Section 29A of Insolvency and Bankruptcy Code, 2016 will also be applicable to the

person proposing the scheme of compromise or arrangement under section 230 of

Companies Act, 2013: Supreme Court of India

By: Jyoti A Singh & Nishi Agrawal

AJA Legal and Associates

Picture credits: Pixabay.com

Recently in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr. 1 decided by the
Hon’ble Supreme Court of India (“Supreme Court” / “SC”) on March 15, 2021, the Division
Bench comprising of Mr. Justice (Dr.) Dhananjaya Y. Chandrachud and Mr. Justice M. R. Shah
rules that section 29A Insolvency and Bankruptcy Code, 2016 (“the Code”) must also be
applicable to a scheme of compromise or arrangement mentioned under section 230 of the
Companies Act, 2013 (“Act of 2013”) when the company is undergoing liquidation under
Chapter III of the Code. The Court further upheld the constitutional validity of the proviso to
Regulation 2B (1) of Insolvency and Bankruptcy Board of India (Liquidation Process)
Regulations, 2016, 2 (“Liquidation Process Regulation”).
The Hon’ble Court very extensively dealt with two issues involved in the present case (i)
whether in a liquidation proceeding under the Code, the scheme of compromise or
arrangement can be made in terms of Sections 230 to 232 of the Act of 2013; (ii) whether the
promoter is eligible to file an application for compromise or arrangement, while he is ineligible
under Section 29A of the Code to submit a ‘Resolution Plan’?
The Court resolved the abovementioned issues by analysing the legal position and the
interplay between the proposal of the scheme of compromise or arrangement under section
230 of the Act of 2013 and liquidation proceedings initiated under Chapter III of the Code. The
Court noted that since the enactment of the Code, it has marked a significant change in good
corporate governance which follows to the rule of law as the central idea for the resolution of
corporate insolvencies. The Code distinguishes corporate insolvency not only as an isolated
problem faced by an individual business entity but also places it in the context of a framework
that is founded on public interest in facilitating economic growth by balancing diverse
stakeholder interests.

1
Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr. W. P. (C) No. 269 of 2020 with Civil
Appeal No. 2719 of 2020.
2
Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016

1
The Court observed that the Code is an attribute to a primacy of the business decisions taken
by creditors acting as a collective body for the timely resolution of corporate insolvency. The
same is necessary to ensure the growth of credit markets and encourages investments.
Primarily, the Code aimed at re-organization and resolution of insolvencies where liquidation
is the last resort.
Per the Report of the Insolvency Law Committee dated March 3, 2018, 3 the main intent behind
introducing section 29A was to prevent the unscrupulous persons from gaining control over
the affairs of the corporate debtor (“CD”) which is already in distress. The same standard is
incorporated under the proviso to Section 35(1)(f) in the liquidation process as well, wherein it
restricts the liquidator from selling the immovable and movable or actionable claims of the CD
in liquidation “to any person who is not eligible to be a resolution applicant”. The words in
section 35(1)(f) of the Code can be clearly referable to the ineligibility criteria mentioned under
section 29A of the Code.
The Court while analysing the issues, cited some of the landmark cases, which includes the
case of Chitra Sharma v. Union of India, 4 wherein the Court emphasised -“Parliament was
evidently concerned over the fact that persons whose misconduct has contributed to defaults
on the part of debtor companies misuse the absence of a bar on their participation in the
resolution process to gain an entry. Parliament was of the view that to allow such persons to
participate in the resolution process should undermine the salutary object and purpose of the
Act. It was in this background that Section 29A has now specified a list of persons who are not
eligible to be resolution applicants.” In Arcelor Mittal India Private Limited v. Satish Kumar
Gupta & Ors., 5 Supreme Court pointed out that section 29A of the Code is a “see-through
provision” which allows reaching to a person who is in actual ‘control’ of the CD. The same is
enacted in the larger public interest and to facilitate effective corporate governance. Further in
Swiss Ribbons Private Limited v. Union of India 6, the Court elucidated the object of the
underlying section 29A, which is primarily to ensure the revival of the CD by protecting it from
its own management and from a corporate death by liquidation.

In the light of the abovementioned precedents, the Court made a purposive interpretation and
held that section 29A has been inserted to ensure that the objective of the Code does not get
defeated by the hands of the ‘ineligible person’ who has put the CD in distress in the first place.
Further, section 35(1)(f) of the Code is placed in the same line where the former promoters of
the CD were forbidden to bid for the property of the CD in case of liquidation. The rationale
behind the provision is to exclude the ineligible person from the process of liquidation which
involves the sale of assets of the CD. The Court pointed out that the main purpose of section
29A is to provide a sustainable revival and a clean slate to the CD by ensuring that the person
who caused the distress by making a default cannot be the part of the solution or revival.
The Hon’ble Court also touched upon the crucial interface between the section 29A of the
Code and section 230 of the Act of 2013 and mention that there are three modes for the revival
of the CD, which include- (i) the corporate insolvency resolution process (“CIRP”) under
Chapter II the Code; (ii) the selling of the business of CD per clause (e) and (f) of Regulation
32 and; (iii) through the modalities given under Section 230 of the Act of 2013. The Court
further took cognizance of National Company Law Appellate Tribunal (“NCLAT”) decision in
Y Shivram Prasad v. S Dhanapal, 7 wherein the NCLAT observed that the steps required to be
taken by the liquidator also comprise of the compromise or arrangement scheme to ensure
the revival of the CD one last time before its death by liquidation. The NCLAT further took note

3
Report of the Insolvency Law Committee, March 2018, Ministry of Corporate Affairs, accessed via link
https://ibbi.gov.in/uploads/resources/ILRReport2603_03042018.pdf
4
Chitra Sharma v. Union of India, (2018) 18 SCC 575
5
Arcelor Mittal India Private Limited v. Satish Kumar Gupta & Ors., (2019) 2 SCC 1
6
Swiss Ribbons Private Limited v. Union of India, (2019) 4 SCC 17
7
Y. Shivram Prasad v. S. Dhanapal, 2019 SCC OnLine NCLAT 172

2
of the Adjudicating Authority’s observation that suggest the dual role of the liquidator, one
pursuant to the provisions of liquidation and the other related to the passing of an order under
Section 230 of Act of 2013.
The Court further observed that the application of ineligibility criteria mentioned in section 29A
of the Code to the scheme of compromise or arrangement under section 230 of Act of 2013 is
not violative of Article 14 of Constitution of India (“COI”). The Court discerned the linkage
between the statutory scheme mentioned under the Code and the scheme envisaged under
Section 230 of the Act of 2013. The liquidator appointed under the Code has to attempt for the
revival of the CD above all so that the CD could be saved from the corporate death.
The scheme of compromise or arrangement come into effect only after the consent of the
creditor and its sanction by the Tribunal, hence, binding on all the stakeholders of the CD
including the liquidator so appointed under the provisions of the Code. The Court pointed out
that the context and interpretation of section 230 of Act of 2013 is wider in the sense that it
cannot be limited to the company being wound up as per the provision of the Act of 2013 or to
the CD undergoing liquidation as per Chapter III of the Code. The Court further clarified that
section 29A will not be applicable to the case where the company is not subjected to the
proceedings under the Code but only be applicable to the cases where the liquidation process
has been initiated pursuant to the provisions of the Code.
In the words of Justice Dr. Dhananjaya Y Chandrachud- “A harmonious construction between
the two statutes would ensure that while on the one hand a scheme of compromise or
arrangement under Section 230 is being pursued, this takes place in a manner which is
consistent with the underlying principles of the IBC because the scheme is proposed in respect
of an entity which is undergoing liquidation under Chapter III of the IBC. As such, 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.”
The Hon’ble Court also interjected on the distinction between the withdrawal of application
filed under section 12A of the Code and scheme of compromise or arrangement and held that
both the provisions cannot be equated, as upon sanctioning of the scheme of compromise or
arrangement under section 230(6) of the Act of 2013 by the Tribunal, it binds the company, all
of its creditors, members and all other stakeholders including the liquidator appointed under
Chapter III of the Code. Similarly, when a resolution plan gets accepted under section 31 of
the Code it become binding on all the stakeholder too; it represents the conclusion of the
process by providing the CD with a clean slate to start with. Whereas, an application filed
under section 12A of the Code is merely a withdrawal application which needs to be approved
by the ninety percent voting share of the committee of creditors. It does not conclude the
resolution process rather; it is in the nature of a settlement that has been agreed or entered
between the creditors and the CD. Thus, it is clear that both the processes are very different
in nature and in intent and therefore, cannot be equated.
Lastly, in respect to the constitutional validity of the proviso to Regulation 2B of Liquidation
Process Regulation, the Court asserted that the primary ground for challenging the Liquidation
Process Regulation is because it contravene with the authority of Insolvency and Bankruptcy
Board of India by introducing a disqualification or ineligibility criteria with regards to the
proposal of an application under section 230 of the Act of 2013. The Court clarified that the
proviso to Regulation 2B of Liquidation Process Regulation is merely a clarification and even
in the absence of the same, a person who is not eligible under section 29A of the Code would
not be permitted to propose a scheme of compromise or arrangement under section 230 of
the Act of 2013.