Section 230 Route Closed During CIRP: NCLT Kochi Rules Compromise Schemes Permissible Only After Liquidation

Section 230 Route Closed During CIRP: NCLT Kochi Rules Compromise Schemes Permissible Only After Liquidation

Introduction

The National Company Law Tribunal (NCLT Kochi) has 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. Judicial Member Vinay Goel observed that the statutory scheme contemplates exploration of such compromise or arrangement only at the stage of liquidation and not during the ongoing CIRP.

Factual Background

The proceedings arose from the CIRP of Mangomeadows Agricultural Pleasure Land Pvt Ltd initiated on an application filed by its financial creditor Kosamattom Finance Ltd.. The insolvency petition was admitted on January 25, 2023, thereby commencing the CIRP. During the resolution process, the Committee of Creditors (CoC) approved a resolution plan submitted by Torrion Impex India Pvt Ltd with 98.69% voting share. However, the plan was subsequently withdrawn before it could be placed before the Tribunal for approval.

Subsequently, the Resolution Professional approached the Tribunal seeking sanction of a scheme of compromise and arrangement under Section 230 of the Companies Act between Kosamattom Finance Ltd., the corporate debtor, and its creditors.

Procedural Background

While the proposal for a compromise scheme was pending, the suspended director of the corporate debtor raised objections. He contended that a proposal submitted by him had been rejected without due consideration, whereas a similar proposal supported by the majority financial creditor had been approved. The Tribunal examined the legal framework governing compromise schemes under Section 230 of the Companies Act, Regulation 39BA of the IBBI (CIRP) Regulations, and Regulation 2B of the IBBI (Liquidation Process) Regulations to determine whether such a scheme could be entertained during the CIRP stage.

Issues

1. Whether a compromise or arrangement under Section 230 of the Companies Act can be considered during the CIRP stage.

2. Whether such a scheme is statutorily permissible only after a liquidation order has been passed.

3. Whether approval of the scheme solely on the basis of majority voting share of the financial creditor can be treated as a valid exercise of commercial wisdom.

Contentions of the Parties

The Resolution Professional sought sanction of the compromise scheme proposed between the financial creditor Kosamattom Finance Ltd., the corporate debtor, and its creditors. The suspended director objected to the proposal, arguing that his own resolution proposal had been rejected without proper evaluation while a similar proposal backed by the dominant financial creditor had been accepted. He also contended that the scheme did not comply with the statutory framework governing compromise arrangements. The Tribunal also noted that the scheme had been approved in the CoC solely on the strength of Kosamattom Finance Ltd.’s overwhelming voting share of 98.69%, while the only other creditor holding 1.31% voting share had opposed the proposal.

Reasoning and Analysis

The Tribunal examined Section 230 of the Companies Act, Regulation 39BA of the CIRP Regulations, and Regulation 2B of the Liquidation Process Regulations. It observed that a combined reading of these provisions clearly indicates that exploration of compromise or arrangement under Section 230 is statutorily contemplated only in the context of liquidation proceedings. The Tribunal held that permitting a Section 230 scheme during the CIRP stage, in the absence of a liquidation order, would blur the distinction between two separate statutory mechanisms and undermine the structured framework of the IBC. The Bench further scrutinised the manner in which the scheme had been approved. It noted that the majority financial creditor effectively controlled the CoC and supported a scheme that could ultimately result in it acquiring control of the corporate debtor. The Tribunal observed that such a process, if not subjected to transparent and competitive evaluation, may compromise the integrity of the insolvency resolution process.

Relying on the decision of the National Company Law Appellate Tribunal in Pragiti Construction v. CoC of Rancom Healthcare Pvt Ltd, the Tribunal held that where a controlling creditor engineers approval of a plan enabling its own takeover without meaningful competition, the process cannot be treated as a bona fide exercise of commercial wisdom. In view of the statutory framework and the circumstances of the case, the Tribunal concluded that the application seeking sanction of the compromise scheme was premature.

Decision

The NCLT Kochi dismissed the application seeking sanction of the compromise and arrangement scheme under Section 230 of the Companies Act, holding that such a scheme can be considered only at the stage of liquidation and not during the ongoing CIRP.

In this case the applicant was represented by Advocate Harikumar G Nair.