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Scheme of Arrangement during Liquidation under Companies Act, 2013

By October 31, 2020 No Comments

A. INTRODUCTION:

Section 390 of the erstwhile Companies Act, 1956 which has now been replaced by Section 230 of the Companies Act, 2013 (“CA, 2013”), lays down that a scheme of arrangement can be proposed by a liquidator of a company, undergoing liquidation by filing an application before the National Company Law Tribunal (“NCLT”), to seek sanction for a scheme of arrangement.

The Insolvency and Bankruptcy Code, 2016 (“IBC”) has laid down corporate insolvency resolution process which is one of the modes of restructuring and the revival of a company. Such a process converts to liquidation proceedings only if the resolution plan has not been approved or upon approval has been contravened by the company. One of the main objectives of the IBC is to ensure that a company is revived, and liquidation is considered as a last resort. The IBC provides that such schemes should be completed within the initial 90 (ninety) days from the date of the liquidation order. However, NCLT has the powers to extend the time limit of 90 (ninety) days on reasonable grounds.

B. LIQUIDATION AND SCHEME OF ARRANGEMENT:

Liquidation proceedings, with the course of time, are now evolving into restructuring proceedings by taking recourse under Section 230 of CA, 2013 for the purpose of restructuring and revival of the company, even at the liquidation stage. These schemes of arrangement have not been very popular and have not been extensively used for the revival of the companies, however, the same gained light through the recent judgment of National Company Law Appellate Tribunal (“NCLAT”) in S.C. Sekaran v. Amit Gupta[1] and Ors. wherein the liquidator was directed by the NCLAT to take steps in terms of Section 230 of the CA, 2013 for the purpose of revival of the corporate debtor.

C. WHETHER PERSONS INELIGIBLE UNDER SECTION 29A OF THE IBC CAN PROPOSE A SCHEME?

Pursuant to Section 230 of the CA, 2013, a scheme of arrangement can be proposed by a creditor or member or a liquidator including one who has been appointed under the IBC.

Applicability of Section 29A: Section 29A was introduced by the Insolvency and Bankruptcy (Amendment) Act, 2017 and has restricted certain persons from being resolution applicants which means that such persons who have been mentioned under Section 29A shall be ineligible to submit resolution plans. Such persons include an undischarged insolvent, a wilful defaulter, a person who has been convicted or a promoter of a company. Section 29A of IBC, also mentions that a promoter of a company cannot propose resolution plans for the purpose of revival of the company.

It is pertinent to state here that, Section 230 of the CA, 2013 does not restrict promoters from proposing a scheme of arrangement. However, it shall be noted that an outsider shall have no right to propose a scheme of arrangement under Section 230 of CA, 2013.

Taking into consideration Section 29A of IBC, promoters cannot propose the scheme of arrangement as Section 29A disqualifies promoters from proposing the resolution plans. In the case of Jindal Steel and Power Limited vs. Arun Kumar Jagatramka & Gujarat NRE Coke Limited[2], the NCLAT has held that when a scheme of arrangement is maintainable as per Section 230 of the CA, 2013 for the companies which are undergoing liquidation, the same shall not be maintainable when proposed by a person ineligible under Section 29A of IBC. It is, therefore, settled now that any member/creditor who is ineligible pursuant to Section 29A shall not be qualified to propose a scheme of arrangement under Section 230 of the CA, 2013, during liquidation process before NCLT.

D. APPROVAL OF SCHEME:

Pursuant to Section 230 of CA, 2013, a scheme of arrangement is required to be approved by a majority of persons representing 3/4th in value of the creditors, or class of creditors or members or class of members, as the case may be, either voting in person or by proxy or by way of a postal ballot.

The meeting of the creditors under Section 230 of CA, 2013 can be dispensed with, in the event the creditors representing 90% in value have approved the scheme of arrangement by way of affidavits.

It would be interesting to note here, as to whether the persons who are ineligible pursuant to Section 29A of IBC, shall have the right to participate and vote in the meetings and would they receive the notice of the meetings and the scheme copies. However, Section 230 of the CA, 2013 or the IBC does not mention any such eligibility or ineligibility criteria for any person as to which member/creditor shall have the right to vote for a scheme of arrangement presented during the liquidation proceeding. It is pertinent to note here that as per IBC, for the approval of a resolution plan, the members or directors are not entitled to vote rather they shall be entitled to the notice and to participate in the meetings as per Section 24 of IBC. The Supreme Court held that as the directors of the corporate debtor, would have a vital interest in the resolution plans, which would be discussed at the meetings of the committee of creditors, such directors shall be provided with the copy of the plans, along with the notice of the meetings, in Vijay Kumar Jain vs. Standard Chartered Bank and Ors[3] and if any such guarantees have been provided by the directors, they shall be bound by the resolution plans.

By considering the design of the IBC and taking voting pattern into consideration, it may be possible to state that persons ineligible under Section 29A may not be entitled to vote. However, there is no clarity given the fact that there is no specific provision either under the CA, 2013 or under the IBC which restricts any particular set of persons to not vote on a scheme of arrangement presented during liquidation.

E. MANAGEMENT OF THE COMPANY: WHETHER IT SHALL BE RETAINED OR NOT?

Pursuant to the provisions of IBC, there is no bar on the continuation of the management and the promoters of the company. However, in such events, concerns and questions may arise with regard to the same management continuing the company, which has led the company into liquidation. The IBC does not provide for the ousting of the management of the company.

F. PROCEDURE FOR APPROVAL OF SCHEME UNDER SECTION 230 OF THE CA, 2013:

  • Pursuant to Section 230 of the CA, 2013, a scheme of arrangement can be proposed by a liquidator.
  • Where a scheme of arrangement is proposed by the liquidator, NCLT may on an application made by the liquidator order a meeting of the creditors or class of creditors, members or class of members and such meeting shall be conducted in the manner as ordered by the NCLT.
  • Where a meeting is required to be called pursuant to the order of NCLT, a notice of the meeting shall be sent to the creditors and members to their respective addresses and such persons shall vote at the meeting, either by themselves or through proxies or by way of the postal ballot for the purpose of adoption of the scheme.
  • The scheme is required to be approved by a majority of persons representing 3/4th in value of the creditors, or class of creditors or members or class of members, as the case may be, either voting in person or by proxy or by way of a postal ballot. The meeting of the creditors can be dispensed with, in the event the creditors representing 90% in value have agreed and approved the scheme of arrangement by way of affidavits.
  • A petition shall be filed before the NCLT for the approval of the scheme of arrangement.
  • If the scheme of arrangement is sanctioned by the NCLT, by an order, the same shall be binding on the company, creditors and members.
  • The order of the NCLT shall be filed with the registrar within 30 (thirty) days of receipt of the order.

G. CONCLUSION:

The concept of the scheme of arrangement during liquidation is a ray of hope for companies to revive themselves but however, it would be better if more clarity is provided on certain aspects such as voting mechanism by creditors and members in relation to the approval of the scheme and if the same is clarified it would encourage more companies to take this route for their revival.

Authors: Prashant Jain, Co-Founder & Partner; Anita Dugar, Senior Associate; Kriti Sanghi, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) anitadugar@samistilegal.in (iii) kritisanghi@samistilegal.in.

[1] Company Appeal (AT) (Insolvency) No. 495 & 496 of 2018

[2] Company Appeal (AT) No. 221 of 2018; order dated 24/10/2019

[3] Civil Appeal No. 8430 of 2018

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