SC dashes Gujarat NRE Coke promoter’s hope; bars him from proposing scheme of compromise during liquidation

The Supreme Court has dashed all hopes of Arun Kumar Jagatramka, the former promoter of Gujarat NRE Coke, of getting the control of the company back.

The Supreme Court on 15 March ruled that prohibitions placed by the Insolvency and Bankruptcy Code (IBC) for promoters of companies undergoing liquidation proceedings should also apply to the scheme of compromise or arrangement under Section 230 of the Act of 2013.

The court was hearing an appeal filed by Jagatramka against a National Company Appellate Tribunal (NCLAT) order that has said that a person who is ineligible under Section 29A of the Insolvency Bankruptcy Code to submit a resolution plan, is also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013.

Gujarat NRE Coke had argued that the scheme of arrangement under Section 230 of the Companies Act 2013 is not regulated by the IBC and is an independent provision and hence ineligibilities mentioned in the IBC should not be applied for the scheme of arrangement.

Scheme of arrangement not independent process

However, dismissing the petition of Gujarat NRE Coke’s former founder, the Supreme Court said that it is difficult to accept the submission of the appellant that Section 230 of the Act of 2013 is a standalone provision which has no connect with the provisions of the IBC. 

“Undoubtedly, Section 230 of the Companies Act of 2013 is wider in its ambit in the sense that it is not confined only to a company in liquidation or to corporate debtor which is being wound up under Chapter III of the IBC. Therefore, the rigors of the IBC will not apply to proceedings under Section 230 of the Act of 2013 where the scheme of compromise or arrangement proposed is in relation to an entity which is not the subject of a proceeding under the IBC. But, when, as in the present case, the process of invoking the provisions of Section 230 of the Act of 2013 traces its origin or, as it may be described, the trigger to the liquidation proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony,” reads the Supreme Court order.

The apex court also stressed on the fact that 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 Companies Act,” it further said. 

On the appellant’s argument that attaching the ineligibilities under Section 29A and Section 35(1)(f) of the IBC to a scheme of compromise and arrangement under Section 230 of the Act of 2013 would be violative of Article 14 of the Constitution, the Supreme Court said that  the stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages.

Background of the case

The promoter of Gujarat NRE Coke had moved an application under Section 10 of the IBC before the NCLT for initiating the Corporate Insolvency Resolution Process. The application was admitted on 7 April 2017. 

Arun Kumar Jagatramka submitted a resolution plan for Gujarat NRE Coke on 1 November 2017, which was presented by the Resolution Professional before the Committee of Creditors. The plan was to be put to a vote in a meeting of the CoC scheduled on 23-24 November 2017, when the IBC was amended and Section 29A which was inserted with retrospective effect from 23 November 2017. 

Sub-section (g) of Section 29A disqualifies a person from being a resolution applicant if they have been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the NCLT.

Due to the insertion of Section 29A, Arun Kumar Jagmatramka became ineligible to submit a resolution plan.

Thereafter, the NCLT passed an order of liquidation on 11 January 2018, after the expiry of 270 days. The order of the NCLT ordering liquidation was challenged in appeal13 by Arun Kumar Jagatramka before the NCLAT. The appeal was dismissed by the NCLAT by its order dated 10 July 2018. 

During the pendency of the appeal before NCLAT, where the order of liquidation passed by the NCLT was assailed, Arun Kumar Jagatramka moved an application under Sections 230 to 232 of the Companies Act of 2013 before the NCLT proposing a scheme for compromise and arrangement between the erstwhile promoters and creditors. This application was allowed by the NCLT through its order dated 15 May 2018.

Jindal Steel and Power Ltd, an operational creditor of Gujarat NRE Coke, appealed against the order of the NCLT dated 15 May 2018 before the NCLAT. The NCLAT allowed the appeal by its judgement dated 24 October 2019, holding that promoters who are ineligible to propose a resolution plan under Section 29A of the IBC are not entitled to file an application for compromise and arrangement under Sections 230 to 232 of the Companies Act of 2013.

Also Read: Another setback to Gujarat NRE Coke liquidation process; NCLAT halts asset sale process