The Supreme Court recently considered the interaction between liquidation proceedings under the Insolvency and Bankruptcy Code, 2016 ("IBC") and Section 230 of the Companies Act, 2013 in the case of Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr1 ("Act"). Whether a person who is unable to submit a resolution plan under Section 29A of the IBC is also ineligible to propose a scheme under Section 230 of the Act was the question before the Supreme Court.
In the instant case titled Arun Kumar Jagatramka vs. Jindal Steel and Power Ltd the issue raised for clarification before the Apex Court was:
Whether regulation 2B of the Liquidation Process is constitutionally valid or not?
With regard to this issue, the SC ruled that the prohibition in sections 29A and 35(1)(f) of the Code must also apply to a scheme of compromise or arrangement under section 230 of the Companies Act, 2013 (scheme), where a company is undergoing liquidation under the Code, upholding the constitutional validity of regulation 2B of the Liquidation Process Regulations. A person who is disqualified under section 29A read with section 35(1)(f) is not allowed to put out a plan for the revival of a firm that is being liquidated under the Code, even in the absence of the aforementioned rule.
A scheme is a step in the liquidation process when a company is being liquidated in accordance with Chapter III of the Code. If those who are disqualified for submitting a resolution plan, taking part in the sale of the company's assets in liquidation, or taking part in the sale of the corporate debtor as a "going concern" are somehow allowed to offer a plan, it would result in a blatant absurdity. The same reasoning that underlies the Chapter II resolution process (by virtue of the provisions of Section 29A) also underlies the Chapter III liquidation procedure (by virtue of the provisions of Section 35(1))(f)
The Court categorically stated that,
"We must not be oblivious to the following prospect, should we find that the appellant is not an operational creditor, even under the IBC Regulations apart from claims by financial creditors and operational creditors, claims can be made by other creditors. However, there are, undoubtedly, certain advantages, which an operational creditor enjoys over the other creditors. We would proceed on the basis that, while the appellant is not a financial creditor, it would constitute an operational creditor."