Schemes of arrangement have historically been available under Indian company law as a means to carry out corporate debt restructuring. However, as I have found in this paper, schemes were hardly used for this purpose in India. The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) and the implementation of the corporate insolvency resolution process (CIRP) therein were expected to further diminish the utility of schemes in debt restructuring. However, very recent practice in corporate insolvency cases suggests that schemes of arrangement are witnessing a strong comeback. Interestingly, it is not parties (and their lawyers) who have sought to use the tool, but adjudicating authorities that are steering failed insolvency cases, which would have otherwise resulted in liquidation of the corporate debtor company, towards possible revival using schemes of arrangement. This trend and its implications are worth a brief look.
Schemes in Case of Failed Insolvency Resolution
The IBC prescribes an elaborate procedure for CIRP, which is conducted with a view to the revival and rehabilitation of the corporate debtor. A failure of the CIRP would lead to a liquidation of the company. In a string of recent cases, the National Company Law Appellate Tribunal (NCLAT) has interspersed another step between the failure of CIRP and liquidation, and that is to direct the liquidator to take steps to sell the assets of the corporate debtor through a scheme of arrangement under section 230 of the Companies Act, 2013. The origin of this approach can be attributed to the NCLAT order in S.C. Sekaran v. Amit Gupta (29 January 2019). This involved two companies wherein the CIRP had failed and the National Company Law Tribunal (NCLT) has passed orders for liquidation of the companies. The NCLT drew inspiration from the broader jurisprudence that the Supreme Court had earlier laid down. In Swiss Ribbons Pvt. Ltd. v. Union of India (25 January 2019), the Court stated: “Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern”. It placed reliance on the goals of the IBC, which were to ensure the revival and continuation of the corporate debtor and not merely as a recovery tool for creditors. Similarly, in ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (4 October 2018), the Supreme Court found that “the liquidator may also sell the corporate debtor as a going concern”.
After reviewing the provisions of section 230 of the Companies Act, 2013, the NCLAT in S.C. Sekaran directed the liquidator to take steps through a scheme of arrangement for a revival of the corporate debtor. In case of failure, the NCLAT provided for two further steps: (i) sale of the company’s assets as a whole; and, if that is not possible, (ii) sale of the company’s assets in part. The NCLAT has been prescriptive in the use of various steps in a sequential manner. The NLCAT has followed its approach in S.C. Sekaran in numerous subsequent appeals before it, including Ajay Agarwal v. Ashok Magnetic Ltd. (22 February 2019), Rajesh Balasubramanian v. Everon Castings Pvt. Ltd. (25 February 2019) and Y. Shivram Prasad v. S. Dhanapal (27 February 2019).[1]
Schemes in Pre-IBC Cases
A somewhat similar issue arose in a case involving a liquidation of a company that was pending even before the IBC came into effect. In Rasiklal S. Mardia v. Amar Dye Chem Limited (In Liqudiation), the NCLAT was dealing with a situation where the promoter director of a company that was placed in liquidation approached the NCLT, Mumbai[2] with a plan to restructure the business and debts of the company through a scheme of arrangement under section 391 of the Companies Act, 1956 (which was then applicable to the case). The NLCT rejected the promoter director’s plea on the ground that liquidator alone was authorized to file a petition for compromise or arrangement under section 391, and that the promoter director was barred from doing so. It was against this order that the promoter director preferred an appeal before the NCLAT.
After examining the case law on this point, the NCLAT found that the liquidator “is only an additional person and not exclusive person” to file an application under section 391 initiating a scheme of arrangement. Hence, the NCLAT overturned the order of the NCLT, Mumbai, and directed the promoter director to approach the High Court with a plea to initiate the scheme of arrangement. The NCLAT did not direct the matter back to the NCLT as there was some doubt on whether the case had previously been transferred appropriately from the Bombay High Court to the NCLT.
This case suggests the scheme of arrangement has been recognized as an important intermediate tool for revival of a company prior to liquidation even in cases that do not proceed through an insolvency process under the IBC. This would be relevant for pre-IBC cases such as Amar Dye Chem and also for newer cases that do not necessarily go through the process under the IBC. It retains the attractiveness of the scheme of arrangement as a form of debt restructuring outside the purview of the IBC.
Implications and Conclusion
The cases discussed above have the potential to bring about some significant changes in practice involving debt restructuring, whether under the IBC or otherwise. They revive the utility of the scheme of arrangement as a restructuring tool. Given that the scheme jurisdiction has been transferred from the High Court to the NCLT, the process can be rather streamlined. In the end, the effort is to add another layer of opportunity to revive the company and address the interests of various stakeholders instead of straight away placing it under liquidation.
At the same time, several issues abound. One of the main allegations against this approach is that it has the effect of providing leeway to errant promoters by giving them another opportunity to wrest control over their company. This is the essence of pre-IBC cases such as Amar Dye Chem where the NCLAT has recognized that promoter directors have the power to initiate a scheme of arrangement and that such discretion is not limited to the liquidator. Although the IBC cases such as S.C. Sekaran and its progeny are less clear about whether the creditors or promoter directors can directly initiate a scheme of arrangement or whether they can do so only through the liquidator, they nevertheless have the effect of providing the erstwhile promoters with another bite at the cherry. Note that amendments to the IBC in the form of sections 29A and 12A seek to preserve the sanctity of the IBC process. While section 29A of the IBC bars promoters and associated parties in certain circumstances from bidding for their companies in the insolvency process, section 12A prevents a withdrawal from the insolvency process except with the consent of 90 percent in value of the committee of creditors. By permitting the promoters to bid for their company (whether directly or through the liquidator) in case of failure of the CIRP process, the promoters may very well be in a better position if the insolvency process fails rather than succeeds. The adjudicatory authorities must pay closer attention to these issues.
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[1] I thank Dhananjay Kumar and Gaurav Gupte for pointing me to the various NCLAT decisions.
[2] Although the liquidation order was passed by the High Court of Bombay, the case was subsequently transferred to the NCLT.
