The Supreme Court closed the backdoor on defaulting developers by using a special compromise or arrangement provision during the liquidation phase of insolvency proceedings. The Supreme Court said that a developer, who does not have the right to bid for his business that is the subject of an insolvency proceeding, also cannot regain control of the business by using the provision. of the “plan of arrangement”.

The Supreme Court dismissed a petition filed by ex-Gujarat NRE Coke promoter Arun Kumar Jagatramka, which had moved the court against an order from the National Company Law Appeals Tribunal (NCLAT) rendering the former ineligible to propose the arrangement plan.

A scheme of arrangement under section 230 of the Companies Act allows a defaulting company to enter into a compromise with creditors. The same provision has been incorporated into the liquidation regulations under the Insolvency and Bankruptcy Code (IBC). In its order, the Supreme Court stated that section 230 of the Companies Act is not a stand-alone provision when used in liquidation cases under IBC.

“The rigors of the IBC will not apply to proceedings under section 230 of the 2013 Act where the proposed compromise or arrangement scheme relates to an entity that is not the subject of a proceeding.” under the IBC. But, when, as in the present case, the process of invoking the provisions of article 230 of the law of 2013 finds its origin or, as one can describe it, the trigger of the liquidation procedure which was opened in Under the IBC, it becomes necessary to read both set of provisions in harmony, ”the Supreme Court said in its order.

The court therefore held that under the plan of arrangement, a claimant excluded under the IBC should not be allowed to make a claim.

Article 29A of the IBC prohibits a person from participating in the tendering process if he has been a promoter or in the direction or control of a debtor company in which a preferential transaction, an undervalued transaction , an exorbitant credit transaction or fraudulent transaction has taken place and an order has been issued by the NCLT.

Gujarat promoter NRE Coke voluntarily admitted the company into insolvency proceedings in April 2017. Later, it submitted a resolution plan in November 2017 and was to be voted on by the creditors committee on November 23 and 24. However, the government inserted Article 29A into the IBC on November 23 with retroactive effect, rendering Gujarat’s promoter NRE Coke ineligible to bid for the company in the insolvency proceedings.

The NCLT ordered in January 2018 the liquidation of Gujarat NRE Coke. The sponsor, however, moved NCLAT against the ordinance.

At the same time, Jagatramka filed an application under Articles 230-232 of the Companies Act 2013 to the NCLT, proposing a plan of compromise and arrangement between promoters and creditors. This request was granted by the NCLT by its order of May 15, 2018.

Jindal Steel and Power, an operational creditor, had filed an appeal with NCLAT against the NCLT order of May 15, 2018. NCLAT upheld JSPL’s request and denied the ex-Gujarat developer NRE Coke the possibility of proposing a plan of arrangement / compromise. Following this, Jagatramka filed for SC.

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