Compromise Schemes Are Consensual, Class-Based; No Omnibus Liability Extinguishment: NCLT Hyderabad

The National Company Law Tribunal (NCLT) at Hyderabad has rejected a debt restructuring scheme proposed under Section 230 of the Companies Act during the liquidation of Sarda Agro Oils Ltd, holding that such schemes, in effect, cannot be used to grant a blanket “clean slate” by extinguishing liabilities.

A bench of Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri clarified that a scheme under Section 230 is inherently consensual and class-based, binding only identified stakeholders who are notified and whose rights are specifically addressed.

The tribunal observed, "In contrast, Section 230 of the Companies Act stands on an entirely different footing. A scheme thereunder is consensual and class-based, binding only those identified classes of creditors or members who are duly notified and whose rights are expressly dealt with under the scheme. It does not result in automatic or omnibus extinguishment of liabilities, nor does it involve any statutory substitution of consent."

The ruling came on an application filed by liquidator G. Madhusudhan Rao seeking approval of a scheme proposed by Prakash Oil Depot for revival of the company.

Sarda Agro Oils Ltd entered insolvency on August 27, 2019 following a petition by Allahabad Bank, now Indian Bank, and was later pushed into liquidation by an order dated January 9, 2023.

Filed on January 25, 2024, the proposed scheme offered Rs. 43 crore to secured creditors as a full and final settlement. Operational creditors were to receive only marginal payouts, alongside provisions for extinguishing past liabilities. The proposal also included release of personal guarantees and allowed the corporate debtor to pursue recoveries without setting off corresponding liabilities.

What weighed with the tribunal was the breadth of the reliefs sought. The scheme envisaged wiping out claims, freeing guarantees, and preserving recovery rights yet did not adequately set out details on receivables, valuations, or even the full spectrum of stakeholder claims.

Concerns flagged by the Regional Director and the Registrar of Companies on transparency, steep haircuts, and disclosure gaps were also taken into account.

Questions were also raised about the eligibility of the proponent itself. The bench noted the issue of whether a partnership firm, which is not a shareholder, could at all maintain a scheme under Section 230.

In the end, the tribunal declined to approve the proposal, holding that, in these circumstances, a Section 230 scheme cannot be stretched into a statutory discharge route or used to bind those outside the arrangement. Its operation, the bench emphasised, must remain confined to clearly identified stakeholders who have consented to it.