NCLAT (13.04.2021) in Ashish Mohan Gupta Vs. The Liquidator of M/s. Hind Motors India Ltd (In Liquidation) [Company Appeal (AT) (Insolvency) No. 875 of 2019] held that;
The introduction of the proviso to Regulation 2B was a step in this direction which sought to clarify the position with respect to the applicability of the disqualifications set out in Section 29A of the IBC to Section 230 of the Act of 2013 in tandem with the legislative intendment.
the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through the judicial intervention of the NCLAT in Y Shivram Prasad (supra). Since the efficacy of this arrangement is not challenged before us in this case, we cannot comment on its merits. However, we do take this opportunity to offer a note of caution for the NCLT and NCLAT, functioning as the Adjudicatory Authority and Appellate Authority under the IBC respectively, from judicially interfering in the framework envisaged under the IBC. . . . . . . . .
we find that the prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC must also attach itself to a scheme of compromise or arrangement under Section 230 of the Act of 2013, when the company is undergoing liquidation under the auspices of the IBC. As such, Regulation 2B of the Liquidation Process Regulations, specifically the proviso to Regulation 2B(1), is also constitutionally valid.
In the Summary Procedure under IBC, the Resolution Professional and Adjudicating Authority are not expected to go into accounts and investigate if and in which category an application falls under Section 7 examining Notifications under Explanation 2 or Sub-Section 9 of Section 7 of MSME Act.”
When we find that it is not necessary for us to pursue Section 230 of the Companies Act at the stage of Liquidation, the same not being part of Procedure of IBC when the Corporate Debtor is in Liquidation, both the Appeals must fail, not having substance in the contentions raised.
Excerpts of the Order;
# 2. The Company Appeal (AT) (Ins.) No. 875 of 2019 relates to Liquidation Proceedings against Corporate Debtor M/s. Hind Motors India Limited. The Appellant is promoter and director of the said Company. It is stated that the Company was engaged in sale and service of cars and has certain immovable assets as well as plant and machinery and stock of spare parts of cars. The Order of Liquidation with regard to this Company was passed on 12th September, 2017. The Appellant claims that the Liquidator instead of reviving the Company through Settlement under Section 230 of the Companies Act, 2013 sought to close the business of the Company. The Liquidator issued Notice for sale of spare parts available with the Company at low price. E-Auction was proposed to be held on 16th August, 2019. The Appellant filed Application CA No. 620/2019 in CP No. 6/chd/CHD/2017 before the Adjudicating Authority (National Company Law Tribunal, Chandigarh Bench, Chandigarh) against said action and the Application came to be rejected by the Impugned Order dated 23rd August, 2019. The Appellant is taking exception to the Impugned Order passed claiming that the Liquidator did not take steps in terms of the Orders passed by National Company Law Appellate Tribunal in the matter of “S.C. Sekaran Vs. Amit Gupta and Ors.”, Company Appeal (AT) (Ins.) No. 495-496 of 2018. It was also claimed that the sale of spare parts would lead to loss of substratum of the Company since the same were old. The Appellant is claiming that the Liquidator should have taken steps to sell the assets of the Corporate Debtor as a going concern.
# 7. We have heard Learned Counsel for both sides and we have gone through both these Appeals. It appears strange but an Insolvency Appeal is required to be taken up with a Company Appeal. This is because of linking between the IBC and Section 230 of the Companies Act, 2013 brought about by earlier Judgments of this Tribunal.
# 8. With regard to Section 230 of the Companies Act, 2013 it would be appropriate to refer to recent Judgment in the matter of “Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd” passed by the Hon’ble Supreme Court of India in Writ Petition Civil No. 269 of 2020 with other Appeals on 15th March, 2021 reported as 2021 SCC Online SC 220. The Hon’ble Supreme Court of India in Paragraph 99 to 105 in the said Judgment observed as under:
“99. In paragraph 24 of our judgment, we noted the two issues which had been framed by the NCLAT in the impugned judgment in the first of the appeals. The first issue was “Whether in a liquidation proceeding under [IBC] the Scheme for Compromise and Arrangement can be made in terms of Sections 230 to 232 of the Act of 2013]”. While we noted in paragraph 25, that no challenge has been made by the appellant in regard to the finding of the NCLAT on this issue, it is imperative for us to make some remarks in relation to this issue and the larger issue of judicial intervention by the NCLT and NCLAT while adjudicating disputes under the IBC.
100. To begin with, we would like to take note of the observations made by the Insolvency Law Committee in its Report of February 2020. The Committee began by acknowledging that the floating of schemes of compromise or arrangement under Sections 230 to 232 of the Act, even for companies undergoing liquidation, was not part of the framework under the IBC. This, the Committee noted, had led to a multiplicity of issues including, but not limited to, the duality of the role of the NCLT (as a supervisory Adjudicatory Authority under the IBC versus the driving Tribunal under the Act of 2013) and indeed the very question before us in this case, whether the disqualification under Section 29A and proviso to Section 35(1)(f) of the IBC also attaches to Section 230 of the Act of 2013. However, the Committee notes that judicial intervention by the NCLAT along with the IBBI’s introduction of new regulations have led to some alignment in the two frameworks.
101. The Committee thereafter notes that the introduction of such schemes into the framework of the IBC may be worrisome since it will alter the incentives during the CIRP and lead to destructive delays, which often plagued the process under the Sick Industrial Companies (Special Provisions) Act, 1985. However, it nonetheless also acknowledges the benefits such schemes may have to offer. Even so, the Committee concludes by noting that such schemes, if at all they are to be brought in, should not be under the Act of 2013 but the IBC itself.
102. Due to the ambiguity in the application of the two frameworks, it became imperative that a clarification be issued in this regard. The introduction of the proviso to Regulation 2B was a step in this direction which sought to clarify the position with respect to the applicability of the disqualifications set out in Section 29A of the IBC to Section 230 of the Act of 2013 in tandem with the legislative intendment.
103. At this juncture, it is important to remember that the explicit recognition of the schemes under Section 230 into the liquidation process under the IBC was through the judicial intervention of the NCLAT in Y Shivram Prasad (supra). Since the efficacy of this arrangement is not challenged before us in this case, we cannot comment on its merits. However, we do take this opportunity to offer a note of caution for the NCLT and NCLAT, functioning as the Adjudicatory Authority and Appellate Authority under the IBC respectively, from judicially interfering in the framework envisaged under the IBC. . . . . . . . .
105. Based on the above analysis, we find that the prohibition placed by the Parliament in Section 29A and Section 35(1)(f) of the IBC must also attach itself to a scheme of compromise or arrangement under Section 230 of the Act of 2013, when the company is undergoing liquidation under the auspices of the IBC.As such, Regulation 2B of the Liquidation Process Regulations, specifically the proviso to Regulation 2B(1), is also constitutionally valid. For the above reasons, we have come to the conclusion that there is no merit in the appeals and the writ petition. The civil appeals and writ petition are accordingly dismissed.”
Keeping the above observations of the Hon’ble Supreme Court in view, and the note of caution as recorded by the Hon’ble Supreme Court, in the present matters, we can see that considerable delay leading to erosion of Value is taking place because of effort to push in provisions of Section 230 of the Companies Act at the stage of Liquidation.
# 12. Keeping the above observations of the Hon’ble Supreme Court in view and the note of caution in Para 103 of Judgment of Hon’ble Supreme Court in the matter of Arun Kumar Jagatramka (Supra) when present matter is appreciated it is apparent that the Appellant and the management concerned who brought about the situation where the three companies are in Liquidation is trying to take over coming up with the scheme where there is no infusion of additional funds and the liabilities are sought to be discharged in the name of amalgamation. It is not in tune with expectations of a Resolution Plan under IBC.
# 13. At the time of arguments, now effort is being made to take benefit of Section 240A of IBC calling upon this Tribunal to go into the definitions of Micro, Small and Medium Enterprise and hold the Company to be Micro or Medium Industry. We however find that the caution recorded by the Hon’ble Supreme Court is important. We have noticed the worry recorded of Insolvency Law Committee. We can see the effect of our intervention in importing Section 230 of Companies Act, into Liquidation stages under IBC. There are simply delays. Keeping in view caution noted by Hon’ble Supreme Court of India and reasons for it, we find in this matter it is not necessary for us to push for further steps under Section 230 of the Companies Act inter alia considering that basically Section 230 of the Companies Act is not part of the scheme of IBC where Liquidation is concerned. As such, in the present matter, we need not decide the question of Section 29A of IBC. Alternatively, even if the said Section was to be considered, although the Learned Counsel for the Appellant is arguing that this Court should record finding on Micro, Small and Medium Enterprises on the basis of definition in the MSME Act, and records of the three Companies, we decline to go into those details in the absence of memorandum under MSME Act and for reasons we recorded in Judgment in the matter of “Amit Gupta Vs. Yogesh Gupta” in Company Appeal (AT) (Ins.) No. 903 of 2019 dated 20.12.2019 where we have observed in Para 14 as under:
“14. Section 7 itself shows that the Central Government has to “classify” any class or classes or enterprises either as micro or small or medium on the basis of parameters fixed in Section 7. The Appellant has not brought on record that the Corporate Debtor has been classified by Central Government and if yes, under which parameter. In the Summary Procedure under IBC, the Resolution Professional and Adjudicating Authority are not expected to go into accounts and investigate if and in which category an application falls under Section 7 examining Notifications under Explanation 2 or Sub-Section 9 of Section 7 of MSME Act.”
# 14. When we find that it is not necessary for us to pursue Section 230 of the Companies Act at the stage of Liquidation, the same not being part of Procedure of IBC when the Corporate Debtor is in Liquidation, both the Appeals must fail, not having substance in the contentions raised. The Company Appeal (AT) No. 07/2020 also needs to be dismissed as the Appellant is pushing forward a scheme of amalgamation compromise and arrangement for three companies which are already in Liquidation under IBC.
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Blogger’s Comments; This above case answers pertinent questions about the applicability of the section 29A & 240A of the Code on compromise under section 230 of “The Companies Act” during liquidation process.-
1. Section 29A. Observations of The Hon’ble SCI in “Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd” [Writ Petition Civil No. 269 of 2020] are quite clear.
“The introduction of the proviso to Regulation 2B was a step in this direction which sought to clarify the position with respect to the applicability of the disqualifications set out in Section 29A of the IBC to Section 230 of the Act of 2013 in tandem with the legislative intendment.”
2. Section 240A. On this matter the Appellate Tribunal observed that neither Resolution Professional nor Adjudicating Authority are not expected to go into accounts and investigate if and in which category an application falls under Section 7 examining Notifications under Explanation 2 or Sub-Section 9 of Section 7 of MSME Act.”, giving credence to the view that in case of MSME unit the disqualification under section 29A will not attach for the compromise under section 230 of The Companies Act” during liquidation, whereas section 240A reads as under;
Section 240A. Application of this Code to micro, small and medium enterprises. –
(1) Notwithstanding anything to the contrary contained in this Code, the provisions of clauses (c) and (h) of section 29A shall not apply to the resolution applicant in respect of corporate insolvency resolution process of any micro, small and medium enterprises.
The bare reading of Section 240A, shows that exemption from section 29A has been allowed only for resolution applicants in respect of CIRP of MSME & not for any other purpose. How come provisions of this section were invoked for compromise under section 230 of “The Companies Act” during the liquidation process in the first place & provisions of this section of the Code escaped the attention of the Appellate Tribunal.
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