Compromise Scheme Under Companies Act Can Be Considered Only In Liquidation, Not During CIRP: NCLT Kochi

The National Company Law Tribunal (NCLT) at Kochi on Friday held that a scheme of compromise or arrangement under Section 230 of the Companies Act, 2013 cannot be considered during the corporate insolvency resolution process (CIRP) in the absence of a liquidation order.

A coram of Judicial Member Vinay Goel observed that the statutory framework places schemes under Section 230 at the post-liquidation stage and dismissed the application seeking its sanction as premature.

The proceedings arise from the corporate insolvency resolution process (CIRP) of Mangomeadows Agricultural Pleasure Land Pvt Ltd.by its financial creditor, Kosamattom Finance Ltd. The tribunal admitted the petition on January 25, 2023, triggering the commencement of CIRP.

At one stage of the process, the committee of creditors approved a resolution plan submitted by Torrion Impex India Pvt Ltd, securing 98.69% of the voting share. That plan, however, was later withdrawn before it could come up for approval before the Tribunal.

The matter then took a different turn. The resolution professional moved the tribunal seeking sanction of a scheme of compromise and arrangement under Section 230 of the Companies Act, proposed between Kosamattom Finance, and Mangomeadows and its creditors.

Meanwhile, the company's suspended director raised objections to the process. According to him, a proposal submitted by him had been rejected without proper consideration, while a similar proposal backed by Kosamattom Finance, which held the dominant voting share in the committee of creditors, was approved. He further argued that the proposal did not comply with the statutory requirements governing such schemes.

Referring to Section 230 of the Companies Act, Regulation 39BA of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, and Regulation 2B of the IBBI (Liquidation Process) Regulations, the tribunal observed:

“A conjoint reading of Section 230(6) of the Companies Act, 2013, Regulation 39BA of the CIRP Regulations, 2016 and Regulation 2B of the Liquidation Process Regulations, 2016 makes it abundantly clear that the exploration of a compromise or arrangement under Section 230 is statutorily contemplated only in the context of liquidation.”

The tribunal held that since the company was admittedly undergoing CIRP and no liquidation order had been passed, consideration of such a compromise or arrangement at this stage was legally untenable and premature.

“Permitting a Section 230 scheme during the Corporate Insolvency Resolution Process, in the absence of a liquidation order, would amount to conflating two distinct statutory processes and would defeat the structured scheme of the Code,” it emphasised.

The tribunal further noted that the scheme had been proposed by Kosamattom Finance, which held 98.69% of the voting share in the committee of creditors. The scheme was approved solely on the strength of its overwhelming voting power, while the only other CoC member holding 1.31% voting share voted against it.

The Tribunal observed:

“Though the Financial Creditor in the present case is technically entitled to vote as a Financial Creditor, the substance of the process cannot be ignored. When the majority Financial Creditor, who virtually controls the Committee of Creditors, submits, or supports a scheme which ultimately enables it to acquire control over the Corporate Debtor, and the Resolution Professional facilitates such consideration without ensuring a transparent, competitive, and fair evaluation process, the integrity of the Corporate Insolvency Resolution Process stands compromised.”

Relying on the NCLAT's decision in Pragiti Construction v. CoC of Rancom Healthcare Pvt Ltd, the Tribunal held that where a controlling creditor effectively engineers and approves a plan facilitating its own takeover without meaningful competition, the process ceases to be a bona fide exercise of commercial wisdom.

Holding that approval of the scheme solely on the basis of majority voting share cannot be treated as an unquestionable exercise of commercial wisdom, the tribunal dismissed the application seeking sanction of the scheme as premature.

For Applicant: Advocate Harikumar G Nair

For RP: Advocate Dhananjaya Sud and K Easwara Pillai, RP

For Financial Creditor: Advocate Jolly John