[Harsh is a student at National Law School of India University.]
In Arun Kumar Jagatramka v. Jindal Steel and Power Limited (Jagatramka) the Supreme Court opined that the disqualifications placed under Section 29A of the Insolvency and Bankruptcy Code of India 2016 (IBC) will also apply to the scheme of compromise or arrangement under Section 230 of the Companies Act 2013 (Companies Act) when the company is at the stage of liquidation. In this piece, the author analyses this decision of the Supreme Court. The author has tried to present a critique on the judgment from an exclusive legal positivist and law and economics perspectives and argued that there was no need to take the interpretative approach to which the court relied on.
ANALYSIS OF THE JUDGMENT
Exclusive legal positivists believe that law requires a source to gain authoritativeness or validity. As per them “all law is source based, and anything which is not source based is not law”. This is generally referred as the source thesis.
Now coming to the judgment, a literal interpretation of Section 230 will suggest that there are no ineligibilities described for bringing a scheme for compromise and arrangement under Section 230 like those which are present in Section 29A of IBC. Section 230 does not disqualify the promoter to propose a scheme of compromise or arrangement. However, by importing these ineligibilities to the concerned provision without the statutory mandate, it is submitted that the Supreme Court in Jagatramka has violated the ‘sources’ thesis. The source for compromise and arrangement is Section 230 of Companies Act. Under this provision, once an application is submitted, the NCLT may call for a meeting between the different class of creditors or members who will then decide by voting on the adequacy of the proposal. If the proposed scheme is approved by the required number of votes, the NCLT will give a stamp of validity to the accepted proposal and thereby it becomes binding. However, NCLT may refuse to give its approval if there is breach of Sections 230(1), 232 or 68 of the Companies Act. There is no other provision under which NCLT can refuse to give sanction to the proposal accepted in the meeting. However, as per the decision in Jagatramka, if the proposal is submitted by the people falling under Section 29A, it should also be refused. In this case, Jagatramka was the one who brought the proposal and was the promoter of the company. Since promoter is the member of the company, it is no doubt that he is eligible to bring proposal for scheme and arrangement under Section 230.
However, the question which then becomes relevant is why the SC came to this conclusion.
One of the primary reasons for such conclusion of the court was because of their purposive interpretation to Section 29A. It is submitted that this approach towards interpreting Section 29A is nothing new and the judgment in Jagatramka is just an addition to the line of cases where court has relied on such interpretative approach to Section 29A of IBC. In Jagatramka itself, the court cited some of these judgments including Arcelormittal India Private Limited v. Satish Kumar Gupta and Others, Chitra Sharma v. Union of India, and Swiss Ribbons Private Limited v. Union of India. These cases clearly describe the judiciary’s attitude towards Section 29A of IBC. It has already been argued by many that Section 29A is quite broad. Despite this, courts and tribunals have given purposive interpretation to it which has extended its scope further. The judgment in Jagatramka case is one more example of this.
But is this extension of judiciary’s interference in the insolvency or liquidation stage acceptable? It is submitted that it is not. It is to be noted that the reorganisation under Section 230 is maybe the last possible option available for the revival of a distressed company. Hence, there should be minimum restrictions imposed at this stage and commercial wisdom of the creditors or the members as the case may be should be revered. This will also help in realising one of the objectives of IBC which is to protect the surplus value of the corporate entity and preventing it from piecemeal liquidation. There may be situations where the promoters are willing to propose the highest bid and the creditors also confident that they are better in accepting the proposal of the promoter. In that scenario, the restrictions under the concerned section will result the creditors being devoid of the extra price offered by the promoters. In such case, the judiciary is interfering with the commercial wisdom of creditors. It is argued that by taking a purposive interpretation and reading the ineligibilities to Section 230, the court in Jagatramka seems to be favouring commercial morality rather than commercial wisdom. However, according to Raz, the task of judges is to apply law as it is before them; they are not supposed to use moral acumen to make judgments. In this case, the court by ignoring the literal interpretation relied on the grounds like commercial morality and absurdity to prohibit promoters from proposing a scheme of compromise and arrangement which was not supported by the law on the same. Hence, it is argued that this is clearly against the exclusive legal positivists' understanding of judges’ role or power in adjudication.
As per the exclusive legal positivists, the purpose of law is to settle the debate. Hence, it becomes important for judges to apply law as it is posited in statutes. However, when judges make judgments based on moral considerations and go against the posited law, they re-settle such debates. This resettling leads to reallocation of resources opposite to what is envisaged in the statute as it imposes costs on the parties as they make actions on the basis of the settled law assuming it to be the law of the land. However, when court re-settles the debate, they are compelled to change their actions accordingly and hence bear extra costs due to such re-settling.
Talking only about Section 29A, if the creditors whose money is involved are getting what they want and at the same time the resolution plan is fulfilling all the requirements, the need to reject it on ground that the applicant was ineligible at the first place is questionable. Similar argument should also apply to Section 230 if read with Section 29A and Section 35 of IBC. If creditors are fine with the proposal by the promoter, it is argued that there is no need for courts or tribunals to question their commercial wisdom.
It is to be noted that one of the purposes of IBC is also to maximise the value of assets. If promoters who are the willing to propose the highest amount are prohibited for bringing such proposal and the proposal of the one with the lower bid is accepted, it may be argued that there will not be maximisation of assets for the benefit of the creditors or the members which will therefore defeat one of the important purposes of IBC. It may possibly also defeat objective of effective revival of the entity as the promoters who are familiar with the business and the company are precluded to take part in the process of revival or debt-restructuring.
The language of the scheme of compromise and arrangement has changed from the Companies Act 1956 to the Companies Act 2013. The difference between the two is that now the scope of intervention of the judiciary has been reduced. Earlier, when the scheme is approved by the required number of votes, the tribunal could interfere with the approved scheme on grounds such as public interests and prejudice to the interests of the members. Additionally, the tribunal also enjoyed some residuary powers to make incidental, consequential and supplemental orders for ensuring full and effective realisation of the scheme. However, the same grounds are not provided under the Companies Act. From this difference, it is clear that the legislature intended to limit the role of judiciary with the compromise or arrangement process and wanted to give deference to the commercial wisdom of the creditors or the members. Additionally, in Miheer Mafatlal v. Mafatlal Industries Limited, the Supreme Court, while discussing the tribunal’s jurisdiction in reviewing the scheme of arrangement, clarified that the jurisdiction is “peripheral and supervisory and not appellate”. However, arguably, the court in Jagatramka has expanded its jurisdiction beyond the legal mandate by reading the ineligibilities in Section 230.
It is important to remember that the scheme of compromise and arrangement and insolvency resolution mechanism under IBC are two different modes of debt restructuring. They are meant to serve different purposes and work at different stages. The core idea behind these concepts is different. In the insolvency under the IBC, it is debtor-in control model while this is mostly not the case with the scheme under Section 230. IBC and the Companies Act are both economic legislations, hence commercial wisdom of creditors and members should be given deference and such should not be ignored at the cost of morality.
The process of debt-restructuring under Section 230 is already quite cumbersome. NCLT will divide the creditors and the members in different classes. Each such class will then vote on the proposed scheme. Such scheme is required to be approved by a majority, representing 75% in value of each class of creditors or shareholders present and voting, in separate meetings for each class. Due to such complexities the mechanism has rarely been used and has remained ineffective. Therefore, reading some more complex and unwarranted ineligibilities into the section will further restrict its usage.
CONCLUSION
The purpose of law is to settle the debate. However, when judges make judgments based on moral considerations and going against the posited law, they re-settle such debates. This resettling also imposes the costs on the parties as they make actions on the basis of the settled law, but when court re-settles the debate, they get forced to change their actions accordingly and hence bear extra costs due to such re-settling.
Section 29A of IBC has laid down a multi-layered standard of disqualification for excluding persons from participating in the resolution process. However, the Supreme Court by its judgment in Jagatramka has extended its application to Section 230 of the Companies Act. However, at a stage when it is the last possible opportunity for the revival of the company and preventing it from foreseeable corporate death, making such comprehensive ineligibilities can effectively restrict the chances of revival of the company as some important stakeholders will be debarred from bringing proposal to save it which, as has been argued, will also not be in line with the objectives of the IBC. Rather than imposing a blanket ban, a possible solution could be adopted by taking a middle ground where people like promoters and directors who are well aware of the functioning of the company are at least allowed to bring such proposals. At the same time, if the creditors or the members accept their offer and other requirements under the Companies Act are met, certain safeguards should be introduced to ensure that the creditors get what they were promised. Additionally, it is suggested that the judiciary should limit its interference to the extent of ensuring that the sanctity of the process is not compromised. It should allow the creditors and the proposer to negotiate amongst themselves a proposal which benefits the creditors as well as the company. However, the tribunal should interfere when such negotiation causes prejudice to the minority members and ensure that they are well compensated for the same.