Introduction
The Hon’ble National Company Law Appellate Tribunal (‘NCLAT’), Chennai Bench, delivered a significant judgment in Narottamka Trade & Vyapaar (P.) Ltd. v. SPP Insolvency Professionals LLP[i], addressing the contentious issue of whether a Scheme of Arrangement or Compromise under s. 230 of the Companies Act, 2013, (‘Act’) can override the process of the sale of a corporate debtor (‘CD’) as a going concern under Regulations 32(e) and 32A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (‘IBBI Regulations’).
Brief Facts
Corporate Insolvency Resolution Process (‘CIRP’) was initiated against M/s. Kamachi Industries, the CD following the filing of a s.7 application under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), by the financial creditor owing to the non-payment of debt.
The Committee of Creditors (‘CoC’) invited resolution plans; subsequently, three plans were received. However, all of the aforementioned plans were rejected by the CoC on the grounds that the values offered were below the liquidation value. Given the failure to finalize a resolution plan, the CoC voted in favour of liquidation, which was subsequently approved by the National Company Law Tribunal (‘NCLT’).
A liquidator was appointed, and a Stakeholders Consultation Committee (‘SCC’) was formed as per the IBBI Liquidation Regulations. The liquidator conducted a fresh valuation of the CD, prepared an Asset Memorandum, and issued a Public Announcement for the sale of the CD as a going concern under reg. 32(e) and 32A or for the Scheme of Arrangement or Compromise under s. 230 of the Act, read with reg. 2B of the IBBI Regulations.
At the behest of the financial creditor, the initial liquidator was replaced with a new liquidator. Upon receiving instructions from the SCC, the new liquidator cancelled the earlier Expression of Interest (‘EoI’) and issued a fresh e-auction notice. The e-auction was subsequently conducted on 31.01.2024, and the highest bidders were issued Letters of Intent on the same day. The Liquidator also filed an application to confirm the sale of CD as a going concern before the NCLT, which was later approved.
Concurrently, a minority shareholder (‘Appellant’) submitted a Scheme of Arrangement under s. 230 of the Act. The SCC deliberated on the scheme and thoroughly examined its merits. However, it was rejected on multiple grounds, including the fact that (i) the value offered under the scheme was significantly lower than the liquidation value, (ii) there was a lack of clarity regarding the source of funds, and (iii) the SCC expressed concerns about potential delays and disruptions to the ongoing e-auction process. The SCC, consisting of representatives of creditors, deemed the scheme commercially unviable and procedurally deficient and thus rejected the same.
The Appellant filed an application before the NCLT, seeking to set aside the e-auction and direct the liquidator to consider the scheme. However, The NCLT rejected the Appellant's application and approved the sale of the CD as a going concern, noting that the bid price of Rs. 487 crore exceeded the reserve price of Rs. 457 Crore. Aggrieved by the NCLT’s decision, the Appellant filed an appeal before the NCLAT, arguing that the scheme under s.230 should have been given precedence.
Held
The NCLAT upheld the NCLT's decision, emphasizing that the sale of the CD as a going concern under regs. 32(e) and 32A of the IBBI Regulations are more transparent and effective mechanisms for value maximization, and it was concluded that the Scheme of Arrangement is not to be given precedence. The sale of the CD as a going concern better aligns with the objectives of the IBC, which emphasizes maintaining the CD as a going concern. The Tribunal observed that the scheme proposed under s. 230 of the Act was submitted beyond the 90-day timeline prescribed under Reg. 2B of the IBBI Regulations. Furthermore, the SCC and the liquidator had valid grounds for rejecting the scheme, including the significantly lower value offered as compared to the liquidation value and the lack of clarity regarding the source of funds. The Tribunal also noted that the successful bidder had already assumed control of the CD and operated it as a going concern. Any minor procedural lapses in the auction process were deemed inconsequential and insufficient to invalidate the entire process, as they did not undermine the overall objectives of transparency and fairness in the liquidation proceedings.
Our Analysis
The NCLAT's judgment reaffirms the principle that the IBC takes precedence over legacy provisions of the Act when dealing with liquidation processes. While still relevant, s. 230 of the Act serves as an ancillary mechanism and not a primary route for corporate resolution. The intent behind s. 230 was to offer an opportunity for compromise or arrangement before liquidation proceedings are finalized. However, in the present case, the SCC rejected the scheme based on sound commercial rationale.
The Tribunal correctly recognized that the scheme was submitted beyond the prescribed timeline, and additionally, the SCC exercised commercial wisdom in rejecting the scheme. As upheld in Kridhan Infrastructure Pvt. Ltd. v. Venkatesan Sankaranarayanan[ii], commercial wisdom carries significant weight. Courts generally refrain from interfering unless there is evidence of mala fide intent or procedural irregularities. In Arun Kumar Jagatramka v. Jindal Steel & Power Ltd.[iii], the Supreme Court emphasized that the revival of a CD can occur through three modes: CIRP, sale as a going concern, and a scheme under S. 230. However, the latter is not intended to override a transparent auction process aimed at maximizing value. This judgment reinforces the principle of commercial wisdom, transparency, and efficiency in matters pertaining to insolvency resolution.
End Notes
[i] 2024 SCC OnLine NCLAT 1332.
[ii] 2020 SCC OnLine NCLAT 639.
[iii] [2021] SCC Online SC 220.
Authored by Shreya Manchanda, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.