Sale Of Corporate Debtor As Going Concern Under Liquidation Regulations Takes Precedence Over Scheme Of Compromise U/S 230: NCLAT

Brief Facts

`M/s. Kamachi Industries', hereinafter to be referred to as the `Corporate Debtor', was admitted into Corporate Insolvency Resolution Process (CIRP) on an application under Section 7 of I & B Code, 2016, filed by State Bank of India on account of non-payment of debt by an order of NCLT, Chennai, dated 19.02.2020.

Three Resolution Plans were received and all of them were rejected by CoC on account of the plan value being lower than the liquidation value. The CoC voted for Liquidation on 14.09.2021 and the Tribunal allowed the application for liquidation vide its Order of 09.12.2022 and appointed the Liquidator.

The e-auction was held on 31.01.2024 and the highest bidder Mr. Virendra Jain and Mr. Ankit Jain were issued with Letter of Intent on the same day. The Liquidator filed an application being IA (IBC) / 420 (CHE) / 2024 to confirm the sale of Corporate Debtor as a going concern, before the Hon'ble NCLT which was approved by it on 19.07.2024.

Meanwhile, one minority Shareholder, the Appellant herein had submitted a Scheme of Arrangement on 18.10.2023. The same was deliberated upon and rejected by SCC on 31.01.2024 on grounds of the value offered being lower than Liquidation Value.The minority Shareholder filed an application in IA(IBC)/416(CHE)/2024, before Hon'ble NCLT to set aside the e auction process and to direct the Liquidator to consider the Scheme submitted by him. It was rejected by the same order dated 19.07.2024.

Contentions

The appellant submitted that since he was the Scheme Proponent under Section 230 of the Companies Act, his application preferred under Section 230 of the Companies Act, 2013, should have been given precedence in consideration, over the process contemplated under Regulation 32 (e) & 32A of IBBI Regulation of 2016.

That the Liquidator has proceeded with the consideration of the Scheme of Arrangement and the sale of the assets of the Corporate Debtor simultaneously, which is against the provisions of the Code and particularly that, as contained under Section 230 (1) of the Companies Act, 2013.

That the provisions contained under Regulation 2B of the IBBI (Liquidation Process) Regulations, 2016, which prescribes for a period of 90 days to complete process of Compromise / Arrangement under Section 230 of the Companies Act, 2013, is directory in nature and not mandatory.

Per contra, the respondent submitted that as a consequence of the confirmation of the sale in an e-auction proceedings, the process under Regulation 32(e) & 32A of the IBBI (Liquidation Process) Regulations, 2016, has already been completed, and hence, there was no necessity at this stage for consideration of Scheme submitted by the Scheme Proponent, as contemplated under Section 230 of the Companies Act, 2013.

That as a consequence of the sale, which has already taken place, the Corporate Debtor has been sold as a going concern and the same has been given finality and at this stage, no cause of action as such survives to be considered by this Tribunal, in the exercise of its Appellate Jurisdiction under Section 61(1) of the I & B Code, 2016.

NCLAT's Analysis

The tribunal, at the outset, dealt with scheme pertaining to sale of a corporate debtor as going concern and referred to section 230 of the Companies Act which provides for scheme for compromise or arrangement and observed that Section 230 was created in 2013, prior to enactment of I & B Code, 2016, and the concept of CIRP and Liquidation were yet to be born.

The tribunal further noted that that is why under Section 230 (5) notices are to be sent to various Authorities, including Official Liquidator and under Section 230(7) (d) provision is made for abatement of proceedings pending before BIFR in the event of any arrangement agreed to by the Creditors under Section 230 (6). With enactment of IBC, the process of Insolvency Resolution has been fast tracked and therefore, the significance of Section 230(1) in addressing the issue of insolvency / sickness has diminished.

The tribunal further noted that the follow up process which has been provided under Sub Section (1) of Section 230, would only be necessary to be complied with when the process of Compromise or Arrangement, as envisaged under the Companies Act, 2013, becomes necessary and needs to be carried out.

The tribunal further noted that but,that would be only in a situation, when there is a failure on the part of the Liquidator in his attempt to sustain the functioning of the Corporate Debtor as a going concern, as sufficient provisions have been provided under the I & B Code, 2016, and the IBBI (Liquidation Process) Regulations, 2016.

Further, Regulation 2B under the Liquidation Regulations provides for Compromise / Arrangement within a limit of 90 days from the date of Order of Liquidation. The intent behind such provision is to give a chance for Compromise / Arrangement, before resorting to competitive bidding process for sale of the Corporate Debtor in the manner laid down in Regulation 32 of the said Regulations, the tribunal noted.

The tribunal noted that the Apex Court has held in Arun Kumar Jagatramka V. Jindal Steel & Power Ltd. & Anr.,2019 that the three modes in which a revival is contemplated under the provisions of the IBC. The first of those modes of revival is in the form of the CIRP elucidated in the provisions of Chapter II of the IBC. The second mode is where the corporate debtor or its business is sold as a going concern within the purview of clauses (e) and (f) of Regulation 32.

The court continued to observed that the third is when a revival is contemplated through the modalities provided in Section 230 of the Act of 2013. A scheme of compromise or arrangement under Section 230, in the context of a company which is in liquidation under the IBC, follows upon an order under Section 33 and the appointment of a liquidator under Section 34, the tribunal noted.

Based on the above, the tribunal came to the conclusion that Scheme of Compromise / Arrangement under Section 230 is not to be put on a higher pedestal; rather, since it is a carryover from an earlier legal regime, it is sought to be accommodated within the tight-time frame of I & B Code, 2016. On the other hand, the sale of the Corporate Debtor as a going concern under Regulations 32(e) & 32A is more transparent and effective; therefore, the sale of the Corporate Debtor as a going concern will have precedence, rather than resorting to the Scheme of Compromise under Section 230 (1) of the Companies Act, 2013.

While taking action under Chapter 6 of Liquidation Process Regulations, dealing with realizations of assets of the Corporate Debtor, selling the Corporate Debtor as a going concern, will have to be the first priority for the Liquidator, in order to meet the objective of the I & B Code, 2016, i.e. the Corporate Debtor is to be kept, as a going concern after resolution of the insolvency, the tribunal noted.

The tribunal concluded that no irregularity was conducted in the auction process therefore there was no apparent or legal error committed by Adjudicating Authority as such, calling for any interference. Accordingly, the present appeals were dismissed.

Case Title: Narottamka Trade & Vyapaar Pvt. Ltd., V SPP Insolvency Professionals LLP and Anr.

Case Reference: Company Appeal (AT) (CH) (Ins) No.305/2024 and (IA No.817/2024)

Judgment Date: 14/11/2024

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