2021 (9) TMI 411 - AT - Companies Law

Business transfer agreement by way of Slump Exchange - Section 421 of the Companies Act, 2013 - HELD THAT - Chapter XV of the Act Compromises, Arrangements and Amalgamations are covered by Section 230 -240 of the Act. The related regulation is the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 as amended from time to time. The direction that the part III IV of the creditors of the Company shall maintain status quo about their debt, not to classify loan amount as NPA, till further orders with respect to their contractual terms, dues, claims and rights and stopping from taking coercive steps including reporting in any form under Section 230 of the Act R/w 11 of the NCLT Rules, 2016 is not in order. It is because the creditors themselves have to get it approved from 75% of the value of creditors and naturally, if they are not in favour of the scheme of arrangement, it will be disapproved - Even if the Company debt is under NPA and even if the Company is under Liquidation, it can always invoke Chapter-XV of the Act through Scheme of Arrangement to come out of the situation. There is no bar in merging unhealthy company with healthy company to come over the crisis. There was no need perhaps to pass this specific directions. Appeal disposed off.

Summary

Issues Involved:
1. Jurisdictional error or material irregularity by the Tribunal under Section 230 of the Companies Act, 2013.
2. Direction to maintain status quo regarding debts and classification of loans as NPA.
3. RBI's regulatory authority and its role in the scheme of arrangement.

Issue-wise Detailed Analysis:

1. Jurisdictional Error or Material Irregularity by the Tribunal:
The Appellant in CA (AT) No. 232 of 2020 contended that the Tribunal misconstrued individual letters from Axis Bank and UCO Bank as prior consent of 75% approval of the Secured Creditors. The Appellant argued that the proposed scheme was rejected by the majority of the Secured Creditors in the meeting held on 16.12.2020, rendering the scheme legally unapprovable. The Appellant also highlighted that there is no power under Section 230 of the Companies Act, 2013 to grant any stay of proceedings, unlike the erstwhile Section 391(6) of the Companies Act, 1956. The Appellant emphasized the overriding effect of the 'Recovery of Debts and Bankruptcy Act, 1993', 'Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002', and the 'Insolvency and Bankruptcy Code, 2016'. They also noted that the Tribunal Rules, 2016 do not provide for review powers, only correction and rectification under Rules 148 and 154. The interim order of injunction was claimed to be in violation of Section 41 of the 'Specific Relief Act, 1963'.

2. Direction to Maintain Status Quo Regarding Debts and Classification of Loans as NPA:
The Appellant in Company Appeal (AT) No. 43 of 2021 (RBI) criticized the Tribunal's direction to maintain status quo on the Respondents' debts, preventing classification as NPA and taking coercive steps. The RBI argued that this direction undermined the statutory scheme under the RBI Act and related circulars, which have statutory force and set out parameters for classifying loans as NPA. The RBI emphasized its role as a prime regulator with broad powers under the BR Act and RBI Act to supervise and regulate NBFCs. The RBI was not a party to the hearing and thus could not present its submissions but filed an intervention application before the Tribunal. The RBI asserted that Section 230 of the Companies Act cannot extend to banks and financial institutions discharging public functions by the impugned directions.

3. RBI's Regulatory Authority and Its Role in the Scheme of Arrangement:
The Respondent No.1 (SREI Equipment Finance Limited) defended the Tribunal's order for holding creditors' meetings and maintaining status quo, arguing that the scheme's approval by creditors is necessary. They contended that the Appellants' actions, such as imposing a debit freeze, hindered their operations, including paying salaries. They argued that objections should be raised in the creditors' meeting or Tribunal, not before the Appellate Tribunal. They also highlighted that the Tribunal followed the procedure under Rule 5 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. They contended that the absence of specific provisions in Section 230 similar to Section 391(6) of the Companies Act, 1956 does not negate the Tribunal's power under Section 230. They also argued that Section 41 of the Specific Relief Act is not applicable as the order is not a permanent injunction.

Tribunal's Observations and Decision:
The Tribunal observed that Chapter XV of the Companies Act covers Compromises, Arrangements, and Amalgamations under Sections 230-240. The Tribunal is authorized to call meetings of creditors or class of creditors and members or class of members for approving the scheme. The Tribunal noted that the direction to maintain status quo regarding debts and NPA classification was unnecessary, as creditors would naturally not take coercive steps if they favored the scheme. The Tribunal emphasized that NPA classification follows RBI's Master Circular, and financial institutions must adhere to it. The Tribunal set aside the specific direction in para 23-xviii of the impugned order dated 21.10.2020, as it was not in order. The Tribunal disposed of both appeals with the above observations and directions, vacating any interim orders other than those stated above and making no orders as to costs.