Obtaining Prior NOC From Stock Exchanges/SEBI Not Mandatory Before Submitting Scheme Of Arrangement For Company In Liquidation: NCLAT New Delhi

Brief Facts

The Birla Cotsyn (India) Ltd. (corporate debtor) was in liquidation under provisions of the IBC. The liquidator filed a scheme of arrangement before National Company Law Tribunal (NCLT), Mumbai for its approval to revive the corporate debtor under section 230 of the Companies Act and Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016. The NCLT did not approve the scheme on the ground that prior approval of the Bombay Stock Exchange was not taken under Regulation 37 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 before submitting the scheme.

Issues before NCLAT

1. Whether Regulation 37(1) and (2) of the LODR would apply to the Scheme submitted by the Liquidator under Section 230 of the Companies Act read Regulation 2B of the Liquidation Process Regulations?

2. Whether the clarification introduced by way of Regulation 37(7) of the LODR for restructuring proposals under Section 31 of the Code would also apply to a Scheme for revival of a company in liquidation under Regulation 2B of the Liquidation Process Regulations read with Section 230 of the Companies Act, 2013?

NCLAT's Analysis

The NCLAT observed that prior approval from stock exchanges is not required while submitting scheme of arrangement under section 230 of the Companies Act, 2013 before the NCLT. Section 230 only mandates that a notice should be given to the stock exchanges that the scheme has been submitted before the tribunal for its approval of which the liquidator has complied with. It was wrong to insist the prior approval of the stock exchange before the scheme can be approved. The tribunal held as under:

“In Pentemedia Graphics Limited v. The Bombay Stock Exchange, (2006) it was held the requirement of NoC from stock exchanges is not mandatory for approval of a Scheme and it is only required for continued listing of the Company, which can be pursued after the Scheme as well.

Further, Section 230(5) of the Companies Act, 2013 only contemplates notice to the stock exchanges after the Scheme has been filed with the Tribunal, and not a prior NoC from the stock exchanges. The requirement of giving notice to the stock exchanges under Section 230(5) of the Companies Act has been complied with by the Liquidator and the Scheme was received by the BSE on 16.05.2023.(p10)

Thus, under the Companies Act, there is no requirement for prior NOC from the stock exchanges or SEBI before the Scheme is filed before the Ld. NCLT, and the requirement is only to give notice to the stock exchanges and SEBI once the Scheme is filed with the Ld. NCLT for calling/dispensing with meetings of creditors and members, which has been duly complied with by the Liquidator / Applicant of the Scheme”.

The NCLAT further noted that Regulation 37(1) and (2) of the LODR which require listed companies to seek NOC from stock exchanges, are not applicable on the liquidator submitting a scheme to revive the company. When it comes to company under liquidation, scheme of arrangement is not filed by the company rather it is filed by the liquidator. The liquidator is considered as a separate and independent entity from the company for the purpose of section 230 of the Companies Act. This section contemplates four persons who can file a scheme of arrangement and the liquidator is one of them along with a company. It was held as under:

“Now in cases of companies in liquidation, a scheme of arrangement is not filed by the company / listed entity. It is rather filed by the liquidator. Further, under Section 230(1) of the Companies Act, the Liquidator is treated as separate and independent from the company. This is evident from the plain language of Section 230(1), which stipulates the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator.

Thus section 230(1) of the Companies Act contemplates four different categories of persons who can apply to the NCLT for approval of a Scheme. Pertinently, Section 230(1) treats the liquidator as a separate and distinct category of person who can file a scheme before the Ld. NCLT. It does not consider the liquidator to be the same as the company, hence the rigors of Regulation 37(1) and 37(2) of LODR shall not apply”.

The NCLAT further observed that a scheme of arrangement for the revival of a company under liquidation shares all attributes of a resolution plan under section 31 of the IBC. The scheme of arrangement under section 230 is entitled to the same benefit and exemptions under regulation 37 of the LODR as resolution plans under section 31 of the IBC are entitled. The objective of both is to revive the company therefore same regulatory rigors should be applicable on them. The Tribunal held as under:

“Pertinently, a scheme of arrangement for revival of a company in liquidation is also a 'restructuring proposal'. It contains all the same attributes and characteristics of a resolution plan under Section 31 of the Code. It is just a different mode contemplated under the Code for achieving the same objective i.e. revival of the Corporate Debtor.

Hence whatever benefits and rigors that applies to a resolution plan under Section 31 of the Code must equally apply to a scheme of arrangement submitted under Section 230 of the Companies Act read with Regulation 2B of the Liquidation Process Regulations. Both these modes of revival operate in a similar continuum. They deserve equal treatment”.

The NCLAT relied on the Supreme Court judgment in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. in which it was held that section 29A of the IBC disqualifies persons from submitting a resolution plan but this prohibition continues even when a restructuring plan for a company in liquidation is submitted.

It was further held that regulation 5 and 11 of the LODR do not impose any responsibilities on the liquidator as they deal with the responsibilities of the listed entities. It was held as under:

“Regulation 5 above pertains to an obligation of a listed company to ensure its key managerial personnel, officers etc shall comply with the responsibilities or obligations assigned to them and it does not make the obligation of the listed entity the obligation of key managerial personnel, directors, promoters or the persons dealing with the listed entity. To attract Regulation 5, there must be an assignment of responsibility/obligations and there is no Regulation under the LODR which cast an obligation on the Liquidator to obtain a prior NOC before filing a scheme of arrangement.

So far Regulation 11 of the LODR is concerned, it does not deal or impose any obligation on the Liquidator to obtain a NOC in respect of a scheme of arrangement and the said Regulation deals with merits of the Scheme to ensure the same does not violate any provision of the Securities Laws”.

The NCLAT referred to previous cases of Y. Shivram Prasad v. S. Dhanapal & Ors. (2019) and S.C. Sekaran v. Amit Gupta and Ors. [2019] in which it was held that revival of company in liquidation through a scheme of arrangement must be prioritised over assets sale. After these rulings, Regulation 2B was incorporated in the Liquidation Process Regulations on July 25, 2019. The Tribunal observed that when the SEBI introduced various amendments in 2018 including the LODR, revival of a company in liquidation through a scheme of arrangement was not in its contemplation.

Furthermore, the NCLAT observed that the IBC provides a single window streamlined process for the revival of the company under which necessary approvals have to be obtained from the tribunal to ensure timely completion of the process. Section 31(4) of the IBC provides that necessary approvals like from competition commission of India in case of combinations have to be taken within one year from the approval of resolution plan. This provision has been interpreted by the NCLAT to be directory and not mandatory so that it does not obstruct the revival process unnecessarily.

It was further noted by the NCLAT that in case regulation 37 of the LODR is strictly interpreted, it will conflict with the strict timelines provided under the IBC for completing the process. In such a conflict, the IBC will prevail due to overriding effect given to it by section 238 of the IBC. It was observed as under:

“If Regulation 37 is considered to impose a mandatory requirement for prior NOC from stock exchanges for a scheme for revival of a company in liquidation also, it would conflict with the strict timelines provided under the Code and the Liquidation Process Regulations. In case of any such conflict, the provisions of the Code must prevail given the non-obstante clause contained in Section 238 of the Code”.

The present scheme shares attributes of a resolution plan and fulfils the requirements under both the IBC and the Liquidation Process Regulations with the object of preventing the civil death of the company. Accepting strict interpretation of Regulation 37 of the LODR will make the revival through scheme of arrangement of the company in liquidation more difficult than the revival through resolution plan under section 31 of the IBC.

Conclusion

The NCLAT concluded that the impugned order dated April 4, 2024 is set aside as no prior approval of the stock exchanges is required before submitting a scheme of arrangement for the revival of a company in liquidation. It was also held that Regulation 37(7) of the LODR must be applicable on the scheme of arrangement in the same manner it is applied on resolution plans under section 31 of the IBC. The NCLT was directed to hear the scheme on merits without insisting NOC from the stock exchange.

Case Title: Nikhil Jain and Ors.v. Anil Goel (Liquidator) and Anr.

Court: National Company Law Appellate Tribunal, New Delhi

Case Reference: Company Appeal (AT) No. 148 of 2024

Judgment Date: 20/08/2024

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