Role of Promoters in Liquidation of Debtor Cos. under IBC

DELEP GOSWAMI, FCS
Advocate
Supreme Court of India 
​New Delhi

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ANIRRUD GOSWAMI
Advocate
Supreme Court of India
​New Delhi 

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June 19, 2019[2019] 106 taxmann.com 208 (Article) 204 Views

IBC Changes Debtor-Control to Creditor-Control
1. The enforcement of some of the important provisions of the Insolvency and Bankruptcy Code, 2016 ("IBC") has brought about a significant positive change in the way the lender banks and financial institutions and even the operational creditors used to recover their dues from the borrower-debtor-company ('Corporate Debtor' or 'CD'). In the earlier regime, the CD used to be in control and in charge of the management of the company even while the creditors chased them for recovery of the outstanding loans and dues, but under the IBC, as soon as the petition by the Financial Creditor (FC) or the Operational Creditor (OC) under section 7 or 9 of the IBC or even by the corporate debtor itself u/s. 10 of the IBC is admitted by the Adjudicating Authority (AA), i.e., the respective jurisdictional National Company Law Tribunals (NCLT) and the Interim Resolution Professional (IRP) is appointed, under Section 17 of the IBC, the management of the affairs of the CD vest in the IRP and the powers of the board of directors of the CD shall stand suspended and be exercised by the IRP. Further, the said Section 17 of the IBC mandates that the officers and managers of the CD shall report to the IRP and provide access to such documents and records of the CD as may be required by the IRP.
Supreme Court's judgment in Swiss Ribbons case-reiterates basic object of IBC to protect CD from erstwhile promoters and from Corporate death by Liquidation
2. In the recent judgment of the Hon'ble Supreme Court of India ("the Apex Court") in the case of Swiss, Ribbons (P.) Ltd. v. Union of India [2019] 152 SCL 365/101 taxmann.com 389 (SC), while upholding the constitutional validity of the IBC, the Apex Court observed that "the IBC is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, in terms of legislations having failed, "trial" having led to repeated "errors", ultimately led to the enactment of the IBC. The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation…In the working of the Code, the flow of financial resources to the commercial sector in India has increased exponentially as a result of financial debts being repaid. The experiment conducted in enacting the Code is proving to be largely successful. The defaulter's paradise is lost. In its place, the economy's rightful position has been regained."
In the context of the present article, one cannot ignore the loud and clear message sent by the Apex Court in the Swiss Ribbons case (supra) with regard to the approach of the IBC, wherein the Supreme Court has observed, inter-alia, that "the objective of the IBC is to ensure revival and continuation of the corporate debtor by protecting it from its own management and from liquidation and that the Code is a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors."The basic thrust of IBC is therefore revival and continuation of the CD by protecting it from its own management and from liquidation.
It is pertinent to note that the Apex Court in its judgment in Swiss Ribbons (supra) case observed as follows :-
"11. …What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort, if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern.
12. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor's assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends."
In the absence of Revival scheme of CD – Liquidator can sell the assets of CD as a 'Going Concern'
3. Even though liquidation is not the objective of the IBC, yet under the provisions of the IBC, if a viable revival plan of the CD, known as "Resolution Plan" of the CD is not possible within the time frame of 270 days stipulated in IBC (initial 180 days plus extended 90 days period), the AA is left with no other option, but to order liquidation of the CD under Section 33(1) of IBC. In most of the cases, the Resolution Professional (RP) is entrusted with the task of liquidation as per the provisions of the IBC.
Further, the Hon'ble Supreme Court of India in Arcelor Mittal India (P.) Ltd. v. Satish Kumar Gupta [2018] 98 taxmann.com 99/150 SCL 354 at paragraph 83, footnote (3) has noted as follows:
"3. Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 states that the liquidator may sell the corporate debtor as a going concern."
In this regard, the Apex Court analysed its judgment in Meghal Homes Pvt. Ltd. v. Shree Niwas Girni K.K. Samiti [2007] 78 SCL 482, wherein it observed and held as follows:
"33. The argument that Section 391 would not apply to a company which has already been ordered to be wound up, cannot be accepted in view of the language of Section 391(1) of the Act, which speaks of a company which is being wound up. If we substitute the definition in Section 390(a) of the Act, this would mean a company liable to be wound up and which is being wound up. It also does not appear to be necessary to restrict the scope of that provision considering the purpose for which it is enacted, namely, the revival of a company including a company that is liable to be wound up or is being wound up and normally, the attempt must be to ensure that rather than dissolving a company it is allowed to revive. Moreover, Section 391(1)(b) gives a right to the liquidator in the case of a company which is being wound up, to propose a compromise or arrangement with creditors and members indicating that the provision would apply even in a case where an order of winding up has been made and a liquidator had been appointed. Equally, it does not appear to be necessary to go elaborately into the question whether in the case of a company-in-liquidation, only the Official Liquidator could propose a compromise or arrangement with the creditors and members as contemplated by Section 391 of the Act or any of the contributories or creditors also can come forward with such an application."
NCLAT's Directions to the Liquidator Appointed under IBC
4. The National Company Law Appellate Tribunal (NCLAT) in its judgment in S.C. Sekaran v. Amit Gupta [2019] 103 taxmann.com 222/152 SCL 536 (NCLAT) went on to state that Section 391 of the Companies Act, 1956 has been replaced by Section 230 of the Companies Act, 2013 (CA 2013) which talks of "power to compromise or make arrangements with creditors and members" and analysed in detail the elaborate provisions of Section 230 of the CA, 2013. In the aforesaid S.C. Sekaran case (supra), the NCLAT directed the liquidator to proceed in accordance with law, to verify claims of all creditors, take into custody and control the assets, property, effects and actionable claims of the CD; carry on the business of the CD for its beneficial liquidation, etc., as prescribed under Section 35 of the IBC. The NCLAT also directed that the liquidator will have access to information under Section 33 of the IBC and will consolidate the claim under Section 38 and after verification of claim in terms of Section 39, will either admit or reject the claim as required under Section 40 of the IBC. The NCLAT further directed that before taking steps to sell the assets of the CD, the liquidator will take steps in terms of Section 230 of the CA, 2013 and that the AA, if so required, will pass appropriate orders. Only on failure of revival, the AA and the liquidator will first proceed with sale of the company's assets wholly and thereafter, if not possible, to sell the company in part in accordance with law.
In another judgment, in Ajay Agarwal v. Ashok Magnetic Ltd., company Appeal (AT) (Insolvency) Nos.792 & 793 of 2018, dated 22-2-2019 (NCLAT) while reiterating its judgment in S.C. Sekaran (supra), held that even during the period of liquidation, the liquidator should ensure that the debtor-company should remain as a going concern and take steps in terms of Section 230 of the C.A., 2013 and can consider compromise, arrangements and amalgamation between the company and its members or any class of them in terms of Section 230(1)(b) of the C.A., 2013. The NCLAT also observed that it will be open to the members of the debtor-company (in this case M/s. Ashok Magnetics Ltd.) or the creditors, to contact the liquidator for compromise or arrangements in terms of Section 230 of the C.A., 2013 and if the scheme is viable, feasible and maximizes the assets of the CD and the balance of interest of the creditors, then the liquidator will move an application under Section 230 of the C.A., 2013 before the NCLT for order and directions. On failure, the liquidator will ensure to sell the CD as a going concern in its totality, taking into consideration the interests of the employees of the corporate debtor.
NCLAT: At Liquidation Stage, Liquidator may consider Scheme of Compromise or Arrangement with Creditors
5. In a recent judgment dated 27.02.2019, in Y. Shivram Prasad v. S. Dhanapal [2019] 153 SCL 294/104 taxmann.com 377 (NCLAT), the NCLAT reiterated that during the liquidation stage, the liquidator is required to take steps to ensure that the company remains a going concern and that steps are required to be taken for revival and continuance of the corporate debtor by protecting the corporate debtor and its management from death by liquidation. Thus, the steps which are required to be taken, are by compromise and arrangement with the creditors or class of creditors or members or class of members in terms of Section 230 of the C.A., 2013 and on failure, the liquidator is required to take steps to sell the business of the corporate debtor as a going concern in its totality, along with the employees. The last stage will be death of the corporate debtor by liquidation, which should be avoided. The NCLAT directed that a total 90 days' time is allowed to take steps under Section 230 of the C.A., 2013. In case for any reason, the liquidation process under Section 230 takes more time, it is open to the NCLT to extend the period, if there is a chance for approval of arrangement of the scheme.
In the aforesaid NCL-AT judgment in Y. Shivram Prasad (supra), on the question of how to deal with objections to the scheme and to examine the viability of the scheme of compromise and arrangement, the NCL-AT passed the following direction:
"18. During proceeding under Section 230, if any, objection is raised, it is open to the Adjudicating Authority (National Company Law Tribunal) which has power to pass order under Section 230 to overrule the objections, if the arrangement and scheme is beneficial for revival of the 'Corporate Debtor' (Company). While passing such order, the Adjudicating Authority is to play dual role, one as the Adjudicating Authority in the matter of liquidation and other as a Tribunal for passing order under Section 230 of the Companies Act, 2013. As the liquidation so taken up under the 'I&B Code', the arrangement of scheme should be in consonance with the statement and object of the 'I&B Code', meaning thereby, the scheme must ensure maximisation of the assets of the 'Corporate Debtor' and balance the stakeholders such as, the 'Financial Creditors', 'Operational Creditors', 'Secured Creditors' and 'Unsecured Creditors' without any discrimination. Before approval of an arrangement or Scheme, the Adjudicating Authority (National Company Law Tribunal) should follow the same principle and should allow the 'Liquidator' to constitute a 'Committee of Creditors' for its opinion to find out whether the arrangement of Scheme is viable, feasible and having appropriate financial matrix. It will be open for the Adjudicating Authority as a Tribunal to approve the arrangement or Scheme in spite of some irrelevant objections as may be raised by one or other creditor or member keeping in mind the object of the Insolvency and Bankruptcy Code, 2016.
19. In view of the observations aforesaid, we hold that the liquidator is required to act in terms of the aforesaid directions of the Appellate Tribunal and take steps under Section 230 of the Companies Act. If the members or the 'Corporate Debtor' or the 'creditors' or a class of creditors like 'Financial Creditor' or 'Operational Creditor' approach the company through the liquidator for compromise or arrangement by making proposal of payment to all the creditor(s), the Liquidator on behalf of the company will move an application under Section 230 of the Companies Act, 2013 before the Adjudicating Authority, i.e., National Company Law Tribunal in terms of the observations as made in above. On failure, as observed above, steps should be taken for outright sale of the 'Corporate Debtor' so as to enable the employees to continue."
Conclusion
6. Even though the aforesaid judgments give directions to the liquidator to apply the provisions of Section 230 of the Companies Act, 2013 for the scheme of compromise or arrangement, yet a closer reading of the aforesaid judgment also make it clear that, in doing so, the liquidator will have to follow and observe the mandate of the IBC. In Section 29A of the IBC, the promoters of the CD as well as the persons acting in concert with them, or related parties as defined under IBC, are ineligible to submit any resolution plan in respect of the CD under the provisions of IBC. The Supreme Court in Arcelor Mittal (supra) has observed that the CD is to be protected from the erstwhile management of the CD who have defaulted in repaying the outstanding dues to the banks and financial institutions and to the operational creditors. In such a scenario, can such promoters or their related companies acting in concert, make a back-door entry into the corporate-debtor company via the route of Section 230 of the C.A., 2013 to take hold of the CD by making arrangements or compromising with the creditors. It is worthwhile to note that for approving the resolution plan, under IBC it requires 66% voting by committee of creditors in favour whereas Section 230 of the C.A., 2013 mandates approval by scheme by shareholders and creditors representing 75% of the shareholding/debt owed, which is more rigorous and cumbersome. How all these contradictory factors will be reconciled by the Liquidator is an interesting issue on which a clear cut Court direction is awaited, but it seems that the existing promoters of the CD have no direct role while liquidation under IBC is under process. It appears that the Insolvency and Bankruptcy Board of India (IBBI) is amending the appropriate rules for liquidation of companies under IBC and what measures it takes will be an interesting issue.
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