013 at the stage of liquidation eitherthemselves or in concert with others.B

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27. The nuanced manner in which the contesting sides haveprefaced their submissions is indicative of the broad nature of the contest.On one hand, Mr Bajaj submits that the ineligibility under Section 29A ofthe IBC attaches to the proceedings under the IBC alone, involving thesubmission of a resolution plan. On the other hand, what Mr Sibal urgesCis that when an order of liquidation has been passed under and inpursuance of proceedings which were initiated under the IBC, Section230 of the Act of 2013 expressly contemplates that the liquidatorappointed under the IBC may move the NCLT where a compromise orarrangement is proposed. Hence, the proposal for a compromise orDarrangement under Section 230, where a company is in liquidation underthe IBC, is in continuation of that liquidation process. Hence, accordingto Mr Sibal, a person who is ineligible under Section 29A cannot proposea scheme for revival under Section 230.

C Submissions

E28. Having thus elucidated the battle lines of legal conflict, weproceed to enumerate the submissions.

29. Mr Sandeep Bajaj, learned Counsel appearing on behalf ofthe appellant in the First Appeal and the Petition under Article 32 submittedthat:F(i)Chapter II of the IBC indicates that the CIRP can be

(i) Chapter II of the IBC indicates that the CIRP can beinvoked 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.

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(ii) The IBC and its regulations indicate that there is a cleardistinction between:

(a) the settlement mechanism which allows for asettlement upon which the corporate debtor would H

stand restored to the promoter together with all itsassets and liabilities; and A

(b) the resolution mechanism under which, upon theacceptance of a resolution plan, the company movesover to the control of the acquirer on a clean slatefor a fixed consideration, consequent to the provisionsBof Section 31;

(iii) Section 29A is a part of the resolution mechanism, the objectand purpose of which is to prevent a back-door entry to thepromoter who should not be allowed to have advantage oftheir own wrong; C

(iv) Though the appellant falls in the prohibited category underSection 29A, the purpose of the prohibition is to prevent thepromoter from submitting a resolution plan with referenceto the provisions of Sections 30 and 31 of the IBC; D

(v) Chapter III of the IBC, commencing with Section 33, dealswith the liquidation process and Regulation 32 of theLiquidation Process Regulations deals with “sale of assetsetc. by the liquidator”. In the course of the liquidation underChapter III, the liquidation estate is to be formed underSection 36 and the sale under Regulation 32 is an intrinsicpart of the liquidation estate. The consequence is thatacquirer begins on a clean slate. The ineligibility underSection 29A which attaches for the purpose of Chapter II,in the context of a resolution plan, has been extended underSection 35(1)(f) to Chapter III on the basis of the aboverationale, i.e., that the liquidator shall not sell the moveableor immoveable property of the corporate debtor or itsactionable claims in liquidation to any person who is noteligible to be a resolution applicant; E

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(vi) Rule 8 of the Insolvency and Bankruptcy (Application toAdjudicating Authority) Rules, 2016 contemplates that theNCLT, in its role as the Adjudicating Authority, may permitwithdrawal of an application by the financial creditor,operational creditor or corporate applicant on a request madeby the applicant before its admission. This is indicative ofthe position that the NCLAT does not have an inherent G

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Apower to allow for withdrawal of the application afteradmission;

(vii) Section 12-A was inserted in the IBC by Amending Act 26of 2018 with retrospective effect from 6 June 2018 so as topermit the NCLT to allow the withdrawal of an applicationBwhich has been admitted under Sections 7, 9 or 10 on anapplication made by the applicant, with the approval of ninetyper cent of a voting share of the CoC in such a manner asmay be specified;

(viii) Regulation 30-A of the Insolvency and Bankruptcy BoardCof India (Insolvency Resolution Process for CorporatePersons) Regulations, 2016 (which was inserted on 3 July2018) allowed for the withdrawal under Section 12-A beforethe issuance of an invitation for expression of interest underRegulation 36-A. In the decision of this Court in SwissRibbons Private Limited v. Union of India[25] which wasDrendered on 25 January 2019, the Court held that awithdrawal of an application can be permitted betweenadmission of the application and the constitution of the CoC.Following up on this, Regulation 30-A was substituted on25 July 2019 to allow an application for withdrawal underESection 12-A both before and after the constitution of theCoC. However, where the application is made after theconstitution of the CoC (under Regulation 30-A(1)(b)), andafter the issuance of the invitation for expression of interest,the reasons justifying the withdrawal are required to bestated;F

(ix) The decision in Brilliant Alloys (P) Ltd. v. SRajagopal[26]would indicate that a withdrawal can bepermitted even after the expression of interest, as aconsequence of which Regulation 30-A is directory innature;G

(x) The consequence of a withdrawal of the application underSections 7, 9 or 10 is that the corporate debtor standsrestored to the promoter. As such, Section 29A does notoperate as an ineligibility on the settlement mechanism. On25 (2019) 4 SCC 17; herein, referred to as “Swiss Ribbons”H26 2018 SCC OnLine SC 3154; hereinafter, referred to as “Brilliant Alloys”

the withdrawal of the application the corporate debtor goesback to the same promoter, even if they are ineligible underSection 29A for the submission of the resolution plan; A

(xi) The ineligibility under Section 29A, which forms a part ofChapter II of the IBC, is only during the resolution process; B

(xii) The rationale for imposing an ineligibility under Section 29Ain the resolution process is that the successful resolutionapplicant under Section 31 of the IBC obtains the companyon a clean slate, as indicated in the decision of this Court inCommittee of Creditors of Essar Steel India Limitedv. Satish Kumar Gupta[27]. This benefit is not availablewhere an application is simpliciter withdrawn under Section12-A; C

(xiii) Section 230 of the Act of 2013 is a part of the settlementmechanism and is at par with the provisions of Section 12-A. The impact of a compromise or arrangement is also thatDcompany is restored to the promoters with all its liabilities.While Section 12-A of the IBC permits withdrawal of anapplication, Sections 230 and 230-A of the Act of 2013envisage a compromise or arrangement. As such, they bothform a part of the settlement mechanism and are not partof the resolution mechanism, to which alone the ineligibilityEunder Section 29A applies. Hence, this ineligibility cannotnow be engrafted into Section 230; D

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(xiv) Section 230 was amended on 15 November 2016 and underSub-Section (6), the compromise or arrangement becomesbinding if 3/4[th] in value of the creditors or class of creditorsor members agree to it, and if it is sanctioned by the NCLT.The compromise or arrangement then becomes binding onthe liquidator appointed under the IBC as a whole. Theprovisions of Section 230 are, however, not restricted toliquidation. They are not regulated by the IBC. Section 230operates in an area independent of the IBC. Following theamendment of Section 230(1) on 15 November 2016, theapplication for a compromise can also be proposed by theliquidator appointed under the IBC. However, the right of F

G

Athe liquidator to make an application under Section 230(1)is in addition to the others enumerated therein and notexclusive, in view of the principle which was laid down bythis Court while construing the corresponding provisions ofSection 391 of the Companies Act, 1956[28]; B(xv)The discussion papers circulated by the IBBI in April andNovember 2019 clearly demonstrate that IBBI was awareof the fact that the ineligibility which attaches to theresolution process under Section 29A will not attach toSection 230 of the Act of 2013. The proviso to Regulation2B was notified by the IBBI on 6 January 2020 to stipulateCthat a person who is not eligible under the IBC to submit aresolution plan for insolvency resolution of the corporatedebtor shall not be a party to such compromise orarrangement. Regulation 2B is ultra vires the provisions ofSection 230 of the Act of 2013. IBBI had no statutoryDauthority to make the Regulation 2B, through which it haseffectively provided a disqualification under the Act of 2013,even though the mandate of IBBI is confined only to theIBC; and

(xvi) Regulation 2B is violative of Articles 14, 19 and 21 of theEConstitution as it seeks to import an ineligibility under theprovisions of the IBC to a dissimilar provision in the Act of2013. Moreover, when ineligibility is not attracted underSection 12-A of the IBC, imposing this ineligibility underSection 230 of the Act of 2013 is arbitrary.

F30. Adopting the submissions which were urged by Mr SandeepBajaj, Mr Shiv Shankar Banerjee, learned Counsel appearing on behalfof the appellant in the Second Appeal, submitted that:

(i) A complete procedure has been stipulated under theprovisions of the IBC for liquidation; G(ii)Where a sale of the assets of the corporate debtor or saleof the business of the corporate debtor takes place in thecourse of the liquidation, Section 35(1)(f) of the IBCstipulates that the assets cannot be sold to a person who isineligible under Section 29A. The object is to ensure that H28 the “Act of 1956”

liquidation should not be used to allow the promoter to getthe assets free from encumbrances; A

(iii) In contrast to a successful resolution applicant underChapter II or the person who benefits from the sale of assetsin liquidation under Chapter III of the IBC, the person whoproposes a compromise or arrangement under Section 230Bunder the Act of 2013 does not have the benefit of acquiringthe company free of encumbrances. There is thus no reasonor justification to exclude the promoter from invoking theprovisions of Section 230;

(iv) Section 230(1) makes a reference to a liquidator appointedunder the IBC because when the provision of Sections 7, 9or 10 have been invoked, and an order of admission hasbeen passed, liquidation, if required, will take place underthe provisions of Section 35 of the IBC; C

(v) The mischief which was sought to be remedied by theadoption of Section 29A is restricted to the resolutionprocess, its object being that persons should not takeadvantage of their own wrong. It is justifiable if a defaulteris excluded from the resolution process which may result inthe creditors taking a haircut of their outstanding claims.Moreover, a successful resolution applicant begins on a cleanslate. In contrast, under Section 230, the scheme has to besanctioned by the NCLT only upon which it will pass muster;and D

E

D

E

(vi) The insertion of the proviso in Regulation 2B of theLiquidation Process Regulations is a clear indicator of thefact that a disqualification or ineligibility under Section 29Ais not a part of Section 230 of the Act of 2013.

F

31. The above submissions have been contested by Mr Amit Sibal,learned Senior Counsel appearing on behalf of the respondents in theSecond Appeal. Learned Senior Counsel submitted that:

G

(i) A proposal under Section 230 of the Act of 2013 need notresult in the revival of the company. The proposal may applyonly to a class of creditors or shareholders. Even prior toits amendment, this Court had held that additional conditionsapply when a plan under the erstwhile provisions of Section H

[2021] 3 S.C.R.

A391 of the Act of 1956 is propounded at the time of liquidationof the company;

(ii) Section 29A has several ineligibilities apart from those thatattach to promoters. To allow a person who is ineligibleunder Section 29A from submitting a compromise orBarrangement under Section 230 at the liquidation stage iscontrary to the letter and spirit of the IBC;

(iii) The NCLT while dealing with an application for acompromise or arrangement under Section 230 of the Actof 2013, in respect of a company which is being liquidatedCunder the IBC, performs a dual role: firstly, as an AdjudicatingAuthority under the IBC and as a Tribunal under the Act of2013. Therefore, it can insist on adherence to additionalconditions namely that:

(a) The proposed compromise or arrangement must resultDin a revival of the company; and (b)The compromise or arrangement cannot be proposedby a person who is barred under Section 29A;

(iv) When the IBC was originally enacted there was no bar ofthe nature found in Section 29A on who can propose aEresolution plan either pre or post liquidation;

(v) The ineligibility under Section 29A and Section 35(1)(f) wasintroduced by a legislative amendment on 23 November2017[29], both at the pre and post liquidation stages;

(vi) The purpose of the disqualification is to ensure a sustainableFrevival, which means that those responsible for the state ofaffairs of a company and other persons regarded by thelegislature as undesirable should be excluded from theprocess;

(vii) Persons who are ineligible under Section 29A or SectionG35(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 tothe corporate debtor, but in relation to other companies aswell; A

(ix) The ineligibility engrafted in Section 29A extends to ChapterBIII by virtue of the provision of Section 35(1)(f). This mustbe read together with Regulation 32 of the LiquidationProcess Regulations. Regulation 32 provides six modes ofrealization of assets, out of which four involve the sale ofassets and two involve the transfer of the corporate debtoror its business as a ‘going concern’;C

C

(x) Regulation 44(1), through its proviso, allows for an additionalperiod of ninety days for the liquidation process where thesale is through Regulation 32-A(1) so as to encourage arevival of the company; D

(xi) There is no reference in the body of the IBC to a schemeof compromise under Section 230. Section 230 (especiallysub-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 canEbe invoked; and

(c) a compromise with only a class of creditors will bindonly that class under Section 230(c);

(xii) While construing the corresponding provisions of erstwhileSection 391 of the Act of 1956, this Court held in MeghalFHomes Pvt. Ltd. v Shree Niwas Girni K. K. Samiti[30]that where a scheme of compromise and arrangement isproposed in respect of the company in liquidation, additionalrequirements need to be established, namely that the schememust be for the revival of company. The impact of a schemeGunder Section 391, where the company is in liquidation, isthat the proposers of the scheme enter into the managementwith the debt having been resolved. This makes the schemeof compromise or arrangement under Section 230

30 (2007) 7 SCC 753; herein, referred to as “Meghal Homes”

qualitatively different from a simpliciter withdrawal of anapplication under Section 12-A of the IBC. Section 12-Adoes not incorporate any requirement for the revival of thecompany; A

(xiii) The IBC provides for three modes of revival:

B

(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 underSection 230 of the Act of 2013, following upon anorder for liquidation being passed under Chapter IIIof the IBC; C

The prohibition or ineligibility which applies in (a) and (b)must necessarily attach to (c) as well. When a plan forcompromise or arrangement is proposed at the liquidationstage of IBC under Section 230 of the Act of 2013, it mustsatisfy the rigors of the IBC. Hence, a person who isineligible under Section 29A cannot submit a plan underSection 230 of the Act of 2013; D

(xiv) In construing the provisions of Sections 29A and 35(1)(f)Eof the IBC, notice must be taken of the fact that theineligibility was made applicable both to the resolution stageas well as the stage of liquidation. In interpreting theseprovisions, the purpose and object of the amendment mustbe borne in mind, which is that a scheme of revival cannotFbe proposed by a person who stands disqualified underSection 29A; E

(xv) The proposal of a compromise or arrangement under Section230 in a situation where the company is in liquidation underthe IBC is a facet of the liquidation process under the IBC.GSection 230 was amended to include a liquidator appointedunder the IBC. The statutory scheme indicates that:

(a) A liquidation under the IBC follows upon the entiregamut of proceedings under the IBC; (b)Section 230 of the Act of 2013 provides one of themodes of revival in the liquidation process; and H

(c) Other activities of the liquidator do not cease whileAinviting schemes under Section 230. The stepsrequired to be taken by the liquidator in liquidationinclude a compromise or arrangement under Section230. It is in this context that the NCLT performs adual role - that of an Adjudicating Authority in theBmatter of liquidation under the IBC as well as of aTribunal for a scheme of compromise andarrangement under the Act of 2013; A

(xvi) The fundamental postulate of the IBC is that a corporatedebtor has to be protected from its management andcorporate debt. Hence, it would be anomalous if acompromise or arrangement can be entertained from aperson who is responsible for the state of affairs of thecorporate debtor; C

(xvii) Where a company is in liquidation under the provisions ofthe IBC, the submission of a compromise or arrangementunder Section 230 has distinct features of commonality witha resolution plan namely:

D

(a) The object is to revive the company; and (b)Once officially approved, it assumes a bindingcharacter; E

These intrinsic elements of revival and of the binding naturepermeate both a resolution plan on the one hand and acompromise or arrangement on the other, which is arrivedat in the course of liquidation; F

(xviii) The introduction of the proviso to Regulation 2(B) of theLiquidation Process Regulations with effect from 6 January2020 is only by way of a clarification;

(xix) Dehors the provisions of the IBC, the rigors of the IBCwill not apply to a proceeding under Section 230 of the Actof 2013. In other words, the ineligibility under Sections 29Aand 35(1)(f) applies only to a situation where a corporatedebtor has come within the purview of the IBC and hasbeen taken into liquidation under Chapter III. It is only wherea compromise or arrangement under Section 230 of the G

H

SUPREME COURT REPORTS

Act of 2013 is proposed in respect of a company which isundergoing liquidation under the IBC that the rigors ofSection 29A and 35(1)(f) would stand attracted; A

(xx) An absurdity will result if persons found to be derelict orguilty of malfeasance, who are barred from:

B

(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 theAct of 2013. It is a settled principle of law that anCinterpretation which leads to absurdity must be avoided;

(xxi) There is a fallacy in equating the provisions of Section 230of the Act of 2013 with an application for withdrawal underSection 12-A of the IBC. Section 12-A is not intended to bethe culmination of the resolution process but is at theDinception. The withdrawal by an applicant leads to a statusquo ante in respect of liabilities of the corporate debtorand does not require that the defaults in respect of allcreditors are brought to an end. In contrast:

(a) a resolution plan under Section 31 of the IBC (asEwell as the scheme under Section 230 of the Act of2013) 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 IBCand Section 230 of the Act of 2013, a withdrawal underSection 12-A restores the status quo ante and is hence notconcerned with ineligibilities under Section 29A; and F

(xxii) Section 240 of the IBC enunciates the power to makeregulations to carry out the provisions of the Code. TheGinsertion of the proviso to Regulation 2(B) is valid because:

(a) the amendment is consistent with the IBC and carriesout its provisions; and (b)it is clarificatory in nature since even in its absence,the ineligibility under Section 29A would govern.

H

32. In summing up, Mr Sibal urged that:

(i) Where a company is in liquidation under Chapter III of theIBC, a proposed scheme of compromise or arrangementunder Section 230 of the Act of 2013 must comply with therequirements 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 ineligibleunder Section 29A of the IBC;

(iii) The above requirements are IBC specific and notinconsistent with the provisions of Section 230 of the Actof 2013;

(iv) Sections 29A and 35(1)(f) of the IBC prohibit a certaincategory of persons from proposing a revival of the companyin the course of the CIRP, liquidation process and inpurchasing the assets in the course of liquidation. To makean exception in a plan for revival under Section 230 of theAct of 2013 in the context of a scheme of compromise orarrangement will defeat the object and intent of theamendment to the IBC and lead to an absurdity. This wouldperpetrate the mischief which was sought to be obviated;

(v) When a company is in liquidation under the IBC, a schemeproposed under Section 230 is a facet of the liquidationprocess and the same rationale which permeates theliquidation process must also govern it; and

(vi) Section 12-A stands on a completely different footing. Itprovides for a withdrawal at the inception of the CIRP andis not a culmination of a resolution process. Nor does aSection 12-A withdrawal bind all stakeholders.

33. Mr Gopal Jain, learned Senior Counsel appearing for therespondents in the First Appeal, has urged submissions along the samelines as Mr Amit Sibal. His submissions are summarized below:

A

B

C

D

E

F

G

A(i)The commencement or the initiation process attracting theIBC is an application under Sections 7, 9 or 10;

(ii) In the present case, an application was filed under Section10 as a consequence of which the case has to be analyzedthrough the prism of the IBC; B

(iii) The IBC is an economic legislation and its key objectivesare to ensure:

(a) good corporate governance;

(b) control deviant behavior;

C

(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 asignificant element of public interest in facilitating a creditor-centric regime for achieving economic growth. Ensuringthat resolution plans are submitted by credible persons isintrinsic to the scheme of the IBC. Speed is of the essence.The IBC has sought to convert a legal regime which was adebtor’s paradise into a regime governed by corporatejustness. The regime under the IBC is dynamic, which isreflected by eight amendments which took place betweenNovember 2017 and September 2020; D

E

(iv) The basic principle is that an entity which is barred underSection 29A and Section 35(1)(f) should not be in controlFof the assets of the corporate debtor. The objective is thatdefaulting promoters:

(a) should not be in the driver’s seat; and (b)should be kept at arm’s length; G

(v) In order to achieve the above objectives, the Parliamentenacted a simultaneous amendment of both Section 29Aand Section 35(1)(f) to maintain a level playing field bycomprehensively catering to all situations relating todefaulting or barred promoters; H

(vi) In interpreting the IBC, legal sanctity and clarity are ofAutmost importance. But for Section 29A, promoters wouldhave got back into management after securing a haircut tolenders in the course of the resolution plans. Section 29Awhich applies to the resolution process and Section 35(1)(f)which applies to the liquidation process were intended toBplug a loophole. To accept the submissions of the appellantswould be creating a new loophole. Section 29A is in thenature of a see-through provision. The submissions of theappellants will in fact scare away genuine creditors andderail the process; and A

C

(vii) According to Section 238 of the IBC, in case of anyinconsistency between the provisions of the IBC and anyother law in force, the provisions of the IBC are to have anoverriding 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:

D

(i) The trigger is the liquidation resulting from the operation ofthe provisions of Section 33 of the IBC;

(ii) Regulation 2B facilitates an additional period of ninety daysfor a compromise under Section 230 of the Act of 2013because the entire process is time specific; E

(iii) Even if the legal position is assessed independent ofRegulation 2B, the same embargo as contained in Section29A and Section 35(1)(f) would apply to a compromise orarrangement proposed under Section 230 of the Act of 2013in respect of a company which is undergoing liquidationunder Chapter III of the IBC; F

(iv) Regulation 2B is essentially clarificatory;

(v) The basis of Regulation 2B is the same as Sections 29AGand 35(1)(f), which is that a person who is the cause of theproblem either by a design or default cannot be a part ofthe process solution;

(vi) The IBC is a beneficial legislation. Prior to the enactmentof the IBC:

H

A(a)individual creditors had individual remedies; and (b)the debtor would remain in possession of the companyand its assets.

With the introduction of the IBC, there has been a paradigm shift in that:

B

(a) under the new legal regime there is a collective effortof all creditors even if at the behest of one of them; (b)the creditor is in control instead of the debtor inpossession; and C

(c) revival is the soul of the IBC;

(vii) Sections 196 and 240 of the IBC reflect a specificconferment of power on the IBBI to frame regulationssubject to the stipulation that:

(i) they are not inconsistent with the provisions of the IBC;and D

(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 ofEthe authority which is conferred on the delegate can bechallenged on the ground of being:

(a) ultra vires the parent statute; or

(b) being contrary to the provisions of Part III of theConstitution; F

To suffer from unreasonableness, a regulation must be heldto be manifestly arbitrary. Regulation 2(B) is consistent withthe object and purpose of the IBC; and does not sufferfrom manifest arbitrariness; and G(ix)Sections 29A and 35(1)(f) apply to liquidation pursuant tothe IBC. The principle of Section 29A stands absorbed inthe hybrid process of compromise during liquidation underthe IBC, by way of a device of incorporation by reference.

35. Mr Balbir Singh, learned Additional Solicitor General, hasHaddressed submissions also along the above lines.

A

D Analysis of the Legal Framework

36. Having narrated the submissions advanced by both sides, wenow turn to the legal position and the interplay between the proposal ofa scheme of compromise and arrangement under Section 230 of the Actof 2013 and liquidation proceedings initiated under Chapter III of theIBC.

B

D.1 Ineligibility during the resolution process andliquidation

37. Section 29A of the IBC was introduced with effect from 23November 2017 by Act 8 of 2018. The birth of the provision is an eventattributable to the experience which was gained from the actual workingof the provisions of the statute since it was published in the Gazette ofIndia on 28 May 2016. The provisions of the IBC were progressivelybrought into force thereafter.

The foundation

D

38. The IBC is a law which consolidated and amended existinglegislation relating to re-organisation and insolvency resolution of corporatepersons, partnerships and individuals. The long title to the legislationindicates the specific objects, which it is intended to facilitate. Theseobjects include:

E

(i) A time bound process of re-organization and insolvencyresolution;

(ii) Maximization of the value of assets;

(iii) Promoting entrepreneurship;

F

(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 existedprior to the enactment of the IBC, were:

(i) The absence of a single legislation governing insolvencyGand bankruptcy;

(ii) A multiplicity of laws governing insolvency and bankruptcyof corporate entities; H

A(iii)The existence of multiple foraestablished to deal with theenforcement of diverse legislative provisions; and

(iv) The complexity caused by a maze of statutes resulting ininadequate, ineffective and delayed resolutions, occasionedby the (then) existing framework.

B

These inadequacies were noticed in the Statement of Objectsand Reasons accompanying the introduction of the Bill. The IBC reflectsa fundamental change in the erstwhile legal regime. A timely resolutionof corporate insolvency was conceived as an instrument to support thedevelopment of credit markets, encourage entrepreneurship, enhanceCthe ease of doing business and provide an environment conducive toinvestment, setting the economy on the path to growth and development.In resolving some of the complex issues which arise under the new legalregime envisaged under the IBC, it then becomes necessary to vacuumthe cobwebs of the past. Interpreting the IBC in a manner which wouldfacilitate the salutary objects which it is intended to achieve requires allDstakeholders to shed concepts and notions associated with the earlierlegal regime, which was largely a debtor’s paradise. The earlier regimewas one in which the debtor would largely remain in possession of thecompany and its assets and individual creditors were left to paddle theirown canoe in headwinds controlled by those in debt and default.

E

E40. The enactment of the IBC has marked a quantum change incorporate governance and the rule of law. First and foremost, the IBCperceives good corporate governance, respect for and adherence to therule of law as central to the resolution of corporate insolvencies. Second,the IBC perceives corporate insolvency not as an isolated problem facedFby an individual business entities but places it in the context of a frameworkwhich is founded on public interest in facilitating economic growth bybalancing diverse stakeholder interests. Third, the IBC attributes aprimacy to the business decisions taken by creditors acting as a collectivebody, on the premise that the timely resolution of corporate insolvency isnecessary to ensure the growth of credit markets and encourageGinvestment. Fourth, in its diverse provisions, the IBC ensures that theinterests of corporate enterprises are not conflated with the interests oftheir promoters; the economic value of corporate structures is broaderin content than the partisan interests of their managements. These salutaryobjectives of the IBC can be achieved if the integrity of the resolutionprocess is placed at the forefront. Primarily, the IBC is a legislationH

aimed at re-organization and resolution of insolvencies. Liquidation is amatter of last resort. These objectives can be achieved only through apurposive interpretation which requires courts, while infusing meaningand content to its provisions, to ensure that the problems which beset theearlier regime do not enter through the backdoor through disingenuousstratagems.

The amendments

41. On 23 November 2017, Parliament intervened through itsamending power to introduce Section 29A into the provisions of ChapterII and Section 35(1)(f) into the provisions of Chapter III. Chapter II ofthe IBC ,which enunciates provisions for the CIRP, has evolved overthe previous four years. Chapter III enunciates provisions in regard tothe liquidation process. Section 29A stipulates diverse categories ofpersons who will not be eligible to submit a resolution plan.

42. By the same amending Act through which Section 29A wasintroduced, Section 35(1)(f) was also amended with the introduction ofa proviso. Section 35 specifies the powers of the liquidator as well astheir duties, which are subject to the directions of the AdjudicatingAuthority. Section 35(1)(f) provides as follows:

“35. Powers and duties of liquidator.—(1) Subject to thedirections of the Adjudicating Authority, the liquidator shall havethe following powers and duties, namely:—

...

(f) subject to section 52, to sell the immovable and movable propertyand actionable claims of the corporate debtor in liquidation bypublic auction or private contract, with power to transfer suchproperty to any person or body corporate, or to sell the same inparcels in such manner as may be specified:

Provided that the liquidator shall not sell the immovable and movableproperty or actionable claims of the corporate debtor in liquidationto any person who is not eligible to be a resolution applicant.”

43. The Statement of Objects and Reasons accompanying theintroduction of the Bill proposing the amendment dated 23 November2017, elucidates the purpose of introducing the new provisions:

“2. The provisions for insolvency resolution and liquidation of acorporate person in the Code did not restrict or bar any person A

B

C

DE

F

G

H

Afrom submitting a resolution plan or participating in the acquisitionprocess of the assets of a company at the time of liquidation.Concerns have been raised that persons who, with their misconductcontributed to defaults of companies or are otherwise undesirable,may misuse this situation due to lack of prohibition or restrictionsto participate in the resolution or liquidation process, and gain orBregain control of the corporate debtor. This may undermine theprocesses laid down in the Code as the unscrupulous person wouldbeseen to be rewarded at theexpense of creditors. In addition, inorder to check that the undesirable persons who may havesubmitted their resolution plans in the absence of such a provision,Cresponsibility is also being entrusted on the committee of creditorsto give a reasonable period to repay overdue amounts and becomeeligible.”

A

44. During the course of the debate in the Lok Sabha on 29December 2017, the Finance Minister noted that the IBC had been inDoperation for about a year. The new legislation had been a “learningexperience”. The Ordinance was promulgated since a large number ofcases were “already pending resolution mechanism itself” and therewas a danger that if the amendment was not immediately brought in,persons who were “ineligible” would have started applying as resolutionapplicants. The Finance Minister in the course of his speech highlightedEthe reason for the amendments when he observed as follows:

“…What do you do with promoters who are themselves responsiblefor these NPAs, that is clause C. Every creditor takes hishaircut and there is an equitable distribution in the case ofdissolution. In the case of resolution also, all type ofFcreditors may take some haircut and the man who createdthe insolvency pays a fraction of the amount and comes backinto management. Should we allow that to continue? Theoverwhelming view, as expressed by the Members, is thatit should not be allowed. This was a gap which was there inGthe original Bill and by bringing in 29(a) we have tried to fill in thatgap. That is the objective. In order that this provision must applyto allexisting cases of resolution which are pending, that is thecase for urgency. If we had not done this, then all such defaulterswould have rejoiced because they would have merely walkedback into these companies by paying only a fraction of these H

amounts. That is something which besides being commerciallyimprudent would also be morally unacceptable. That is the realrationale behind this particular Bill:.”

45. The Report of the Insolvency Law Committee dated 3 March2018 states that the intent behind introducing Section 29A was to preventunscrupulous persons from gaining control over the affairs of the company.These persons included those who by their misconduct have contributedto the defaults of the company or are otherwise undesirable. TheCommittee observed:

“14.1. Section 29A was added to the Code by the AmendmentAct. Owing to this provision, persons, who by their misconductcontributed to the defaults of the corporate debtor or are otherwiseundesirable, are prevented from gaining or regaining control ofthe corporate debtor. This provision protects creditors of thecompany by preventing unscrupulous persons from rewardingthemselves at the expense of creditors and undermining theprocesses laid down in the Code.”

46. Significantly, the ineligibility which was engrafted by theamending legislation was incorporated in both the provisions of ChapterII dealing with the CIRP as well as in Chapter III dealing with theliquidation process. Section 29A stipulates the category of persons who“shall not be eligible to submit a resolution plan”. The proviso to Section35(1)(f) incorporates the same norm in the liquidation process, when itstipulates that the liquidator shall not sell the immovable and movable oractionable claims of the corporate debtor in liquidation “to any personwho is not eligible to be a resolution applicant”. These words in Section35(1)(f) are clearly referable to the ineligibility which is set up in Section29A.

Judicial understanding

Chitra Sharma

47. The underlying purpose of introducing Section 29A wasadverted to in a judgment of this court in Chitra Sharma v. Union ofIndia[31].One of us (Justice DY Chandrachud) speaking for a Bench of31 (2018) 18 SCC 575; hereinafter, referred to as “Chitra Sharma”

A

B

C

DE

F

G

H

Athree learned judges took note of the Statement of Objects and Reasonsaccompanying the Bill and emphasised the purpose of Section 29A thus:

“[…]

38. Parliament has introduced Section 29A into IBC with a specificpurpose. The provisions of Section 29A are intended to ensurethat among others, persons responsible for insolvency of thecorporate debtor do not participate in the resolution process. TheStatement of Objects and Reasons appended to the Insolvencyand Bankruptcy Code (Amendment) Bill, 2017, which wasultimately enacted as Act 8 of 2018, states thus:

B

“2. The provisions for insolvency resolution and liquidationof a corporate person in the Code did not restrict or barany person from submitting a resolution plan orparticipating in the acquisition process of the assets of acompany at the time of liquidation. Concerns have beenraised that persons who, with their misconduct contributedto defaults of companies or are otherwise undesirable, maymisuse this situation due to lack of prohibition or restrictionsto participate in the resolution or liquidation process, andgain or regain control of the corporate debtor. This mayundermine the processes laid down in the Code as theunscrupulous person would be seen to be rewarded at theexpense of creditors. In addition, in order to check thatthe undesirable persons who may have submitted theirresolution plans in the absence of such a provision,responsibility is also being entrusted on the committee ofcreditors to give a reasonable period to repay overdueamounts and become eligible.”

C

D

E

F

Parliament was evidently concerned over the fact thatpersons whose misconduct has contributed to defaults onthe part of debtor companies misuse the absence of a baron their participation in the resolution process to gain anGentry. Parliament was of the view that to allow such personsto participate in the resolution process would underminethe salutary object and purpose of the Act. It was in thisbackground that Section 29A has now specified a list ofpersons who are not eligible to be resolution applicants.”

48. The Court held that “Section 29A has been enacted in thelarger public interest and to facilitate effective corporate governance”.The Court further observed that “Parliament rectified a loophole in theAct which allowed backdoor entry to erstwhile managements in theCIRP”.

Arcelormittal

49. In Arcelormittal India Private Limited v. Satish KumarGupta& Ors.[32], Justice Rohinton F Nariman, speaking for himself andJustice Indu Malhotra, reiterated the same principle when heunderscored the need to impart a purposive interpretation to Section29A “depending both on the text and context in which the provision wasenacted”:

“30. A purposive interpretation of Section 29A, depending bothon the text and the context in which the provision was enacted,must, therefore, inform our interpretation of the same. We areconcerned 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 areactually in ‘control’, whether jointly or in concert with other persons[33].

32 (2019) 2 SCC 1; hereinafter, referred to as “Arcelormittal”

3 “32. The opening lines of Section 29A of the Amendment Act refer to a de facto asopposed to a de jure position of the persons mentioned therein. This is a typicalinstance of a “see-through provision”, so that one is able to arrive at persons who areactually in “control”, whether jointly, or in concert, with other persons. A wooden,literal, interpretation would obviously not permit a tearing of the corporate veil whenit comes to the “person” whose eligibility is to be gone into. However, a purposeful andcontextual interpretation, such as is the felt necessity of interpretation of such a provisionas Section 29A, alone governs. For example, it is well settled that a shareholder is aseparate legal entity from the company in which he holds shares. This may be truegenerally speaking, but when it comes to a corporate vehicle that is set up for thepurpose of submission of a resolution plan, it is not only permissible but imperativefor the competent authority to find out as to who are the constituent elements thatmake 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 notapply. For it is important to discover in such cases as to who are the real individuals orentities who are acting jointly or in concert, and who have set up such a corporatevehicle for the purpose of submission of a resolution plan.”

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50. In Swiss Ribbons (supra), the constitutionality of certainprovisions of the IBC was challenged. Justice Rohinton F Narimanemphasised the object of the IBC in the following observations:

“27. As is discernible, the Preamble gives an insight into what isBsought to be achieved by the Code. The Code is first and foremost,a Code for reorganization and insolvency resolution of corporatedebtors. Unless such reorganization is effected in a time-boundmanner, the value of the assets of such persons will deplete.Therefore, maximization of value of the assets of such persons soCthat they are efficiently run as going concerns is another veryimportant objective of the Code. This, in turn, will promoteentrepreneurship as the persons in management of the corporatedebtor are removed and replaced by entrepreneurs. When,therefore, a resolution plan takes off and the corporate debtor isbrought back into the economic mainstream, it is able to repay itsDdebts, which, in turn, enhances the viability of credit in the handsof banks and financial institutions. Above all, ultimately, theinterests of all stakeholders are looked after as the corporate debtoritself becomes a beneficiary of the resolution scheme—workersare paid, the creditors in the long run will be repaid in full, andEshareholders/investors are able to maximize their investment.Timely resolution of a corporate debtor who is in the red, by aneffective legal framework, would go a long way to support thedevelopment of credit markets. Since more investment can bemade with funds that have come back into the economy, businessthen eases up, which leads, overall, to higher economic growthFand development of the Indian economy. What is interesting tonote is that the Preamble does not, in any manner, refer toliquidation, which is only availed of as a last resort if there iseither no resolution plan or the resolution plans submitted are notup to the mark. Even in liquidation, the liquidator can sell theGbusiness of the corporate debtor as a going concern.(See ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. SatishKumar Gupta, (2019) 2 SCC 1] at para 83, fn 3).

28. It can thus be seen that the primary focus of the legislation isto ensure revival and continuation of the corporate debtor byprotecting the corporate debtor from its own management and H

from a corporate death by liquidation. The Code is thus a beneficiallegislation which puts the corporate debtor back on its feet, notbeing a mere recovery legislation for creditors. The interests ofthe corporate debtor have, therefore, been bifurcated andseparated from that of its promoters/those who are in management.Thus, the resolution process is not adversarial to the corporatedebtor but, in fact, protective of its interests. The moratoriumimposed by Section 14 is in the interest of the corporate debtoritself, thereby preserving the assets of the corporate debtor duringthe resolution process. The timelines within which the resolutionprocess is to take place again protects the corporate debtor’sassets from further dilution, and also protects all its creditors andworkers by seeing that the resolution process goes through asfast as possible so that another management can, through itsentrepreneurial skills, resuscitate the corporate debtor to achieveall these ends.”

51. While adverting to the earlier decision in Chitra Sharma andArcelormittal(supra), which had elucidated the object underlying Section29A, this Court in Swiss Ribbons (supra) held that the norm underlyingSection 29A “continues to permeate” Section 35(1)(f) “when it appliesnot merely to resolution applicants, but to liquidation also”. Rejecting theplea that Section 35(1)(f) is ultra vires,this Court held:

“102. According to the learned counsel for the petitioners, whenimmovable and movable property is sold in liquidation, it ought tobe sold to any person, including persons who are not eligible to beresolution applicants as, often, it is the erstwhile promoter whoalone may purchase such properties piecemeal by public auctionor by private contract. The same rationale that has been providedearlier in this judgment will apply to this proviso as well — there isno vested right in an erstwhile promoter of a corporate debtor tobid for the immovable and movable property of the corporate debtorin liquidation. Further, given the categories of persons who areineligible under Section 29A, which includes persons who aremalfeasant, or persons who have fallen foul of the law in someway, and persons who are unable to pay their debts in the graceperiod allowed, are further, by this proviso, interdicted frompurchasing assets of the corporate debtor whose debts they haveeither willfully not paid or have been unable to pay. The legislative ABC

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Apurpose which permeates Section 29A continues to permeate thesection when it applies not merely to resolution applicants, but toliquidation also. Consequently, this plea is also rejected.”

A Purposive Interpretation

52. This line of decisions, beginning with Chitra SharmaB(supra)and continuing to Arcelormittal (supra) and Swiss Ribbons(supra) is significant in adopting a purposive interpretation of Section29A. Section 29A has been construed to be a crucial link in ensuring thatthe objects of the IBC are not defeated by allowing “ineligible persons”,including but not confined to those in the management who have run theCcompany aground, to return in the new avatar of resolution applicants.Section 35(1)(f) is placed in the same continuum when the Court observesthat the erstwhile promoters of a corporate debtor have no vested rightto bid for the property of the corporate debtor in liquidation. The valueswhich animate Section 29A continue to provide sustenance to the rationaleunderlying the exclusion of the same category of persons from the processDof liquidation involving the sale of assets, by virtue of the provisions ofSection 35(1)(f). More recent precedents of this Court continue to adopta purposive interpretation of the provisions of the IBC. (See in this contextthe judgments in Phoenix ARC Private Limited v. Spade FinancialService[34] , Ramesh Kymal v. M/s Siemens Gamesa RenewableEPower Pvt Ltd.[35] and Anuj Jain, Interim Resolution Professionalfor Jaypee Infratech Limited v. Axis Bank Limited[36].)

Sustainable revival

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

34 2021 SCC OnLine SC 51 at paragraphs 103-104

35 C.A. No. 4050 of 2020, decided on 9 February 2021, at paragraphs 23 and 25H36 (2020) 8 SCC 401, at paras 28.4 and 28.5

54. The prohibition which has been enacted under Section 29Ahas extended, as noted above, to Chapter III while being incorporated inthe proviso to Section 35(1)(f). Under the Liquidation ProcessRegulations, Chapter VI deals with the realization of assets. Regulation32 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:Provided that where an asset is subject to security interest, it shallnot be sold under any of the clauses (a) to (f) unless the securityinterest therein has been relinquished to the liquidation estate.”

Clauses (a) to (d) of Regulation 32 deal with the sale of assets ona 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 agoing concern.

55. Regulation 32-A(1) then stipulates:

“32A. Sale as a going concern.

(1) Where the committee of creditors has recommended sale underclause (e) or (f) of regulation 32 or where the liquidator is of theopinion that sale under clause (e) or (f) of regulation 32 shallmaximize the value of the corporate debtor, he shall endeavor tofirst sell under the said clauses.”

Regulation 32-A(1) emphasizes the importance placed on thetransfer of the corporate debtor or its business on a going concern basis.

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

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A“44. Completion of liquidation.

(1) The liquidator shall liquidate the corporate debtor within a periodof one year from the liquidation commencement date,notwithstanding pendency of any application for avoidance oftransactions under Chapter III of Part II of the Code, before theBAdjudicating 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 additionalperiod up to ninety days.]

(2) If the liquidator fails to liquidate the corporate debtor withinC29[one year], he shall make an application to the AdjudicatingAuthority to continue such liquidation, along with a report explainingwhy the liquidation has not been completed and specifying theadditional time that shall be required for liquidation.”

D.2 Interplay : IBC liquidation and Section 230 of the ActDof 2013

57. Section 230 of the Act of 2013 is incorporated in Chapter XVwhich is titled “compromise, arrangement and amalgamations”. Sub-section (1) of Section 230 provides as follows:

“230. Power to compromise or make arrangements with creditorsEand members.— (1) Where a compromise or arrangement isproposed—

(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,Fthe Tribunal may, on the application of the company or of anycreditor or member of the company, or in the case of a companywhich is being wound up, of the liquidator, order a meeting of thecreditors or class of creditors, or of the members or class ofmembers, as the case may be, to be called, held and conducted insuch manner as the Tribunal directs.G

Explanation.—For the purposes of this sub-section, arrangementincludes a reorganization of the company‘s share capital by theconsolidation of shares of different classes or by the division ofshares into shares of different classes, or by both of thosemethods.”

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58. A compromise or arrangement under Sub-section (1) of Section230 may take place:

(i) between a company and its creditors or any subset ofcreditors; or

(ii) between a company and its members or subset of members.

59. Liquidation is one of the factual situations in which the provisionsof Section 230 can be invoked. Section 230(1) can also be invoked in thecase of a company which is wound up, as is evident from the statutoryprovision itself, which contemplates that an application may be submittedto the NCLT, acting as the Tribunal, by the liquidator.

60. Sub-section (1) of Section 230 was amended by Act 31 of2016 with effect from 15 November 2016. Prior to the amendment, anapplication for compromise or arrangement could be moved before theTribunal by:

(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 theliquidator.

Following the amendment, Section 230(1) envisages thatan application in the case of a company which is being wound up maybe presented by a liquidator who has been appointed under the Act of2013 or under the IBC. Interestingly, Section 230 (except Sub-sections(11) and (12)) came into force on 7 December 2016. Where a compromisehas been entered into with only a class of creditors, it will bind that classunder 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 thecreditors, or class of creditors or members or class of members,as the case may be, voting in person or by proxy or by postalballot, agree to any compromise or arrangement and if suchcompromise or arrangement is sanctioned by the Tribunal by anorder, the same shall be binding on the company, all the creditors,or class of creditors or members or class of members, as the case A

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Amay be, or, in case of a company being wound up, on the liquidatorand the contributories of the company.”

61. Under Sub-section (6) of Section 230, the comprise orarrangement has to be agreed to by a “majority of persons representing3/4[th] in value” of the creditors, members or a class of them. Upon theBsanctioning of the compromise or arrangement by the NCLT, it binds thecompany, all the creditors or members or a class of them, as may be, orin the case of a company being wound up, the liquidator appointed underthe Act of 2013 or the IBC and the contributories.

The Companies’ Act 1956 : Section 391 and Meghal HomesC62. Prior to the enforcement of the Act of 2013, the erstwhilelegislation - the Act of 1956 - contained an analogous provision in Section391.

63. The provisions of Section 391 came up for interpretation in adecision of this Court in Meghal Homes (supra). Justice PKDBalasubramanyan, speaking for the two judge Bench of this Court,adverted to the earlier decision in Miheer H Mafatlal v. MafatlalIndustries Ltd.[37] which had dealt with the jurisdiction of the CompanyCourt (or the Company Law Board as it then was) while sanctioning ascheme of merger or amalgamation of two companies. The earlierEdecision, as this Court noted, did not involve either a transferor ortransferee in liquidation. Hence, this Court did not have occasion toconsider whether “any additional tests have to be satisfied when thecompany concerned is in liquidation and a compromise or arrangementin respect of it is proposed”. Dealing specifically with a company whichhas been ordered to be wound up, this Court observed that the CompanyFCourt (before whom the jurisdiction under the erstwhile Section 391was vested at the material time) had “necessarily to see whether thescheme contemplates revival of the business of the company”. In thatcontext, this Court observed:

“47. When a company is ordered to be wound up, the assets of itGare put in possession of the Official Liquidator. The assetsbecome custodia legis. The follow-up, in the absence of a revivalof the company, is the realisation of the assets of the company bythe Official Liquidator and distribution of the proceeds to thecreditors, workers and contributories of the company ultimately H37 (1997) 1 SCC 579

resulting in the death of the company by an order under Section481 of the Act, being passed. But, nothing stands in the way ofthe Company Court, before the ultimate step is taken or beforethe assets are disposed of, to accept a scheme or proposal forrevival of the Company. In that context, the court has necessarilyto see whether the scheme contemplates revival of the businessof the company, makes provisions for paying off creditors or forsatisfying their claims as agreed to by them and for meeting theliability of the workers in terms of Section 529 and Section 529Aof the Act. Of course, the court has to see to the bona fides of thescheme and to ensure that what is put forward is not a ruse todispose of the assets of the company in liquidation.”

Moreover, the Court held that in the case of a company whichhas been wound up it would have to perceive aspects of public interest,commercial morality and the existence of a bona fide intent to revivethe company, while considering whether a compromise or arrangementput forward under Section 391 should be accepted. While the Courtwould not sit in appeal over the commercial wisdom of the shareholders,“it will certainly consider whether there is a genuine attempt to revivethe company that has gone into liquidation and whether such revival is inpublic interest and conforms to commercial morality”. On the facts ofthe case, the Court found that it was difficult to hold that “it is a schemefor revival of the Company, the clear statutory intention behindentertaining a proposal under Section 391”. These observations of thetwo judge Bench in Meghal Homes (supra) have a significant bearingon the nature of a compromise or arrangement which fell within thepurview of Section 391 of the Act of 1956. This Court emphasized that where a company is in liquidation, its assets are custodia legis, theliquidator being the custodian for the distribution of the liquidation estate.A compromise or arrangement in respect of a company in liquidationmust foster a revival of the company, this being (as the Court termed it) “the clear statutory intention behind entertaining a proposal underSection 391” in respect of a company in liquidation.

IBC liquidation and Section 230 scheme : a statutorycontinuum

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

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A15 November 2016 so as to allow for a scheme of compromise orarrangement being proposed on the application of a liquidator who hasbeen appointed under the provisions of the IBC. The substratum of thesubmission of Mr Sandeep Bajaj, learned Counsel for the appellants, isthat Section 230 is not regulated by the IBC but is a provision independentof it, though after the amendment of Sub-section (1), a compromise orBarrangement 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 maysubmit an application under Section 391 of the Act of 1956 (correspondingto Section 230 of the Act of 2013). The submission of Mr Bajaj howeverCmisses the crucial interface between the provisions of Section 230 ofthe Act of 2013 in their engagement with a company in respect of whichthe provisions of the IBC have been invoked, resulting in an order ofliquidation under Section 33 of the IBC. Liquidation of the companyunder the IBC, as emphasized by this Court in its previous decisions, is amatter of last resort. Section 33 requires the NCLT, acting as theDAdjudicating Authority, to pass an order for the liquidation of the corporatedebtor where:

(i) before the expiry of the insolvency resolution process periodor the maximum period contemplated for its completion aresolution plan has not been received under Sub-sectionE(6) of Section 30; or

(ii) the resolution plan has been rejected under Section 31 fornon-compliance with the requirements of the provision.

65. Under Sub-Section (2) of Section 33, the Adjudicating AuthorityFhas to pass a liquidation order where the resolution professional, duringthe CIRP but before the confirmation of the resolution plan, intimatesthe Adjudicating Authority of the decision of the CoC approved by notless than 66 per cent of the voting shares to liquidate the corporatedebtor. Under Section 34, upon the Adjudication Authority passing anorder for liquidation of the corporate debtor under Section 33, the resolutionGprofessional appointed for the CIRP under Chapter II is to act asa liquidator for the purpose of liquidation. Section 35 proceeds to stipulatethat subject to the directions of the Adjudicating Authority, the liquidatorshall have the powers and duties enumerated in the provision.

66. What emerges from the above discussion is that the provisionsHof the IBC contain a comprehensive scheme, first, for the initiation of the CIRP at the behest of financial creditor under Section 7 or at thebehest of the operational creditor under Section 9 or the corporate debtorunder Section 10. Chapter II provides for the appointment of an interimresolution professional[38] in Section 17 and the constitution of a CoCunder Section 21. Chapter II contemplates the submission of a resolutionplan in Section 30 and the approval of the plan in Section 31. Liquidationforms a part of a distinct Chapter - Chapter III. Liquidation under Section33 is contemplated in specific eventualities which are adverted to inSub-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 revivalis contemplated under the provisions of the IBC. The first of those modesof revival is in the form of the CIRP elucidated in the provisions ofChapter II of the IBC. The second mode is where the corporate debtoror 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 contemplatedthrough the modalities provided in Section 230 of the Act of 2013. Ascheme of compromise or arrangement under Section 230, in the contextof a company which is in liquidation under the IBC, follows upon anorder under Section 33 and the appointment of a liquidator under Section34. While there is no direct recognition of the provisions of Section 230of the Act of 2013 in the IBC, a decision was rendered by the NCLATon 27 February 2019 in Y Shivram Prasad v. S Dhanapal[39]. NCLAT inthe course of its decision observed that during the liquidation process thesteps which are required to be taken by the liquidator include acompromise or arrangement in terms of Section 230 of the Act of 2013,so as to ensure the revival and continuance of the corporate debtor byprotecting it from its management and from “a death by liquidation”.The decision by NCLAT took note of the fact that while passing theorder under Section 230, the Adjudicating Authority would perform adual role: one as the Adjudicating Authority in the matter of liquidationunder the IBC and the other as a Tribunal for passing an order underSection 230 of the Act of 2013. Following the decision of NCLAT, anamendment was made on 25 July 2019 to the Liquidation ProcessRegulations by the IBBI so as to refer to the process envisaged underSection 230 of the Act of 2013.

38 “IRP”

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

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A68. The statutory scheme underlying the IBC and the legislativehistory of its linkage with Section 230 of the Act of 2013, in the contextof a company which is in liquidation, has important consequences for theoutcome of the controversy in the present case. The first point is that aliquidation under Chapter III of the IBC follows upon the entire gamutof proceedings contemplated under that statute. The second point to beBnoted is that one of the modes of revival in the course of the liquidationprocess is envisaged in the enabling provisions of Section 230 of the Actof 2013, to which recourse can be taken by the liquidator appointedunder Section 34 of the IBC. The third point is that the statutorilycontemplated activities of the liquidator do not cease while inviting aCscheme of compromise or arrangement under Section 230. Theappointment of the liquidator in an IBC liquidation is provided in Section34 and their duties are specified in Section 35. In taking recourse to theprovisions of Section 230 of the Act of 2013, the liquidator appointedunder the IBC is , above all, to attempt a revival of the corporate debtorso as to save it from the prospect of a corporate death. The consequenceDof the approval of the scheme of revival or compromise, and its sanctionthereafter by the Tribunal under Sub-section (6), is that the scheme attainsa binding character upon stakeholders including the liquidator who hasbeen appointed under the IBC. In this backdrop, it is difficult to acceptthe submission of Mr Bajaj that Section 230 of the Act of 2013 is aEstandalone provision which has no connect with the provisions of theIBC. Undoubtedly, Section 230 of the Act of 2013 is wider in its ambit inthe sense that it is not confined only to a company in liquidation or tocorporate debtor which is being wound up under Chapter III of the IBC.Obviously, therefore, the rigors of the IBC will not apply to proceedingsunder Section 230 of the Act of 2013 where the scheme of compromiseFor arrangement proposed is in relation to an entity which is not the subjectof a proceeding under the IBC. But, when, as in the present case, theprocess of invoking the provisions of Section 230 of the Act of 2013traces its origin or, as it may be described, the trigger to the liquidationproceedings which have been initiated under the IBC, it becomesGnecessary to read both sets of provisions in harmony. A harmoniousconstruction between the two statutes[40] would ensure that while on the 40 G.P. Singh, Principles of Statutory Interpretation (1st edn., Lexis Nexis 2015) whichnotes that “Further, these principles [referring to the principle of harmoniousconstruction] have also been applied in resolving a conflict between two different Acts”and providing the following examples – “Jogendra Lal Saha v. State of Bihar, 1991HSupp (2) SCC 654 (Sections 82 and 83 of the Forest Act, 1927 are special provisions one hand a scheme of compromise or arrangement under Section 230 isbeing pursued, this takes place in a manner which is consistent with theunderlying principles of the IBC because the scheme is proposed inrespect of an entity which is undergoing liquidation under Chapter III ofthe IBC. As such, the company has to be protected from its managementand a corporate death. It would lead to a manifest absurdity if the verypersons who are ineligible for submitting a resolution plan, participatingin the sale of assets of the company in liquidation or participating in thesale of the corporate debtor as a ‘going concern’, are somehow permittedto propose a compromise or arrangement under Section 230 of the Actof 2013.

69. The IBC has made a provision for ineligibility under Section29A which operates during the course of the CIRP. A similar provision isengrafted in Section 35(1)(f) which forms a part of the liquidationprovisions contained in Chapter III as well. In the context of the statutorylinkage provided by the provisions of Section 230 of the Act of 2013 withChapter III of the IBC, where a scheme is proposed of a companywhich is in liquidation under the IBC, it would be far-fetched to hold thatthe ineligibilities which attach under Section 35(1)(f) read with Section29A would not apply when Section 230 is sought to be invoked. Such aninterpretation would result in defeating the provisions of the IBC andmust be eschewed.

70. An argument has also been advanced by the appellants andthe petitioners that attaching the ineligibilities under Section 29A andSection 35(1)(f) of the IBC to a scheme of compromise and arrangementunder Section 230 of the Act of 2013 would be violative of Article 14 ofthe Constitution as the appellant would be “deemed ineligible” to submit which prevail over the provisions in the Sale of Goods Act ); Jasbir Singh v. VipinKumar Jaggi, (2001) 8 SCC 289 (Section 64 of NDPS Act will pre vail over section307 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 (conflictbetween section 23 of the Travancore Cochin High Court Act and section 98(3) CivilProcedure Code resolved by holding the latter to be special law); Talchar Municipalityv. Talcher Regulated Market Committee, (2004) 6 SCC 178 (Section 4(4) of theOrissa Agricultural Produce Markets Act, 1956 was held to prevail over section 295 ofthe Orissa Municipalities Act, 1950 as the former was a special provision and alsostarted 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 theHigh Court concerned and are not displaced by the general provisions of the CivilProcedure Code)”

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Aa proposal under Section 230 of the Act of 2013. We find no merit in thiscontention. As explained above, the stages of submitting a resolutionplan, selling assets of a company in liquidation and selling the companyas a going concern during liquidation, all indicate that the promoter orthose in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate duringBthese stages. Proposing a scheme of compromise or arrangement underSection 230 of the Act of 2013, while the company is undergoingliquidation under the provisions of the IBC lies in a similar continuum.Thus, the prohibitions that apply in the former situations must naturallyalso attach to the latter to ensure that like situations are treated equally.CD.3 The ‘Clean Slate’

71. A crucial limb of the submissions which have been urged byMr Sandeep Bajaj and Mr Shiv Shankar Banerjee, learned Counselappearing for the appellants and the petitioner is that both Section 12-Aof the IBC and Section 230 of the Act of 2013 belong to what is describedDas the “settlement mechanism” which is distinct from the “resolutionmechanism”. The corporate debtor, it has been urged, will proceed toliquidation if no resolution is possible. Section 29A was designed to preventa back-door entry to a class of persons considered to be ineligible toparticipate in the resolution process. Section 35(1)(f) extends theEineligibility where the liquidator is conducting a sale of the assets of thecorporate debtor in liquidation. It has been submitted in this context thatwhere an application for withdrawal under Section 12-A is allowed, thecompany reverts to the promoter. Placing a scheme under Section 230of the Act of 2013 on the same pedestal, it has been urged that there isno reason to prevent a person who falls in the class of those ineligibleFunder Section 29A from submitting a scheme of compromise orarrangement under Section 230 of the Act of 2013. In order to amplifythe line of submissions as recorded above, the following points havebeen urged:

(i) Though eight amendments have been brought about to theGIBC between November 2017 and September 2020, theineligibility contemplated by Section 29A and Section 35(1)(f)has not been expressly incorporated in Section 230 of theAct of 2013 even after the amendment to the IBC;

(ii) Under Section 230, the persons competent to submit aHscheme are (a)the company or its liquidator; A

(b) the creditors; or

(c) a member.

Section 230 does not prohibit a promoter or a personbelonging to the ex-management, from proposing a schemeof compromise or arrangement. This creates a “front dooropportunity” to the erstwhile management to come forthand save the company; B

(iii) Under Section 30(1) of the IBC, a resolution plan can besubmitted by a person who is not ineligible with referenceto Section 29A. Under Sub-section (4) of Section 30, forthe approval of the resolution plan, a 66 per cent votingshare only of the financial creditors is required. Sub-section2(b) of Section 30 requires the resolution professional toexamine whether the resolution plan provides for thepayment of the debt of operational creditors which shallnot be less than the amount which is payable to them in theevent of liquidation. On the other hand, the provisions ofSection 230 of the Act of 2013 are far more stringent inthat they require a voting share of 75 per cent and, wherethe company is in liquidation, a settlement with all creditorsincluding the operational creditors; CDE

(iv) Section 35(1)(f) applies to the liquidator but does not applyto the NCLT, acting as either the Adjudicating Authority oras the Tribunal; F

(v) A resolution plan upon being approved becomes binding onall stakeholders and is attended with all benefits unlikeSection 230 of the Act of 2013;

(vi) Under Regulation 32 of the Liquidation Process Regulations,two modes are contemplated for the sale of the corporatedebtor as a ‘going concern’, while four modes areGcontemplated for the sale of the assets of the corporatedebtor. The prohibition under Section 35(1)(f) will applyonly to a sale which is governed by Regulation 32, and willhave no application to a scheme of compromise orarrangement which is proposed under Section 230; andH

A(vii)There is no mechanism in the IBC for effecting acompromise or arrangement, and since the only provisionis contained in Section 230, there is no inconsistency withthe IBC.

Withdrawal of applicationB[[41]]

72. Section 12A[[41]] of the IBC was inserted with effect from 6June 2018 by Amending Act 26 of 2018. Under Section 12A, theAdjudicating Authority may allow the withdrawal of an application whichis admitted under Sections 7, 9 and 10, on an application made by theapplicant with the approval of a 90 per cent voting share of the CoC inCsuch manner as may be specified. Rule 8 of the Insolvency andBankruptcy (Application to Adjudicating Authority) Rules, 2016[42], onthe other hand, contemplates that the NCLT, functioning as theAdjudicating Authority, may permit a withdrawal of an application madeunder 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 applicantDbefore its admission. Regulation 30-A of the Insolvency and BankruptcyBoard of India (Insolvency Resolution Process for Corporate Persons)Regulations, 2016 contains provisions for the withdrawal of anapplication. Under Regulation 30-A[43 ], as it originally stood, an application 41 “12A. Withdrawal of application admitted under section 7, 9 or 10 - TheEAdjudicating Authority may allow the withdrawal of application admitted under section7 or section 9 or section 10, on an application made by the applicant with the approvalof ninety per cent. voting share of the committee of creditors, in such manner as may bespecified.”

42 “Adjudicating Authority Rules”

43 “30A. Withdrawal of Application- (1) An application for withdrawal under section12A shall be submitted to the interim resolution professional or the resolutionFprofessional, as the case may be, in Form FA of the Schedule before issue of invitationfor expression of interest under regulation 36A.

(2) The application in sub-regulation (1) shall be accompanied by a bank guaranteetowards estimated cost incurred for purposes of clauses (c) and (d) of regulation 31 tillthe date of application.

(3) The committee shall consider the application made under sub-regulation (1) withinseven days of its constitution or seven days of receipt of the application, whichever isGlater.

(4) Where the application is approved by the committee with ninety percent votingshare, the resolution professional shall submit the application under sub-regulation (1)to the Adjudicating Authority on behalf of the applicant, within three days of suchapproval.

(5) The Adjudicating Authority may, by order, approve the application submittedHunder sub-regulation (4).”

for withdrawal under Section 12-A was required to be submitted beforethe issuance of an invitation for the expression of interest under Regulation36-A. In the decision of this Court in Swiss Ribbons (supra), whichwas rendered on 25 January 2019, it was contemplated that an applicationfor withdrawal may be presented between the period commencing fromthe admission of the application and the date of the constitution of theCoC. This led to the substitution of the Regulation 30-A[44 ]on 25 July2019. As substituted, Regulation 30-A stipulates that an application forwithdrawal under Section 12-A may be made to the adjudicating authority:

44 “30A. Withdrawal of Application- (1) An application for withdrawal under section12A may be made to the Adjudicating Authority- (a) before the constitution of the committee, by the applicant through the interimresolution professional; (b) after the constitution of the committee, by the applicant through the interimresolution professional or the resolution professional, as the case may be:Provided that where the application is made under clause (b) after the issue of invitationfor expression of interest under regulation 36A, the applicant shall state the reasonsjustifying withdrawal after issue of such invitation.

(2) The application under sub-regulation (1) shall be made in Form FA of the Scheduleaccompanied by a bank guarantee- (a) towards estimated expenses incurred on or by the interim resolution professionalfor purposes of regulation 33, till the date of filing of the application under clause (a) ofsub-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), theinterim resolution professional shall submit the application to the Adjudicating Authorityon behalf of the applicant, within three days of its receipt.

(4) Where an application for withdrawal is under clause (b) of sub-regulation (1), thecommittee shall consider the application, within seven days of its receipt.

(5) Where the application referred to in sub-regulation (4) is approved by the committeewith ninety percent voting share, the resolution professional shall submit such applicationalong with the approval of the committee, to the Adjudicating Authority on behalf ofthe applicant, within three days of such approval.

(6) The Adjudicating Authority may, by order, approve the application submittedunder sub-regulation (3) or (5).

(7) Where the application is approved under sub-regulation (6), the applicant shalldeposit an amount, towards the actual expenses incurred for the purposes referred to inclause (a) or clause (b) of sub-regulation (2) till the date of approval by the AdjudicatingAuthority, 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 thecorporate debtor, failing which the bank guarantee received under sub-regulation (2)shall be invoked, without prejudice to any other action permissible against the applicantunder the Code.”

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A(a)before the constitution of the CoC, by the applicant throughthe IRP; and (b)after the constitution of the CoC, by the applicant throughthe IRP or the RP as the case may be.

However, where the application under clause (b) is made afterBthe issuance of the invitation for expression of interest, the applicant hasto state the reasons justifying withdrawal after the issuance of theinvitation. In the decision of this Court in Brilliant Alloys (supra), it hasbeen held that a withdrawal may be contemplated even after the issuanceof invitation of expression of interest. In Swiss Ribbons (supra),theCprovisions of Section 12-A were upheld against the challenge that theyviolated Article 14 of the Constitution. Justice Rohinton F Nariman, whileadverting to the decision in Brilliant Alloys (supra), noted that Regulation30-A(1) has been held not to be mandatory but directory because in agiven case an application for withdrawal may be allowed for exceptionalreasons even after issuance of an invitation for expression of interestDunder Section 36-A. Dealing with the provisions of Section 12-A, thisCourt observed:

“82. It is clear that once the Code gets triggered by admission ofa creditor’s petition under Sections 7 to 9, the proceeding that isbefore the adjudicating authority, being a collective proceeding, isEa proceeding in rem. Being a proceeding in rem, it is necessarythat the body which is to oversee the resolution process must beconsulted before any individual corporate debtor is allowed to settleits claim. A question arises as to what is to happen before aCommittee of Creditors is constituted (as per the timelines thatFare specified, a Committee of Creditors can be appointed at anytime within 30 days from the date of appointment of the interimresolution professional). We make it clear that at any stage wherethe Committee of Creditors is not yet constituted, a party canapproach NCLT directly, which Tribunal may, in exercise of itsinherent powers under Rule 11 of NCLT Rules, 2016, allow orGdisallow an application for withdrawal or settlement. This will bedecided after hearing all the parties concerned and considering allrelevant factors on the facts of each case.

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

allow withdrawal. This high threshold has been explained in theILC Report as all financial creditors have to put their headstogether to allow such withdrawal as, ordinarily, an omnibussettlement involving all creditors ought, ideally, to be entered into. This explains why ninety per cent, which is substantially all thefinancial creditors, have to grant their approval to an individualwithdrawal or settlement. In any case, the figure of ninety percent, in the absence of anything further to show that it is arbitrary,must pertain to the domain of legislative policy, which has beenexplained by the Report (supra). Also, it is clear, that under Section60 of the Code, the Committee of Creditors do not have the lastword on the subject. If the Committee of Creditors arbitrarilyrejects a just settlement and/or withdrawal claim, NCLT, andthereafter, NCLAT can always set aside such decision underSection 60 of the Code. For all these reasons, we are of the viewthat Section 12-A also passes constitutional muster.”

Distinction between a withdrawal simpliciter and schemeof arrangement

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

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

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Aon 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 ofthe corporate debtor. A withdrawal under Section 12-A is in the natureof settlement, which has to be distinguished both from a resolution planwhich is approved under Section 31 and a scheme which is sanctionedunder Section 230 of the Act of 2013. A resolution plan upon approvalBunder Section 31(1) of the IBC is binding on the corporate debtor, itsemployees, members, creditors (including the central and stategovernments), local authorities, guarantors and other stakeholders. Theapproval of a resolution plan under Section 31 results in a “clean slate,”as held in the judgment of this Court in Committee of Creditors ofCEssar Steel India Limited v. Satish Kumar Gupta[45]. Justice RohintonF Nariman, speaking for the three judge Bench of this Court, observed:

“105. Section 31(1) of the Code makes it clear that once aresolution plan is approved by the Committee of Creditors it shallbe binding on all stakeholders, including guarantors. This is for theDreason that this provision ensures that the successful resolutionapplicant starts running the business of the corporate debtor on afresh slate as it were. In SBI v. V. Ramakrishnan [SBI v. V.Ramakrishnan, (2018) 17 SCC 394 : (2019) 2 SCC (Civ) 458] ,this Court relying upon Section 31 of the Code has held: (SCC p.411, para 25)E

“25. Section 31 of the Act was also strongly relied uponby the respondents. This section only states that once aresolution plan, as approved by the Committee of Creditors,takes effect, it shall be binding on the corporate debtor aswell as the guarantor. This is for the reason that otherwise,Funder Section 133 of the Contract Act, 1872, any changemade to the debt owed by the corporate debtor, withoutthe surety’s consent, would relieve the guarantor frompayment. Section 31(1), in fact, makes it clear that theguarantor cannot escape payment as the resolution plan,Gwhich has been approved, may well include provisions asto payments to be made by such guarantor. This is perhapsthe reason that Annexure VI(e) to Form 6 contained in theRules and Regulation 36(2) referred to above, requireinformation as to personal guarantees that have been given in relation to the debts of the corporate debtor. Farfrom supporting the stand of the respondents, it is clearthat in point of fact, Section 31 is one more factor in favourof a personal guarantor having to pay for debts duewithout any moratorium applying to save him.””

In the same vein, the Court observed:

“107. For the same reason, the impugned NCLAT judgment[Standard Chartered Bank v. Satish Kumar Gupta, 2019 SCCOnLine NCLAT 388] in holding that claims that may exist apartfrom those decided on merits by the resolution professional andby the Adjudicating Authority/Appellate Tribunal can now bedecided by an appropriate forum in terms of Section 60(6) of theCode, 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 hasbeen accepted as this would amount to a hydra head popping upwhich would throw into uncertainty amounts payable by aprospective resolution applicant who would successfully take overthe business of the corporate debtor. All claims must be submittedto and decided by the resolution professional so that a prospectiveresolution applicant knows exactly what has to be paid in orderthat it may then take over and run the business of the corporatedebtor. This the successful resolution applicant does on a freshslate, as has been pointed out by us hereinabove. For thesereasons, NCLAT judgment must also be set aside on this count.”

75. The benefit under Section 31, following upon the approval ofthe resolution plan, is that the successful resolution applicant starts runningthe business of the corporate debtor on “a fresh slate”. The scheme ofcompromise or arrangement under Section 230 of the Act of 2013 cannotcertainly be equated with a withdrawal simpliciter of an application, asis contemplated under Section 12-A of the IBC. A scheme of compromiseor arrangement, upon receiving sanction under Sub-section (6) of Section230, binds the company, its creditors and members or a class of personsor creditors as the case may be as well as the liquidator (appointedunder the Act of 2013 or the IBC). Both, the resolution plan upon beingapproved under Section 31 of the IBC and a scheme of compromise orarrangement upon being sanctioned under Sub-section (6) of Section230, represent the culmination of the process. This must be distinguished A

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

76. Additionally, there is no merit in the submission that Section35(1)(f) applies only to a liquidator who conducts a sale of the propertyBof the corporate debtor in liquidation but not to the NLCT, acting as theTribunal, when it exercises its powers under Section 230 of the Act of2013. The liquidator appointed under the provisions of Chapter III of theIBC is entrusted with several powers and duties. Sections 37 to 42 ofthe IBC are illustrative of the powers of the liquidator in the course ofthe liquidation. The liquidator exercises several functions which are of aCquasi-judicial in nature and character. Section 35(1) itself enunciatesthat the powers and duties which are entrusted to the liquidator are“subject to the directions of the adjudicating authority”. The liquidator, inother words, exercises functions which have been made amenable tothe jurisdiction of the NCLT, acting as the Adjudicating Authority. ToDhold therefore that the ineligibility prescribed under the provisions ofSection 35(1)(f) can be disregarded by the Tribunal for the purpose ofconsidering an application for a scheme of compromise or arrangementunder Section 230 of the Act of 2013, in respect of a company which isunder liquidation under the IBC, would not be a correct construction ofthe provisions of law.ED.4 Constitutional validity of Regulation 2B - LiquidationProcess Regulations

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

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 theHCompanies Act 2013. If there is a proposal for a compromise or

arrangement, a member, a creditor or the Liquidator may makean application to the NCLT under the Compromise Act 2013 (Act)(not the Adjudicating Authority under the Code) and then proceedin the manner directed by the NCTL in accordance with the Act.While compromise or arrangement under Section 230 of the Actis proposed, it must be utilize first and only on its closure/ failure,liquidation under the Code may commence. The Code read withregulations may provide that where a credible proposal is made tothe Liquidator under Section 230 of the Act for compromise orarrangement of the CD within seven days of the order underSection 33 of the Code for liquidation, the Liquidator shall file anapplication under the said section within ten days of the order ofliquidation under Section 33 of the Code. A member or a creditormay file an application under Section 230 of the Act within 10days of the order of liquidation. If approved by the NCLT, theLiquidator shall complete the process under Section 230 within 90days of the order of liquidation. The Regulations may provide thatliquidation process under the Coe shall commence at the earlierof the four events:

(a) there is no proposal for compromise or arrangement withinten days; (b)the NCLT does not approve the application under Section230 of the Act,

(c) the process under Section 230 is not completed within 90days or such extended period as may be allowed by theNCLT, or (d)the process under Section 230 is not sanctioned underSection 230(6) of the Act.

A tight time schedule is necessary for conclusion of the processfor compromise or arrangement to ensure that the liquidationprocess is concluded without undue delay.”

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

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A“3.3.3 Ineligibility: Proviso to section 35(1)(f) of the Code mandatesthat the Liquidator shall not sell the immovable and movableproperty or actionable claims of the CD in liquidation to any personwho is not eligible to be a resolution applicant. This prohibits GCSto persons ineligible under section 29A. However, the law doesnot prohibit such ineligible persons to participate in compromiseBor arrangement under section 230 of the Act. It may be necessaryto harmonise the provisions in the Code and the Act to providelevel playing field. Some stakeholders feel that the ineligibility normsunder section 29A of the Code may also apply to compromise orarrangement under section 230 of the Act. Other stakeholdersCfeel that unlike liquidation under the Code, which is mostlyLiquidator driven, the compromise or arrangement under the Actis mostly driven by the Tribunal. Further, section 29A of the Codehas several exceptions, while section 230 of the Act deals with allkinds of companies in all situations. There will be practicaldifficulties in implementation of ineligibility for the purposes ofDsection 230 of the Act. Therefore, it is proposed that the ineligibilitynorms under section 29A of the Code may not apply to compromiseor arrangement under section 230 of the Act.”

Be that as it may, the IBBI solicited public comments on itsproposals. The IBBI evolved its view on the issue of whether SectionE29-A should be made applicable to Section 230 of the Act of 2013 in itssubsequent discussion paper.

80. The discussion paper brought out on 3 November 2019 byIBBI discussed the applicability of Section 29A of the IBC to acompromise and arrangement under Section 230 of the Act of 2013.FThe discussion paper notes that there were many instances where theNCLAT had allowed the application under Section 230 of the Act of2013. In that context, the discussion paper notes thus:

“21. Section 29 A of the Code prohibits certain persons frombecoming a resolution applicant/ submitting a resolution plan in aGCIRP. Proviso to section 35(1)(f) of the Code mandates that aLiquidator shall not sell the immoveable and moveable propertyor actionable claims of the CD in liquidation to any person who isnot eligible to be a resolution applicant. These provisions wereinserted in the Code with effect from 23[rd] November, 2017, whileHsection 230 of the Act was amended along with the enactment of the Code. There is no explicit prohibition on persons ineligible tosubmit resolution plans under section 29A from proposingcompromise or arrangement made under Section 230 of the Act,which may result in person ineligible under section 29A acquiringcontrol of the CD. Thus, while section 29A of the Code is applicableto a CD when it is under CIRP and when it is under LiquidationProcess, it is not applicable to the same CD when it is undergoingcompromise or arrangement, in between CIR process andliquidation process. This has created an anomaly that section 29Ais applicable during the stage before and the stage aftercompromise and arrangement and not during compromise andarrangement.

22. Section 29A of the Code keeps out a person, who is a wilfulldefaulter, who has an account with non-performing assets for along period, etc. and therefore, is likely to be a risk to a successfulresolution of insolvency of a company. This rationale equally appliesto the stage of compromise or arrangement. Non-applicability of section 29A at the stage of compromise or arrangement mayundermine the process and may reward unscrupulous persons atthe expense of creditors. Thus, it may be necessary to harmonisethe provisions in the Code and the Act to provide level playingfield.”

81. The discussion paper also notes that it was necessary to havea discussion on the following amongst other issues:

“f. Should the persons ineligible under section 29A of the Code tobe a resolution applicant be barred from becoming a party incompromise or arrangements under section 230 of the CompaniesAct, 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 discussionpaper is what it professes to be – a matter for discussion in the publicrealm. This cannot be held to constitute an admission of IBBI that anapplicant who is ineligible under Section 29A may submit a scheme ofcompromise or arrangement under Section 230 of the Act of 2013. Thevalidity of the provisions of Regulation 2B, more specifically the proviso,has to be considered on their own footing.

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ASection 196 of the IBC

83. The powers and functions entrusted to IBBI are specified inSection 196 of the IBC. Section 196(1)(t) provides IBBI with the powerto frame regulations, as follows:

“(t) make regulations and guidelines on matters relating toBinsolvency and bankruptcy as may be required under this Code,including mechanism for time bound disposal of the assets of thecorporate debtor or debtor; and”

Clause (t) empowers IBBI to make regulations and guidelines onmatters relating to insolvency and bankruptcy, as may be required underCthe IBC.

Section 240

Section 240(1) empowers IBBI with the power to make regulationsin the following terms:D“(1) The Board may, by notification, make regulations consistent “(1) The Board may, by notification, make regulations consistentwith this Code and the rules made thereunder, to carry out theprovisions of this Code.”

Under Sub-Section (1) of Section 240, the power to frameregulations is conditioned by two requirements: first, the regulations haveEto be consistent with the provisions of the IBC and the rules framed bythe Central Government; and second, the regulations must be to carryout the provisions of the IBC. Regulation 2B meets both the requirements,of being consistent with the provisions of IBC and of being made inorder to carry out the provisions of the IBC, for the reasons discussedearlier in this judgment.F

A clarificatory exercise

84. The principal ground of challenge to Regulation 2B is that theregulation transgressed the authority of IBBI by introducing adisqualification or ineligibility in regard to the presentation of an applicationGfor a scheme of compromise or arrangement under Section 230 of theAct of 2013. It has been urged that IBBI, as an entity constituted by theIBC, had no statutory jurisdiction to amend the provisions of Section 230of the Act of 2013 or to impose a restriction which operates under thepurview of Section 230. The position in our view can be consideredfrom two perspectives, independent of the provisions of Regulation 2B.H

We have indicated in the discussion earlier that even in the absence ofthe Regulation 2B, a person ineligible under Section 29A read with Section35(1)(f) is not permitted to propose a scheme for revival under Section230, in the case of a company which is undergoing a liquidation underthe IBC. We have come to the conclusion, as noted for the reasonsindicated earlier, that in the case of a company which is undergoingliquidation pursuant to the provisions of Chapter III of the IBC, a schemeof compromise or arrangement proposed under Section 230 is a facet ofthe liquidation process. The object of the scheme of compromise orarrangement is to revive the company. The principle was enunciated inthe decision in Meghal Homes (supra) while construing the provisionsof erstwhile Section 391. The same rationale which permeates theresolution process under Chapter II (by virtue of the provisions of Section29A) permeates the liquidation process under Chapter III (by virtue ofthe provisions of Section 35(1)(f)). That being the position, there can beno manner of doubt that the proviso to Regulation 2B is clarificatory innature. Even absent the proviso, a person who is ineligible under Section29A would not be permitted to propose a compromise or arrangementunder Section 230 of the Act of 2013.We therefore do not find any meritin the challenge to the validity of Regulation 2B.

E Epilogue

85. In paragraph 24 of our judgment, we noted the two issueswhich had been framed by the NCLAT in the impugned judgment in thefirst of the appeals. The first issue was “Whether in a liquidationproceeding under [IBC] the Scheme for Compromise and Arrangementcan 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 theappellant in regard to the finding of the NCLAT on this issue, it isimperative for us to make some remarks in relation to this issue and thelarger issue of judicial intervention by the NCLT and NCLAT whileadjudicating disputes under the IBC.

86. To begin with, we would like to take note of the observationsmade by the Insolvency Law Committee in its Report of February 2020[46].The Committee began by acknowledging that the floating of schemes ofcompromise or arrangement under Sections 230 to 232 of the Act, evenfor companies undergoing liquidation, was not part of the framework

46 Available at <https://ibbi.gov.in/uploads/resourcesc6cb71c9f69f66858830630da08e45b4.pdf> accessed on 10 March 2021

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Aunder the IBC. This, the Committee noted, had led to a multiplicity ofissues including, but not limited to, the duality of the role of the NCLT(as a supervisory Adjudicatory Authority under the IBC versus the drivingTribunal under the Act of 2013) and indeed the very question before usin this case, whether the disqualification under Section 29A and provisoto Section 35(1)(f) of the IBC also attaches to Section 230 of the Act ofB2013. However, the Committee notes that judicial intervention by theNCLAT along with the IBBI’s introduction of new regulations have ledto some alignment in the two frameworks.

87. The Committee thereafter notes that the introduction of suchschemes into the framework of the IBC may be worrisome since it willCalter the incentives during the CIRP and lead to destructive delays, whichoften plagued the process under the Sick Industrial Companies (SpecialProvisions) Act, 1985.[47] However, it nonetheless also acknowledges thebenefits such schemes may have to offer[48]. Even so, the Committeeconcludes by noting that such schemes, if at all they are to be brought in,Dshould not be under the Act of 2013 but the IBC itself. The Report notesthus:

“4.6…However, the Committee was of the view that such aprocess for compromise or settlement need not be effected onlythrough the schemes mechanism under the Companies Act, 2013,Eand felt that the liquidator could be given the power to effect acompromise or settlement with specific creditors with respect totheir claims against the corporate debtor under the Code.

4.7 Given the incompatibility of schemes of arrangementand the liquidation process, the Committee recommendedFthat recourse to Section 230 of the Companies Act, 2013for effecting schemes of arrangement or compromise shouldnot be available during liquidation of the corporate debtorunder the Code. However, the Committee felt that anappropriate process to allow the liquidator to effect acompromise or settlement with specific creditors shouldGbe 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 ofArrangement as a Debt Restructuring Tool in India: Problems and Prospects’ (MarchH2017) NUS Working Paper 2017/005 available at <http://law.nus.edu.sg/wp>

88. Due to the ambiguity in the application of the two frameworks,it became imperative that a clarification be issued in this regard. Theintroduction of the proviso to Regulation 2B was a step in this directionwhich sought to clarify the position with respect to the applicability ofthe disqualifications set out in Section 29A of the IBC to Section 230 ofthe Act of 2013 in tandem with the legislative intendment.

89. At this juncture, it is important to remember that the explicitrecognition of the schemes under Section 230 into the liquidation processunder the IBC was through the judicial intervention of the NCLAT in YShivram Prasad (supra). Since the efficacy of this arrangement is notchallenged before us in this case, we cannot comment on its merits.However, we do take this opportunity to offer a note of caution for theNCLT and NCLAT, functioning as the Adjudicatory Authority andAppellate Authority under the IBC respectively, from judicially interferingin the framework envisaged under the IBC. As we have noted earlier inthe judgment, the IBC was introduced in order to overhaul the insolvencyand bankruptcy regime in India. As such, it is a carefully considered andwell thought out piece of legislation which sought to shed away thepractices of the past. The legislature has also been working hard toensure that the efficacy of this legislation remains robust by constantlyamending it based on its experience. Consequently, the need for judicialintervention or innovation from the NCLT and NCLAT should be kept atits bare minimum and should not disturb the foundational principles ofthe IBC. This conscious shift in their role has been noted in the report ofthe 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 withall applicable laws is controlled by the adjudicating authority. Theadjudicating authority gives powers to the insolvency professionalto take appropriate action against the directors and managementof the entity, with recommendations from the creditors committee.All material actions and events during the process are recordedat the adjudicating authority. The adjudicating authority can assessand penalise frivolous applications. The adjudicator hearsallegations of violations and fraud while the process is on. Theadjudicating authority will adjudicate on fraud, particularly duringthe process resolving bankruptcy. Appeals/actions against the AB

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90. Once again, we must clarify that our observations here arenot 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 NCLTBand NCLAT adjudicating disputes under the IBC, going forward.

F Conclusion

91. Based on the above analysis, we find that the prohibition placedby the Parliament in Section 29A and Section 35(1)(f) of the IBC mustalso attach itself to a scheme of compromise or arrangement under SectionC230 of the Act of 2013, when the company is undergoing liquidationunder the auspices of the IBC. As such, Regulation 2B of the LiquidationProcess Regulations, specifically the proviso to Regulation 2B(1), is alsoconstitutionally valid. For the above reasons, we have come to theconclusion that there is no merit in the appeals and the writ petition. The Dcivil appeals and writ petition are accordingly dismissed.

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

Nidhi Jain

Appeals and writ petition dismissed.

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