Open Access Research Article
ARRANGEMENT AND COMPROMISES UNDER THE COMPANIES ACT: IS LLIQUIDATION IRREVERSIBLE By – Mohika Srivastava
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Article Details
ARRANGEMENT
AND COMPROMISES UNDER THE COMPANIES ACT: IS LLIQUIDATION IRREVERSIBLE
Authored By – Mohika Srivastava
Institute – 3rd Year Student At Symbiosis
Law School, Noida
Course - Ballb
INTRODUCTION
A
comprehensive and detailed plan for the revival of a corporation subject to
liquidation is contained in the Insolvency and Bankruptcy Code, 2016. However,
if the procedure is unsuccessful, a firm that is about to go bankrupt can be
saved by using Section 230 of the 2013 Companies Act.
STATEMENT
OF PROBLEM
A
successful insolvency legislation should balance liquidation and
rehabilitation. It should present a chance for sincere exploration of
restructuring and rehabilitation of potentially viable firms with a reasonable
consensus among stakeholders. When resurrection or rehabilitation are shown to
be impractical, winding up should be used as a last resort. When necessary, the
technique should make it simple to switch between different modes of operation.
This will provide businesses who are under liquidation the chance to turn
things around where they can. Similarly, if a rehabilitation plan was obtained
through fraud or it can no longer be carried out, conversion to liquidation may
be necessary even after the plan has been approved.
The
IBC does not include any provisions for the conversion of liquidation
proceedings into restructuring/rehabilitation procedures because liquidation is
the last option. By using Section 230 of the 2013 Companies Act, liquidation
processes are currently transitioning into restructuring/rehabilitation
proceedings (Companies Act). Similar rules are present in other countries as
well, most notably in Singapore's Companies Act, 1967 and the United Kingdom's
Companies Act, 2006 (UK Act) (Singapore Act).
The
Corporate Insolvency and Governance Act, 2020 is a provision of UK law that
temporarily suspends some insolvency-related regulations in order to support
companies during the pandemic. The Act significantly altered the corporate
environment in the UK by giving businesses more time to stabilise their
finances and reorganise their operations.
HYPOTHESES
It is impossible for a company undergoing
liquidation to be revived under the Companies Act.
RESEARCH
OBJECTIVES
1.
To critically
analyse whether it is possible to suspend the liquidation proceedings faced by
a corporationas per the Companies Act, 2013.
2.
To study the
significance of the Corporate Insolvency and Governance Act,
2020 of the United Kingdom and the permanent measure of moratorium under it.
DESCRIPTION
AND ANALYSIS
The
role IBC plays in bringing a company facing liquidation back to life
The
IBC, 2016 is a comprehensive law in India that offers a strategy for an
effective implementation of insolvency and in India. The IBC plays a
significant role in bringing back to life of a corporation undergoing
liquidation. The resolution process involves identifying a resolution plan that
would allow the company to continue its business operations and settle its
debts. The resolution process is monitored by the NCLT and overseen by a
resolution professional. If a resolution plan is approved, the company can be
revived, and its liquidation proceedings can be discontinued. The IBC provides
a time-bound and transparent process for the revival of companies under liquidation,
thereby promoting the efficient resolution of insolvency and bankruptcy in
India.
Failure of a CIRP
A
Corporate Insolvency Resolution Process (CIRP) under the IBC can fail when it
is not completed within the prescribed timeframe, or if the resolution plan is
not approved or implemented. Section 33 of the IBC provides for the termination
of a CIRP if it is not completed within the timeframe specified in the code and
consequently, the NCLT may order the liquidation of the corporation and the
assets of the corporation will be sold to pay off its creditors. This timeframe
is usually 330 days from the initiation of the CIRP, but it can be extended by
a maximum of 90 days in exceptional circumstances.
Compromise procedure in accordance with Section 230 of the Companies Act
Section
230 of the Companies Act offers a recourse to compromise and make settlement
and arrangements between a corporation and the creditors of the corporation.
This section lets a company to offer settlements to its members for the settlement
of its debts or for the adjustment of its obligations. The purpose of this
provision is to provide a mechanism for a company to reach a settlement with
its creditors or members in order to avoid liquidation and preserve its
business operations.
The NCLAT instructed the liquidator appointed
pursuant to the IBC in S.C. Sekaran v. Amit Gupta & Ors[1] to
"take actions in terms of Section 230" for the revival of the
corporate debtor. According to Section 230, the liquidator chosen in accordance
with Section 34 of the IBC may submit an application to the NCLT outlining a
compromise or arrangement between the firm and its creditors, as well as, if
appropriate, its members.
In accordance with Section 230 who may and may not put up a scheme?
Under
Section 230 a compromise or arrangement can be proposed by a company, its
creditors, or members. The proposal for a compromise or arrangement is made to
the National Company Law Tribunal (NCLT) for approval. The NCLT must ensure
that the proposed compromise or arrangement is fair and reasonable and in the
interest of the creditors or members as a whole. All parties involved in the
compromise or arrangement must abide by the NCLT's decision.
Section 29A of the IBC
Section
29A of the Insolvency and Bankruptcy Code (IBC) outlines the eligibility
criteria for individuals or entities to participate in a corporate insolvency
resolution process (CIRP). It lays out the disqualifications for individuals or
entities who are not eligible to participate in the CIRP. These
disqualifications include individuals or entities who have been convicted of
certain crimes, have a history of fraud or mismanagement, or have been
associated with any other company that is undergoing a CIRP.
Section 29A versus Section 230
Section
29-A of the Insolvency and Bankruptcy Code and Section 230 of the Companies Act
deal with different aspects of the insolvency resolution process in India.
While Section 29A outlines the eligibility criteria for individuals or entities
to participate in a corporate insolvency resolution process (CIRP), Section 230
provides for recourse to compromise and arrangements between a company and its
creditors or members.
The
conflict between these two sections arises when a company that is undergoing a
CIRP under the IBC seeks to compromise or arrange its debts with its creditors
or members under Section 230 of the Companies Act. Section 29A of the IBC sets
strict eligibility criteria for individuals and entities to participate in the
CIRP, which may exclude some creditors or members from participating in the
compromise or arrangement.
This
conflict creates a challenge for companies seeking to restructure their debts
through a compromise or arrangement, as they must navigate the eligibility
criteria set out in Section 29A while also complying with the requirements of
Section 230.
A scheme of settlement is not admissible when
offered by a person who is ineligible under Section 29 of the IBC, the NCLAT
said in Jindal Steel and Power Ltd v. Arun Kumar Jagatramka& Gujarat NRE
Coke Ltd.[2] A
creditor or member who is qualified under Section 29 is thus prohibited, it was
decided.
Can a liquidation order be
reversed?
The
Companies Act provides for the liquidation of companies in India and outlines
the procedures for the liquidation process. However, the question of whether
liquidation is irreversible under the Companies Act is a complex one and
depends on several factors.
According
to the provisions of the Companies Act, once a company has been liquidated, it
cannot be revived or restored. The liquidation process is considered to be a
final step in the life of a company, and it results in the dissolution of the
company. Once a company has been liquidated, it no longer exists as a legal
entity and its assets are distributed among its creditors and shareholders.
However,
in certain circumstances, it may be possible to reverse the liquidation of a
company. For example, if a company has been liquidated due to a technical error
or an administrative mistake, it may be possible to reverse the liquidation
process. In such cases, the company may make an application to the court for
the reversal of the liquidation process. The court will review the application
and decide whether the liquidation process can be reversed.
Another
instance in which the liquidation process may be reversible is if the company
has been liquidated as a result of fraudulent activities. In such cases, the
liquidators may be required to return the assets of the company to its
creditors and shareholders. This process is known as "clawback" and
is typically carried out under the supervision of the court.
Can the Supreme Court reverse a liquidation
order?
Yes,
the Supreme Court can reverse a liquidation order if it is satisfied that there
is sufficient cause to do so but it uses this power very sparingly. In India,
the Supreme Court has the power to hear appeals against decisions made by lower
courts and can reverse a liquidation order if it finds that the original
decision was based on an error of law or was unjust. However, reversing a
liquidation order is a complex process and requires strong evidence to support
the claim. The Supreme Court will consider factors such as the interests of the
creditors, the company's ability to pay its debts, and any other relevant circumstances
before making a decision.
The Supreme Court supported the NCLAT's ruling in
Kamineni Steel & Power India Pvt. Ltd and Innoventive Industries Ltd. and
emphasised the committee of creditors' authority in approving or rejecting
resolution plans based on their commercial judgement. The resolution plans in
both cases were not approved by the necessary majority of the committee of
creditors, hence the NCLAT ordered liquidation in both instances. The Supreme
Court declined to employ the authority granted to it by Article 142. The
Supreme Court will rarely exercise its ability to overturn a liquidation order,
despite the fact that it does have that power.
The Corporate Insolvency and Governance Act,
2020
The
Corporate Insolvency and Governance Act, 2020 is a UK legislation aimed at
providing support to companies during the COVID-19 pandemic by temporarily
suspending certain insolvency-related measures. The Act has had a significant
impact on the UK corporate landscape by providing companies with additional
breathing space to stabilize their finances and restructure their
operations.The measures introduced by the Act include suspension of wrongful
trading provisions, moratorium on winding-up petitions, and restructuring
plans. However this measure was deemed to be a temporary one.
The
sustainable solution (moratorium)
The
Corporate Insolvency and Governance Act, 2020 (CIGA) introduced a permanent
measure of moratorium in the UK. A moratorium is a temporary pause on certain
legal proceedings, such as winding-up petitions and enforcement action that
provides companies with breathing space to restructure their operations and
finances.
The
permanent measure of moratorium introduced by the CIGA allows companies to
apply for a moratorium of up to 20 business days, during which time they are
protected from certain legal proceedings. This moratorium can be extended by
the court for up to a maximum of one year, subject to certain conditions.
The
permanent measure of moratorium under the CIGA is designed to provide companies
with the time and space they need to restructure their operations and secure
their future. By providing a temporary pause on legal proceedings, companies
are able to focus on stabilizing their finances and finding a solution to their
financial difficulties.
The
permanent measure of moratorium is an important tool for companies facing
financial difficulties and provides them with an alternative to formal
insolvency proceedings. It is a positive step for the UK corporate landscape
and provides companies with the support they need to secure their future, and a
similar legal initiative is highly recommended for India as well because India
does not have enough legal provisions addressing the problem of liquidation of
companies.
CONCLUSION
The hypothesis does stand true as a
liquidation once passed cannot in any case be reversed. A measure that can help
a company survive a liquidation action is the scheme of arrangement and
compromise. It's impossible to say whether a strategy like this returns the
corporate debtor to its pre-insolvency state. This is so that the company has a
chance of survival through negotiation and compromise since the liquidation
order, once made, cannot be changed. Aspects like the voting process and plan
approval process should be made clearer. This will lessen any problems that may
occur as a result of the lengthy process involved in the plan under Section 230
of the Companies Act, which would eventually benefit the businesses who are
facing liquidation. A law similar to UK’s Corporate Insolvency and Governance
Act, 2020 which came during the COVID pandemic needs to be enacted in India as
well.
BIBLIOGRAPHY
1.
McCormack,
G. (2012). Universalism in Insolvency Proceedings and the Common Law. Oxford Journal of Legal Studies, 32(2),
325–347. http://www.jstor.org/stable/41682781
2.
VERESS,
J. (1993). Bankruptcy, Liquidation, or Anything You Wish - First Year of the Bankruptcy Law -. Aula, 15(3),
7–15. http://www.jstor.org/stable/45237326
3.
Burgin,
L. (1923). Private International Law and Bankruptcy and Liquidation of
Companies. Transactions of the Grotius Society, 9, 71–88.
http://www.jstor.org/stable/742961
Article Information
ARRANGEMENT AND COMPROMISES UNDER THE COMPANIES ACT: IS LLIQUIDATION IRREVERSIBLE By – Mohika Srivastava
Authors: Mohika Srivastava
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/04/25
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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