No back-door pact for defaulting promoters: What the Supreme Court ruling means

The Supreme Court has ruled that promoters of insolvent companies, which are barred from bidding for their own companies under Section 29A of the Insolvency and Bankruptcy Code (IBC) cannot use any scheme or arrangement to gain control of their company even if it goes into liquidation.

What does the ruling by the Supreme Court say?

In a case involving the liquidation of Gujarat NRE Coke Limited, the National Company Law Appellate Tribunal (NCLAT) had in 2019 held that any person who was ineligible, under Section 29A of IBC, to bid for his company, was also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act.

Section 230 of the Companies Act allows promoters or creditors of the company to propose a scheme of arrangement or compromise under which the debt of the company can be restructured.

In its judgment upholding the NCLAT decision, the apex court said that while Section 230 would be applicable for promoters and creditors in normal course of the workings of the company, it would not be applicable if the company is facing liquidation under IBC.

“The company has to be protected from its management and a corporate death. It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a compromise or arrangement under Section 230 of the Act of 2013,” a two-judge Bench of Justices D Y Chandrachud and M R Shah said.

How does it impact promoters of companies?

The clarification by the Supreme Court with respect to participation of promoters in liquidation process of an insolvent company will speed up the resolution process.

Since the objective of the IBC is to find a suitable buyer for the company and liquidation is ordered only in cases where there are no viable plans submitted, experts believe that a quick liquidation is of utmost importance to maximise the value of assets of the company.

“Any other interpretation would have left a gaping hole in the scheme of IBC and defeated the very object of Section 29A bar introduced both for resolution and liquidation processes under the IBC,” Misha, partner at Shardul Amarchand Mangaldas & Co, said.

Apart from this, it also settles down the conflicting judgments given by different benches of the National Company Law Tribunal (NCLT), wherein these forums had, in order to follow the IBC’s principle of value of asset maximisation, allowed some of the promoters to re-bid for the company or propose some arrangement when it was sent to liquidation.