Scheme of Arrangement – Surrogate route to bail out entities from liquidation

Posted On - 28 May, 2019 • By - Mohana Roy

“The Insolvency and Bankruptcy Code, 2016 is a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors.”- Supreme Court of India inSwiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. – Writ Petition (Civil) No. 99 of 2018. Scheme of Arrangement.

In a string of recent judgments, courts and
quasi-judicial authorities in India has found out a surrogate route to bail out
ailing entities standing at the verge of liquidation. By permitting liquidators
to sell the business of a corporate debtor as a going concern, in case of
failed corporate insolvency resolution process as provided under the Insolvency
and Bankruptcy Code,2016 (“IBC”), an
attempt has been made to provide the real meaning to the objects sought to be
achieved by IBC. As the Preamble of IBC nowhere refers to liquidation, which
can only be availed as a last option, the primary focus must in all case remain
revival of the ailing entity. The National Company Law Appellate Tribunal (“NCLAT”) in the case of S.C.
Sekaran v. Amit Gupta[1]

directed the liquidator for revival of the corporate debtor by scheme of
arrangement. Further, the NCLAT also directed that the same can be implemented
by two ways, first, by sale of the company’s assets as a whole, if possible or
second, by sale of the company’s assets in parts.


On 25th June, 2018 the Mumbai Bench of
National Company Law Tribunal (“NCLT”)
passed an order of winding up of Hindustan Dorr-Oliver Limited and HDO
Technologies Limited (herein after referred as “Corporate Debtors”) under section 33(1) of the IBC. A corporate insolvency
resolution process was initiated against the Corporate Debtors, the resolution
applicants were asked to submit better and revised resolution plan however, the
resolution applicants failed to do so. In the afore said background, where no
resolution plan was arrived at for the Corporate Debtors, the NCLT ordered for
liquidation. Aggrieved by the order of NCLT, the Management of the Corporate
Debtors (Appellant) filed an appeal before NCLAT.

Contentions Raised

The Appellant contended that the liquidator is
supposed to keep the companies as going concern even during the liquidation
process. Further, the liquidator may also sell the company to the third party
under any scheme of compromise and arrangement.


NCLAT while
deciding on the matter put reliance on the Hon’ble Supreme Court Judgment in
the case of Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.(SUPRA),
where in it was observed that the “Preamble does not, in any manner, refer to
liquidation, which is only availed of as a last resort if there is either no
resolution plan or the resolution plans submitted are not up to the mark. ”

Further, the
NCLAT also relied on Arcelormittal India Pvt. Ltd. vs. Satish
Kumar Gupta & Ors.[2]
 under which the Hon’ble Supreme Court opined
that the primary focus of IBC is  to
revival and rehabilitation of the ailing entity, which means the focus should
be towards  saving the corporate debtor
from a death by liquidation and if in case nothing works out then the option of
liquidation to be sort.

The apex court
also mentioned in its judgment that Regulation 32 of the IBC (Liquidation
Process), Regulation 2016, clearly states that liquidator may also sell the
corporate debtor as a going concern.

On perusal of the
above and in view of section 230 of the Companies Act, 2013 the NCLAT, held
that the liquidator shall proceed in accordance with the law and carry on the
business of the corporate debtor as a going concern, the liquidator will also
take steps under section 230 of the Companies Act, 2013.


Scheme of compromise and arrangement for companies
in liquidation may sound like a new ray of hope, however, the option of scheme
of arrangement for companies heading towards winding up has always been present
under our corporate laws. Although, the same had taken a setback for quite some
time which is now been rejuvenated by array of recent NCLAT judgments. Section
390(a) of the Companies Act, 1956 defined the term “company” for the purpose of
scheme of compromise and arrangement, which also included “company liable to be
wound up.” In the case of Meghal Homes Pvt. Ltd. vs. Shree Niwas Girni
K.K. Samiti[3]

the company was ordered to be wound up and liquidated in 1984, however, in 1994
during the pendency of liquidation 
process, the scheme of arrangement was proposed.

In the past it was an established principle that
such scheme of arrangements was only for those entities who are at the brink of
liquidation. However, the High Court of Bombay in the case of Khandelwal
Udyod and Acme Manufacturing Co. Ltd
[4]. observed that scheme of arrangement as
contemplated under section 390 of the Companies Act, 1956 are not meant only
for liquidating companies but also for healthy companies.

Section 391 of the Companies Act, 1956 has now been
replaced with section 230 of the Companies Act, 2013. Section 230(1) of the
Companies Act, 2013 provides that a liquidator appointed under IBC may also
propose scheme of arrangement. However, it is pertinent to note here that the
provisions of Companies Act, 2013 and the IBC will overlap each other. Section
29 A of IBC restricts the errant promoters from proposing resolution plans,
whereas section 230 of the Companies Act, 2013 has no such restrictions,
instead, member or creditors are provided with the power to propose the scheme
of arrangement. This power along with the order granted under the NCLAT
Judgments making way for scheme of arrangements during the liquidation, may be
used adversely by the promoters to perpetuate their stay.  

In the recent judgments, NCLAT have not provide
with the clarity on how the provisions of section 230 of the Companies Act,
2013 and Section 29 A of IBC will go hand in hand. Apart from the above
mentioned restriction on promoter’s proposal, there are other issues which
requires judicial deliberation, such as voting requirements as prescribed under
Section 230. Further, under the NCLAT order in the S.C. Sekaran v. Amit Gupta (SUPRA),
it has also been directed to the liquidator that the scheme of arrangement
proposed under section 230 of the Companies Act, 2013 must be completed within
90 days. This may be a good direction by NCLAT to fix the time period for
completion of the scheme of arrangement else it may also be used for delaying
the liquidation, however, the period of 90 days may seem to be less for
completion of the whole process.

Conclusion – Scheme of Arrangement

The  NCLAT, after its judgment in the S.C. Sekaran
case has followed its footstep in cases subsequent to it[5] and has directed the
liquidator to  resort to the scheme of
arrangement for revival of the corporate debtor. IBC mainly aims to revive and
rehabilitate a corporate debtor so that it can stand on its feet again, paying
back the creditors even by death of the company on winding up is not sought by
the IBC, in fact winding up can be an option only when all other options are

Scheme of Arrangement as a
debt restructuring tool has been used sparingly in India. On one hand, it works
as an antidote for the ailing companies standing at the brink of liquidation,
on the other hand, it may be a difficult process for liquidators to find out
persons who are willing to buy such companies. Further, the provisions under
the Companies Act, 2013 and IBC are overlapping each other, requires clarity
from the judiciary or the legislator.  However,
NCLAT in Shivram Prasad case (Supra) has provided a little clarity by
stating that “as the liquidation so taken up under the IBC, the scheme of arrangement
should be in consonance with the statement and object of the IBC. Meaning there
by the scheme must ensure maximisation of the
assets of the ‘Corporate Debtor’ and balance
the stakeholders such as, the ‘Financial Creditors’, ‘Operational Creditors’,
‘Secured Creditors’ and ‘Unsecured Creditors’ without any discrimination
.”  Thus,
from the above it can be concluded that though the philosophy behind the
concept is clear, it still requires judicial precedents or codified law guiding
towards the procedures to be followed in practicality

Contributed by –Mohana Roy
Designation – Associate, Corporate

Company Appeal(AT) (Insolvency) no. 495 & 496 of 2018.

Civil Appeal No.9402-9405 of 2018

[3] (2007)
139 Com Cases 418

[4] (1977) 47 Com
Cases 503

[5] Ajay Agarwal Vs. Ashok Magnetic Ltd. Company Appeal (AT) (Insolvency) No. 792 of 2018; Y. Shivram Prasad vs. Dhanapal ; Company Appeal (AT) (Insolvency) No. 224 of 2018

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