This Article has been authored by Suman Kumar Jha (Founder & Managing Partner), Afnaan Siddiqui (Co-founder & Partner), Visakha Raghuram (Associate) and Ankit Abhishek Jha
INTRODUCTION
The Hon’ble National Company Law Tribunal (‘NCLAT’) has recently rendered a judgement in the matter of Nikhil Jain and Ors. v. Anil Goel (Liquidator) and Anr. wherein it has been held that the requirement of obtaining a No Objection Certificate (NOC) from Stock Exchange under Regulation 37(1) and (2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) is not applicable for schemes of arrangement for revival of companies undergoing liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC). The outcome of this case is crucial, as it sets a precedent for how revival schemes are handled for companies in liquidation. The interpretation of the applicability of SEBI’s LODR Regulations, 2015 in conjunction with the provisions of the Companies Act, 2013, and the Insolvency and Bankruptcy Code (IBC), will play a pivotal role in streamlining the process and requirements for obtaining approvals for revival schemes.
BACKGROUND AND PROCEDURAL HISTORY
The Corporate Debtor, Birla Cotsyn (India) Ltd. is in liquidation under provisions of the Insolvency and Bankruptcy Code, 2016.
The Liquidator of Birla Cotsyn India Ltd. filed an application before NCLT, Mumbai for approval of the Scheme of Arrangement for the revival of the Corporate Debtor under Section 230 read with Section 66 of the Companies Act, 2013 and Regulation 2B of the IBBI (Liquidation Process) Regulations 2016 (Liquidation Process Regulations).
The Hon’ble National Company Law Tribunal (‘NCLT’), Mumbai in its impugned order dated April 4, 2024, ruled that the Liquidator must obtain a No-Objection Certificate (‘NOC’) from the Bombay Stock Exchange (‘BSE’) before the Scheme could be approved. This requirement was deemed mandatory under Regulation 37 of the SEBI (LODR) Regulations, 2015 Consequently, the NCLT directed the Liquidator to secure a NOC from the BSE before proceeding with the approval process.
KEY LEGAL ISSUES BEFORE THE NCLAT
The case was subsequently brought before the Hon’ble NCLAT, Principal Bench, New Delhi, where the broad question of law to be addressed was:
- Whether Regulation 37(1) and (2) of the SEBI (LODR) Regulations, 2015 would apply to the Scheme submitted by the Liquidator under Section 230 of the Companies Act, 2013 read along with Regulation 2B of the Liquidation Process Regulations; and,
- Whether the clarification introduced by way of Regulation 37(7) of the SEBI (LODR) Regulations, 2015 for restructuring proposals under Section 31 of the Code would also apply to a Scheme for revival of a company in liquidation under Regulation 2B of the Liquidation Process Regulations.
Court’s Reasoning and Findings
- No Statutory Requirement for Prior NOC from Stock Exchanges
There is no statutory provision mandating companies to obtain a prior No-Objection Certificate (NOC) from stock exchanges for a Scheme of Arrangement under the Companies Act, 2013. Section 230(2) of the Companies Act outlines the necessary requirements and disclosures for such schemes but does not prescribe the need for an NOC from stock exchanges as a prerequisite for approval. This position was affirmed in the case of Pentamedia Graphics Limited vs. Bombay Stock Exchange, where it was held that while an NOC may be relevant for the continued listing of a company, it is not a mandatory requirement for the approval of the Scheme itself. The ruling clarified that the pursuit of an NOC from the stock exchanges can occur after the Scheme’s approval also, ensuring that the regulatory process does not impose unnecessary delays on the arrangement’s implementation. This interpretation underscores the flexibility afforded to companies in restructuring efforts, particularly in the context of balancing regulatory compliance with the practicalities of corporate restructuring.
- Application of Regulation 37(7) of SEBI LODR Regulations
Regulation 37(7) of the SEBI (LODR) Regulations, 2015, provides an important exception, stipulating that the requirements under this regulation and Regulation 94 do not apply to a restructuring proposal approved as part of a resolution plan by the Tribunal under Section 31 of the Insolvency and Bankruptcy Code (IBC), provided the details are disclosed to the recognized stock exchanges within one day of the plan’s approval. Significantly, a scheme of arrangement for the revival of a company in liquidation also qualifies as a “restructuring proposal,” sharing the same core attributes and objectives as a resolution plan under Section 31 of the IBC. Both are mechanisms designed to achieve the revival of the corporate debtor, albeit through different procedural routes.
Given this functional similarity, the benefits and obligations that apply to a resolution plan under Section 31 should logically extend to a scheme of arrangement submitted under Section 230 of the Companies Act, 2013, in conjunction with Regulation 2B of the Liquidation Process Regulations. Both these modes of revival operate within the same continuum and aim to prevent the “civil death” of the corporate debtor, thereby warranting equal treatment under the law.
The Hon’ble Supreme Court, in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd., reinforced this principle by extending the applicability of Section 29A of the IBC, which disqualifies certain persons from submitting a resolution plan, to schemes of restructuring in liquidation as well. This precedent supports the argument for a purposive interpretation of Regulation 37(7), where the strict, literal interpretation must yield to a dynamic approach that aligns with the regulation’s objective—facilitating effective and equitable modes of corporate revival. Such an interpretation ensures that the regulatory framework remains adaptive, supporting the broader goal of rescuing financially distressed companies.
- Evolution of Insolvency Jurisprudence and its Impact on Revival Schemes
The evolution of insolvency jurisprudence has demonstrated a flexible approach to the revival of companies in distress, particularly in the context of liquidation.
In S.C. Sekaran vs. Amit Gupta and Ors., the Hon’ble NCLAT established that a scheme of arrangement during liquidation under the Insolvency and Bankruptcy Code (IBC) should be pursued before considering the sale of the company’s assets. This principle was further reinforced in Y. Shivram Prasad vs. S. Dhanapal & Ors., where the Hon’ble NCLAT emphasized the importance of attempting a revival of the Corporate Debtor through a scheme under Section 230 of the Companies Act, 2013, during liquidation – a view subsequently acknowledged by the Supreme Court in Arun Kumar Jagatramka (Supra).
Following these judgments, Regulation 2B was introduced into the Liquidation Process Regulations, highlighting that the concept of a revival scheme during liquidation was not contemplated when SEBI amended the SEBI (LODR) Regulations, 2015 in May 2018. The IBC envisions a “single window” process for corporate revival, ensuring that necessary approvals are streamlined through the NCLT to adhere to strict timelines.
Section 31(4) of IBC, 2016 contemplates that if any statutory approvals are required for a resolution plan, they can be obtained within one year from the date of approval of the resolution plan. Even though the proviso to Section 31(4) of the Code requires prior approval of the Competition Commission in cases of ‘combinations’, the Hon’ble NCLAT has even read that provision as directory and not mandatory in Soneko Marketing v. Girish Sriram Juneja.
If Regulation 37 of the SEBI (LODR) Regulations, 2015 were to mandate a prior NOC from stock exchanges for a scheme of revival during liquidation, it would conflict with these stringent timelines envisaged unde the IBC. Moreover, it is to be noted that it is necessary for the provisions of the IBC to prevail, by virtue of the non-obstante clause in Section 238. Moreover, principles like the “clean slate theory,” recognized by the Supreme Court in Ghanashyam Mishra & Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Company Ltd., have been extended beyond resolution plans to other modes of revival, such as the sale of a corporate debtor as a going concern during liquidation, underscoring the judiciary’s commitment to a dynamic and purposive interpretation of the law in favour of corporate rehabilitation.
- Comparison with Resolution Plans Under IBC
The scheme under consideration in the present matter is akin to a Resolution Plan under Section 31 of the Insolvency and Bankruptcy Code (IBC) and adheres to the stringent requirements set forth in Section 30(2) of the IBC, 2016, as well as Regulations 37 and 38 of the CIRP Regulations, 2016. This scheme, designed to prevent the “Civil Death” of the company, includes provisions for the full payment of CIRP and liquidation costs, the settlement of workmen’s dues, the payment of settlement value to creditors, the extinguishment of all liabilities (whether filed, admitted, or otherwise), the ouster of erstwhile promoters, and the induction of new promoters through the acquirers. Additionally, it mandates the constitution of a Monitoring Committee and the provision of Earnest Money Deposit (EMD) and performance security, thereby aligning closely with the structure and intent of a Resolution Plan. However, a restrictive literal interpretation of Regulation 37(7) of the SEBI (LODR) Regulations, 2015 would create an untenable situation where a Scheme of Arrangement under liquidation which is a process with objectives and forms similar to those of a Resolution Plan’ would be subjected to more onerous requirements. This would lead to a manifest absurdity, undermining the very goal of both processes, which is to facilitate the revival of distressed companies. Such an interpretation would impose unnecessary burdens on schemes under liquidation, despite their alignment with the overarching objectives of the IBC, thereby hindering the efficient resolution of corporate insolvencies.
Implications of the Ruling on Revival Schemes in Liquidation
The clarification or exemption from the prior NOC requirement under Regulation 37(7) of the SEBI (LODR) Regulations, 2015 should logically extend to a scheme of arrangement for the revival of a company in liquidation. Judicial interpretations and the subsequent introduction of Regulation 2B in the Liquidation Process Regulations have firmly established that a scheme of arrangement under Section 230 of the Companies Act, 2013, is a recognized mode of corporate revival. This scheme operates within the same continuum as a restructuring proposal through a resolution plan under Section 31 of the Insolvency and Bankruptcy Code (IBC). Given the similar objectives and outcomes of both processes, facilitating the revival of a distressed company, the clarification introduced by Regulation 37(7) of the SEBI (LODR) Regulations, 2015 should also apply to schemes proposed by liquidators under Section 230. This ensures consistency in the treatment of various revival mechanisms under the IBC and prevents the imposition of unnecessary burdens on liquidation schemes, thereby supporting the efficient and equitable resolution of corporate insolvencies.