Promoters still in doubt how to file settlement proposal during Liquidation Process

Promoters still in doubt how to file settlement proposal during Liquidation Process:

Issue: whether the withdrawal of application filed by the Applicant under section 7, 9 and 10 of IB Code can be permitted by the NCLT post liquidation order passed under section 33 of IB Code. OR, can promoter be entitled to propose a scheme of arrangement after passing Liquidation Order under Section 33 of IB Code?

Earlier, as per Rule 8 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 ("CIRP Rules"), the National Company Law Tribunal may permit withdrawal of Section 7, 9 and 10 of Insolvency and Bankruptcy Code, 2016 ("IB Code"), on a request by the applicant before its admission. However, at that time, there was no provision in the IB Code to permit withdrawal of CIRP process after admission of CIRP.

Thereafter, many corporate debtors has filed an appeal before the National Company Law Appellate Tribunal ("NCLAT") under section 61 of IB Code, to allow the withdrawal of CIRP proceedings after admission of insolvency application by way of availing its inherent power recognized by Rule 11 of NCLAT Rules, 2016. However, the NCLAT has dismissed all such type of plea in various matters and held that "Rule 11 of NCLAT Rules has not been adopted for the purpose IB Code and only Rules 20 and 26 have been adopted in absence of any specific inherent power and where there is no merit, the question of exercising inherent power does not arise". (M/s Lokhandwala Kataria Construction Pvt. Ltd. Vs. Nisus Finance & Investment Manager LLP. CA/AT/95 of 2017).

Rule 8 of CIRP Rules is reproduced as under:

Withdrawal of application: The Adjudicating Authority may permit withdrawal of the application made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission.

After that, number of the aggrieved Corporate Debtor's again filed an appeal against the orders of NCLAT before the Supreme Court for allowing the withdrawal of section 7, 9 and 10 of IB Code application post admission of CIRP proceedings. Thereafter, based on the issue of many aggrieved corporate debtor and necessity to revive and achieve the object of IB Code, the Apex court by utilizing its inherent power under Article 142 of the Constitution of India allowed the appeal and set aside the order passed by NCLT and NCLAT. Observation of the Supreme Court in the matter of M/s Uttara Foods and Feeds Private Limited Vs. Mona Pharmachem (Civil Appeal No. 18520 of 2017), is reproduced as under:

"In an earlier order dated 24.07.2017, this Bench had observed that in view of Rule 8 of the I & B (Application to Adjudicating Authority) Rules, 2016, the National Company Law Appellate Tribunal prima facie could not avail of the inherent powers recognised by Rule 11 of the National Law Appellate Tribunal Rules, 2016 to allow a compromise to take effect after admission of the insolvency petition. We are of the view that instead of all such orders coming to the Supreme Court as only the Supreme Court may utilise its powers under Article 142 of the Constitution of India, the relevant Rules be amended by the competent authority so as to include such inherent powers. This will obviate unnecessary appeals being filed before this Court in matters where such agreement has been reached. On the facts of the present case, we take on record the settlement between the parties and set aside the NCLAT order".

Subsequently, based on the above observation given by the Supreme Court as well as to achieve the object of IB Code as encapsulated in the Bankruptcy Law Reforms Committee ("BLRC") dated November 2015, the Insolvency Law Committee formed an opinion and given its report on March 2018 and agreed to amend the provision of IB Code by allowing the withdrawal of application filed by the applicant under section 7, 9 and 10 of IB Code.

The object of BLRC Report is reproduced as under:

"all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution"

The relevant para No. 29.2 of Insolvency Law Committee, is reproduced as below:

"On a review of the multiple NCLT and NCLAT judgments in this regard, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and not only the applicant creditor and the debtor. On this basis read with the intent of the Code, the Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post admission if the CoC approves of such action by a voting share of ninety per cent. It was specifically discussed that rule 11 of the National Company Law Tribunal Rules, 2016 may not be adopted for this aspect of CIRP at this stage (as observed by the Hon'ble Supreme Court in the case of Uttara Foods and Feeds Private Limited v. Mona Pharmacem) and even otherwise, as the issue can be specifically addressed by amending rule 8 of the CIRP Rules"

After all such deliberation, the Central Government by way of Ordinance amended the IB Code and inserted a new section 12A in the IB Code, to allow the withdrawal of CIRP proceeding post admission. Section 12A of IB Code is reproduced as under:

"Withdrawal of application admitted under section 7, 9 or 10. - The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified"

Now, the same question again arises, whether the withdrawal of application filed by the Applicant under section 7, 9 and 10 of IB Code can be permitted by the NCLT post liquidation order under section 33 of IB Code. OR, can promoter be entitled to propose a scheme of arrangement after passing liquidation order under Section 33 of IB Code?

As of now, if the NCLT does not receive any resolution plan before the expiry of maximum permissible period under section 30(6) of IB Code for the Corporate Debtor or if rejects the plan due to non-compliance of requirement as specified therein, then NCLT will pass an order for commencement of liquidation proceedings.

Question a) whether the Promoters of the Corporate Debtor should have been given any opportunity to pay the dues or propose any settlement proposal or not, during liquidation period?

Answer: The said question has been clearly clarified by the Hon'ble NCLAT (Y. Shivram Prasad Vs. S. Dhanapal & Ors - CA/AT/224 of 2018) and held that parties can settle and withdraw the matters only at three stages, first is before admission of application under section 7, 9 and 10 of IB Code, second is post admission of application but before constitution of committee of creditors (as per Apex Court order in the matter of Swiss Ribbon Pvt Ltd & Anr. Vs Union of India - WP (Civil)-99/2018), and third is as per section 12A of IB Code with the consent of 90% of committee of creditors. If the matter is not settled in any of the above three stages and no resolution plan found viable or feasible or maximum permissible time has been expired, then the NCLT will pass an order for Liquidation. 

Question b) whether the revival of Corporate Debtor is possible during Liquidation Process?

Answer: Yes, once Liquidation order is passed, then Corporate Debtor also has a chance for its revival instead of going into liquidation. As per Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ("Liquidation Regulation), the liquidator may also sell the corporate debtor as a going concern. The Hon'ble NCLAT in the matter of S.C. Sekaran Vs. Amit Gupta & Ors. has held that the Liquidator is supposed to keep the companies as going concern even during the period of liquidation. The Liquidator, if required, will take the steps under section 230 of Companies Act, 2013 after consultation with the members or the creditors of the Corporate Debtor for making arrangement with the third party and thereafter take approval of NCLT. Only on failure of revival, the NCLT and the Liquidator will first proceed with the sale of company's assets wholly and thereafter, if not possible, to sell the company in part and in accordance with law.

Consequently, the IBBI has amended the Liquidation Regulation and inserted Regulation 2A by giving 90 days' time to take steps under Section 230 of the Companies Act, 2013. In case, for any reason the liquidation process under Section 230 takes more time, it is open to the NCLT to extend the period of 90 days, if there is a chance of approval of arrangement of the scheme.

If any objection is raised by any of the parties during liquidation then NCLT has power to overrule the objections, if the arrangement and scheme is beneficial for revival of the Corporate Debtor. And the NCLT has to play dual role, one as the Adjudicating Authority in the matter of liquidation and other as a Tribunal for passing order under Section 230 of the Companies Act, 2013.

Question c) Who is eligible to give proposal under section 230 of Companies Act, 2013 during Liquidation process? OR who can propose scheme of arrangement during Liquidation Process?

Answer: As stated earlier that, during Liquidation Process, the Liquidator will take the steps under section 230 of Companies Act, 2013 after consultation with the members or the creditors of the Corporate Debtor for making arrangement with the third party. Now, it's important to understand, who can propose the scheme of arrangement under Section 230 of Companies Act, 2013 during Liquidation Process.

Because, as per Section 230 of Companies Act, 2013, any member or creditor or company itself or if company is being wound up then the Liquidator, can propose the scheme of arrangement, between the Company and its member or with its creditors or their class. And if the members or Company or creditors or a class of creditors like ‘Financial Creditor' or ‘Operational Creditor' wants to give any proposal for compromise and arrangement then they can do so through the liquidator by making proposal of payment to all the creditor(s), and then the Liquidator on behalf of the company will move an application under Section 230 of the Companies Act, 2013 before the NCLT (Y. Shivram Prasad Vs. S. Dhanapal & Ors - CA/AT/224 of 2018 NCLAT).

However, it's settled law that if members or creditors who wants to propose any scheme of arrangement, is ineligible under Section 29A of IB Code, cannot propose any scheme of arrangement under Section 230 of Companies Act, 2013. Reason behind is that, as per Hon'ble Supreme Court judgment in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. - Writ Petition (Civil) No.99 of 2019 held that primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. Further, as per Proviso to Section 35(f) of IB Code also prohibits the Liquidator to sell the immovable and movable property or actionable claims of the ‘Corporate Debtor' in Liquidation to any person who is not eligible to be a Resolution Applicant.

Therefore, it's clear that the Promoter, if ineligible under Section 29A cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or actionable claims of the ‘Corporate Debtor'.

Question d) Can an outsider who has no interest in the affairs of the Company, propose the scheme of arrangement under Section 230 of Companies Act, 2013 during Liquidation Process?

Answer: Earlier, the same issue has already been raised and then clarified by Hon'ble Karnataka High Court and held that only the creditor or member of that company or a liquidator in the case of company being wound up is entitled to move an application proposing compromise or arrangement. By necessary implication, anyone other than those specified in the section would not be entitled to move such an application. Therefore, an outsider who is the propounder for the sanction of scheme of arrangement is neither a member nor a creditor of the company; and who has no interest in the affairs of the company; and he has only come forward to purchase the assets and liabilities of the company in liquidation by filing an application styled one under Section 391 of Companies Act, 1956, cannot propose any scheme of arrangement under Section 230 of Companies Act, 2013 (Earlier Section 391 of Companies act, 1956). 

My Observation:

After the aforesaid discussion, it's now clear that as per the current provisions, the promoters of the Company either as member or creditor, who is, if ineligible to propose a resolution plan under IB Code, cannot propose a scheme of arrangement during Liquidation Period.

However, as per my understanding, the Promoters also should be allowed to file settlement proposal to withdraw the Liquidation process based on Section 12A of IB Code or to allow for proposing scheme of arrangement under section 230 to 232 of the Companies Act, 2013, because of the following reasons:

1. Difficult to arrange Funds in short period:

As we know very well that, running of business is very difficult during the current period, and most of the promoters who is running their business since long also do not want to close its business suddenly. In most of the cases, promoters generally try its best effort to arrange funds so that they can protect their organization from the insolvency proceedings. Even, after initiation of CIRP process, promoters still try to withdraw the insolvency process by invoking section 12A of IBC. But, in number of cases, it's difficult for the promoters to arrange fund in short period of time and difficult to withdraw the insolvency proceedings or to give Resolution Plan. As we seen in number of cases, where, the promoters arrange funds through selling of their personal properties, however, due to some difficulties it took some time. During that period if the NCLT has passed an order for Liquidation, then it does not mean that the promoters is not capable to run the business. Even, in number of cases, they want to offer a plan to buy the company by giving more than its liquidation value. However, due to lack of any legal provision under the IB code, the NCLT or NCLAT dismissed all the application by saying that there is no provision under IB Code to withdraw the insolvency proceeding during liquidation period or the promoters are debarred to file revival plan under section 230 to 232 of Companies Act, 2013 during liquidation period.

2. As per Insolvency and Bankruptcy Code Preamble:

The preamble of IB Code is "An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto".

3. As per Banking Law Reform Committee Report:

As per BLRC Report "The Code will facilitate the assessment of viability of the enterprise at a very early stage. The law must explicitly state that the viability of the enterprise is a matter of business, and that matters of business can only be negotiated between creditors and debtor. While viability is assessed as a negotiation between creditors and debtor, the final decision has to be an agreement among creditors who are the financiers willing to bear the loss in the insolvency. The legislature and the courts must control the process of resolution, but not be burdened to make business decisions. The law must ensure that all key stakeholders will participate to collectively assess viability. The law must ensure that all creditors who have the capability and the willingness to restructure their liabilities must be part of the negotiation process. The liabilities of all creditors who are not part of the negotiation process must also be met in any negotiated solution".

In number of cases, the Promoters agreed to offer a reasonable or good amount which is much more than the liquidation value and all the creditors are even agreed on such offer amount, however, due to lack of legal provisions, they cannot pass any such resolution.

4. Judgment passed by Hon'ble Supreme Court:

1. In the matter of M/s Uttara Foods and Feeds Pvt Ltd Vs. Mona Pharmachem (Supreme Court) held that, the NCLAT could not avail the inherent power recognized by Rule 11 of NCLAT Rules to allow compromise to take effect after admission of the Insolvency Petition. In that case, only the Apex Court has the power to utilize its power as granted under Article 142 of Constitution of India. Therefore, the Apex Court has issued a direction to the government to amend the relevant rules and allow for withdrawal of insolvency proceedings.

2. In the matter of M/s Brilliant Alloys Pvt Ltd Vs. Mr. S.Rajagopal & Ors. (Supreme Court) the Apex Court understand the concern of promoters as well as the creditors, and to ensure the maximum realization of value of assets, held that withdrawal of insolvency proceeding also permitted even after issue of invitation for expression of interest, and Regulation 30 of CIRP Regulation can only be construed as directory depending on the facts of each case.

3. In the matter of M/s Swiss Ribbons Pvt Ltd & Anr. Vs. Union of India (Supreme Court) held that at any stage where the COC is not constituted, a party can approach the NCLT directly to allow or disallow an application for withdrawal or settlement.

The purpose of all the aforesaid orders is to maximize the value of assets. Therefore, based on the aforesaid conclusion, the government should bring a law to amend the provisions by allowing the promoters to withdraw the insolvency proceedings during liquidation period.

5. IBBI Data:

The Code has led to the resolution and liquidation of various CDs, helping in realisation of claims of creditors. A number of cases have been resolved through settlement between parties as promoters fear losing the ownership of their firm upon initiation of insolvency resolution process under the Code. In the matter of Swiss Ribbons, it was observed that total flow of resources to the commercial sector in India, both bank and non-bank, and domestic and foreign (relatable to the non-food sector) has gone up from a total of Rs. 14,530.47 crore in 2016- 2017, to Rs. 18,469.25 crore in 2017- 2018, and to Rs. 18,798.20 crore in the first six months of 2018-2019. These figures show that the Code has proved to be a successful enactment.

The number of cases resolved amicably before admission of CIRP or cases withdrawn under section 12A of the Code post-admission on account of out of court resolution, it may reasonably be concluded that the Code has been much more effective than other regimes in resolution of conflicts between the stakeholders. Post introduction of the Code, a perceptible change in borrower behaviour has been observed. Now many borrowers are approaching the banks with reasonable settlement offers. Some of them come forward due to fear of losing control of their business. This is also reflected in the better recovery rates of most of the banks.

In the case of State Bank of India (SBI), the recovery during FY2019 was more than double the recovery during FY2018. The contribution of the Code in this recovery was 37 percent and compromise settlements at approximately 16 per cent. Hence, based on the experience of better recovery during last two years, the Code has proved to be very effective in bringing about a positive change in borrower behaviour.