The Insolvency and Bankruptcy Code, 2016 (IBC Code) enacted on May 28, 2016, provides for invitation of resolution plans from Prospective Resolution Applicants (PRAs) for revival of the corporate debtor
By Ashok Kumar Gulla
The Insolvency and Bankruptcy Code, 2016 (IBC Code) enacted on May 28, 2016, provides for invitation of resolution plans from Prospective Resolution Applicants (PRAs) for revival of the corporate debtor (CD). However, in case no resolution plans are received or approved, the Adjudicating Authority (AA) may pass an order of Liquidation under Sec 33 of the IBC Code. Regulation 2B was introduced in IBBI (Liquidation Process) Regulations, 2016 on July 25, 2019 opening another window for CD to be sold by inviting scheme of Compromise or Arrangement under Sec 230 of Companies Act, 2013 (the Scheme). While this initiative is a welcome move, it is saddled with ambiguities and thus a non-starter. There has been hardly any proposal under the scheme having been approved in the recent past for CD in Liquidation.
The scheme was originally envisaged for the creditor or a member of the company when the IBC Code was not enacted. The scheme is akin to obtaining resolution of the CD under Corporate Insolvency Resolution Process (CIRP). However, any person who is ineligible under Sec 29A of the Code will not be eligible to submit the Scheme for CD in Liquidation.
Difference between Resolution Plan in CIRP and Compromise or Arrangement under Sec 230 of Companies Act for CD in Liquidation
The approval of the Resolution Plan in CIRP requires a minimum 66% of the voting share of members of the Committee of creditors (CoC). In sale through Sec. 230 of Companies Act, 2013, it requires approval to the extent of 75% (in value) of voting share by each class of stakeholder’s i.e., financial creditors, unsecured creditors and shareholders as per Companies Act. There is no percentage for voting defined in Code or Liquidation Process Regulations for approval of the scheme for CD under Liquidation. The final decision lies with AA.
In CIRP, amount to be paid to various stakeholders against their claims are proposed in the Resolution Plan after complying with Section 30 of the Code. For approval of the Scheme, no specific mention is in the Code or Regulations as how the payment is to be distributed among stakeholders. The Potential Bidder through the Scheme may propose the amount which is put up for voting of all the stakeholders and scheme to be approved by AA.
Time period is 180 days which can further be extended by another 90 days for completion of CIRP. The entire process, however, is to be completed maximum of 330 days. In Sec 230 Compromise Arrangement, the permitted time limit under Regulation 2B of IBBI (Liquidation Process) Regulation is 90 days from the date of Liquidation order. The Liquidator may make an application with AA, if there is sufficient cause, seeking extension of time for completing the process.
The PRA seeks various waivers, reliefs and concessions in the resolution plan which are first approved by CoC and then by AA. Various laws have also been amended in line with IBC so as to provide relief where the plan is approved under CIRP. There are no provisions either in Companies Act or Code regarding seeking waivers and concessions in Section 230 process. The same has to be sought in the Scheme put up to AA.
Amendment needed in the IBC Code and relevant regulations for scheme of compromise
The scheme proposer who wishes to acquire the CD under Section 230 of the Companies Act will like to acquire it free of all liabilities and legal cases including penalties for past actions. For the benefit of getting more Proposers, it is prudent to bring clarity on key reliefs, concessions and processes to be followed through necessary amendment in Act and regulations briefly summed as under:
– As per the original intent, scheme is to be invited from creditors and stakeholders. It is presumed that the liquidator can invite scheme for Compromise or Arrangement from third parties apart from Creditors and stakeholders. If more than one scheme is received, whether all these Schemes are required to be first put up to AA or approval of such Schemes first sought from Secured FCs.
– Is the Proposer eligible for the various benefits that are provided in the Resolution Plan such as Carry forward of business losses and immunity from all the legal proceedings and penalty prior to approval of the Scheme.
– Is the scheme proposer eligible for waiver of all statutory dues pertaining to the period prior to approval and in case the government authorities do not assent to the scheme, can Hon’ble NCLT exercise jurisdiction to approve the Scheme proposed?
– Is the Proposer bound by the requirement of SEBI Takeover Code where Company is listed?
What shall be the voting share required for approving scheme by Stakeholders under Section 230 of Companies Act, 2013 since no voting share is defined in Code or regulations for approval of the scheme.
– Whether approval for all the stakeholders required or can be dispensed with considering that unsecured creditors and shareholders will be paid lower in the priority under Sec 53 of the Code in case of sale under Reg 32 of Liquidation Process.
– How the shares will be allocated to the Acquirer where it acquires all the equity shares?
Where Section 230 fails, liquidation process resumes and Liquidator shall again first proceed with sale as going concern under Regulation 32(e) and (f) of Liquidation Process. It needs to be examined whether the Scheme can attract investors or it is a drain on the time and efforts required and accordingly, appropriate action be initiated. It is considered appropriate to remove Section 230 as separate process, as Resolution Plan under CIRP and selling CD as going concern under Regulation 32(e) of Liquidation Process serve the purpose better
(Ashok Kumar Gulla is Insolvency Professional and Partner at RBSA Restructuring Advisors LLP. Views expressed are the author’s own.)