Supreme Court Confirms Ineligibility under IBC Section 29A for Scheme Proposals under Companies Act Section 230

Introduction

The landmark judgment in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. and Another (2021 INSC 187) by the Supreme Court of India addresses a pivotal issue in insolvency law: the eligibility of certain individuals to propose schemes of compromise and arrangement under the Companies Act, 2013, while undergoing liquidation under the Insolvency and Bankruptcy Code (IBC), 2016. This case revolves around whether individuals disqualified under Section 29A of the IBC can participate in proposing schemes under Section 230 of the Companies Act during the liquidation process.

Summary of the Judgment

The Supreme Court upheld the decision of the National Company Law Appellate Tribunal (NCLAT), affirming that individuals who are ineligible under Section 29A of the IBC are also barred from proposing schemes of compromise and arrangement under Section 230 of the Companies Act, 2013, during liquidation proceedings. The Court validated the Insolvency and Bankruptcy Board of India's (IBBI) Regulation 2B, which explicitly prohibits ineligible persons from participating in such schemes. This decision reinforces the IBC's objective to prevent promoters responsible for corporate defaults from gaining control during insolvency resolution.

Analysis

Precedents Cited

The judgment heavily references several key precedents that shape the interpretation of insolvency laws:

Chitra Sharma v. Union of India (2018): Emphasized the purpose of Section 29A to prevent promoters responsible for insolvency from participating in resolution processes.
Arcelormittal India Pvt. Ltd. v. Satish Kumar Gupta (2019): Advocated for a purposive interpretation of Section 29A to align with the IBC's objectives.
Swiss Ribbons Pvt. Ltd. v. Union of India (2019): Reiterated that the IBC aims for the revival of corporate debtors and protection from management misuse.
Meghal Homes Pvt. Ltd. v. Shree Niwas Girni K.K. Samiti (2007): Established that schemes of compromise must intend to revive the company and uphold public interest.

These cases collectively emphasize a purposive and holistic interpretation of insolvency provisions, aligning legal interpretations with legislative intent.

Legal Reasoning

The Court's reasoning is anchored in the harmonization of the IBC with the Companies Act, ensuring that the safeguards against misuse during insolvency resolution are consistent across different legal frameworks. Key aspects include:

Integration of Provisions: Recognizing that during liquidation under the IBC, Section 230 of the Companies Act functions as part of the liquidation process, thereby inheriting the ineligibility criteria set by Section 29A.
Regulation 2B Validation: Affirming that Regulation 2B, which prohibits ineligible persons from proposing schemes under Section 230, is within the IBBI's regulatory authority and consistent with the IBC.
Distinction from Section 12A Withdrawals: Clarifying that withdrawal of an insolvency application under Section 12A is distinct from proposing a scheme under Section 230, thereby maintaining the integrity of both processes.
Prevention of Absurdities: Upholding that allowing ineligible persons to propose schemes would lead to outcomes contrary to the IBC's objectives, endorsing the principle that legal interpretations should avoid absurd results.

The Court emphasized that the legislative intent behind Section 29A—to block promoters responsible for defaults from regaining control—must extend to all facets of insolvency resolution, including schemes under the Companies Act.

Impact

This judgment has profound implications for insolvency proceedings in India:

Enhanced Creditor Protection: Strengthens the IBC framework by ensuring that promoters or individuals responsible for corporate failures cannot bypass ineligibility restrictions through schemes of compromise.
Regulatory Clarity: Confirms the validity and necessity of Regulation 2B, providing clear guidelines for liquidators to prevent ineligible parties from influencing liquidation outcomes.
Consistency Across Laws: Promotes coherence between the IBC and the Companies Act, reducing legal ambiguities and ensuring that insolvency resolution mechanisms operate seamlessly.
Judicial Guidance: Sets a precedent for future cases involving the interplay between the IBC and other corporate laws, guiding courts and practitioners in interpreting overlapping provisions.

Future insolvency cases will now uniformly apply Section 29A's disqualifications across both the resolution and liquidation processes, thereby reinforcing the IBC's objectives of corporate revival and creditor rights protection.

Complex Concepts Simplified

Understanding the interplay between different legal provisions is crucial. Here's a breakdown of the key concepts:

Section 29A of the Insolvency Bankruptcy Code (IBC)

This section lists persons who are ineligible to submit a resolution plan during the Corporate Insolvency Resolution Process (CIRP). It aims to prevent promoters or individuals responsible for a company's insolvency from regaining control through resolution plans.

Section 35(1)(f) of the IBC

During liquidation, this section restricts the liquidator from selling the company's assets to anyone who is not eligible to be a resolution applicant under Section 29A. This ensures that only credible, eligible parties can acquire the company's assets.

Section 230 of the Companies Act, 2013

This provision allows companies to propose schemes of compromise or arrangement with creditors or members. Such schemes require approval by the National Company Law Tribunal (NCLT) and, once sanctioned, are binding on all involved parties.

Regulation 2B of the Liquidation Process Regulations, 2016

Introduced by the IBBI, this regulation specifies that during liquidation processes under the IBC, any scheme proposed under Section 230 of the Companies Act must be completed within 90 days. Additionally, it prohibits ineligible persons (as defined under Section 29A of the IBC) from being parties to such schemes.

Section 12A of the IBC

This section permits the withdrawal of insolvency applications under Sections 7, 9, or 10, subject to approval by a significant majority of the Committee of Creditors (CoC). However, this withdrawal is distinct from proposing a scheme under Section 230 and does not automatically trigger ineligibility under Section 29A.

Conclusion

The Supreme Court's affirmation in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. and Another underscores the integrity of the IBC framework in safeguarding creditor interests and ensuring that irresponsible promoters do not manipulate insolvency processes to their advantage. By upholding Regulation 2B, the Court reinforced the necessity for consistent application of disqualification norms across both resolution and liquidation phases, thereby fortifying the IBC's objective of effective and fair corporate revival.

This judgment not only aligns various corporate laws to function cohesively but also sets a robust precedent for future insolvency proceedings, emphasizing the primacy of legislative intent and purposive interpretation in shaping India's corporate insolvency landscape.