Introduction
In a landmark decision, the boundaries between strict legal interpretation versus practical necessity and purposive interpretation were thoughtfully navigated by the National Company Law Appellate Tribunal (Delhi Bench) (“NCLAT”) in the case of Nikhil Jain & Ors. v. Anil Goel, Liquidator of Birla Cotsyn India Limited (Company Appeal (AT) No.148 of 2024).
The main controversy was whether a proposed arrangement to revive a company undergoing liquidation qualifies as a restructuring proposal under SEBI regulations. And whether, for such proposals, No Objection Certificates (“NOCs”) are necessary from the stock exchange.
Accordingly, the NCLAT in its ruling, has also clarified whether Regulation 37(1) and (2) of SEBI (Listing Obligations and Disclosure Requirements) 2015 (“LODR”) come into play as far, as the Scheme filed by the Liquidator under Section 230 of the Companies Act 2013 (“the Act”) read with Regulation 2B of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Process Regulation”) is concerned; and if the clarification introduced by Regulation 37(7) of the LODR for restructuring proposals (“the Code”) applies to a scheme for revival of a company in liquidation sanctioned under Regulation 2B of said Liquidation Process Regulations together with Section 230 of the Act.
Factual Matrix
The dispute arose when the Appellants sought to revive Birla Cotsyn India Ltd. (“Company”) which was under liquidation through a scheme of arrangement submitted to National Company Law Tribunal, Mumbai (“NCLT”). The Appellants argued that the Liquidator submitted the scheme of arrangement, which made Regulations 37(1) and 37(2) of the LODR inapplicable, and that the purchase as ‘going concern’ in liquidation is akin to resolution of the Company under Section 31 of the Code, and on purposive interpretation, the exemption provided to the resolution plan in Regulation 37(7) of LODR shall be applicable to the purchase.
The Respondent (BSE) argued that Regulation 37(1) & (2) of LODR applies to the scheme filed by the Liquidator, and Regulation 37(7) does not apply to a scheme presented by the Liquidator under Section 230 of the Act, as it does not qualify as a ‘restructuring process’ under Section 31 of the Code. It was also argued that when legal provisions impose a prohibition, it cannot be disregarded by the court, and courts should interpret a statute when there is ambiguity, without adding or subtracting anything not explicitly stated.
Key Legal Issues Addressed
Requirement of an NOC under Companies Act 2013
Sections 230-232 of the Act provide for a scheme of arrangement to be proposed by the company or its creditors or members, which requires prior approval of the NCLT. The stock exchange’s involvement is limited to listed companies, where compliance with SEBI regulations comes into play.
The NCLAT clarified that under the Act, there is no explicit requirement for obtaining an NOC from the stock exchange for a scheme of arrangement but for listed companies, compliance with SEBI’s LODR regulations is necessary, including obtaining NOC or approvals depending on the nature of the scheme.
Restructuring Proposals and Regulation 37(7) of LODR
The next question was whether a scheme of arrangement for the revival of a company in liquidation constitutes a “restructuring proposal” under regulation 37(7) of LODR.
The NCLAT clarified that the revival of a company through a scheme of arrangement, even when the company is in liquidation, qualifies as restructuring. The restructuring is subject to Regulation 37(7) provisions, which require prior consent from the stock exchange. As enshrined in Section 31 of the Code, the advantages of a resolution plan must also apply to an arrangement scheme under Section 230 of the Act, read together with Regulation 2-B of Liquidation Process Regulations. Both these modes of revival operate in a similar continuum and deserve equal treatment.
Obligation of the Liquidator under Regulations 5 and 11 of LODR
It was noted that Regulations 5 and 11 of the LODR impose general obligations on listed entities. These regulations extend to the liquidator as well, who assumes the role of managing the company during liquidation. Regulation 11 provides that no listed entity should act in a manner that violates SEBI regulations.
The NCLAT ruled that liquidators must comply with LODR provisions and obtain an NOC from stock exchanges when necessary. Listed companies should follow regulatory obligations to safeguard market integrity and shareholder interests, even while undergoing liquidation.
NOC Requirement under Regulation 37(1) & 37(2) of LODR for Revival Schemes
Regulations 37(1) & 37(2) of the LODR address the requirement for obtaining NOC from stock exchanges for schemes involving restructuring. The NCLAT held that Regulation 37(1) of the LODR refers to the obligation of a ‘listed entity’. Further, through the amendment dated 31st May 2018, SEBI introduced sub-regulation 7 to Regulation 37 of the LODR, where SEBI has chosen to exempt the requirement of seeking an NOC from stock exchanges for any restructuring proposal by way of a resolution plan under Section 31 of the Code.
Relevant Judgments and Precedents
The NCLAT substantiated its ruling based upon (i) Pentamedia Graphics Limited v. The Bombay Stock Exchange (2006 SCC Online Mad 918) which held the requirement of NOC from stock exchanges is not mandatory for approval of a Scheme and is only required for continued listing of the Company, which can be pursued after the Scheme as well; (ii) S.C. Sekaran v. Amit Gupta and Ors. (2019 SCC Online NCLAT 517), which held that a scheme in liquidation must be attempted first, before sale of assets of the company as a going concern; (iii) Y. Shivram Prasad v. S. Dhanapal & Ors. 2019 (SCC Online NCLAT 172) which emphasised the revival of a Corporate Debtor during liquidation by way of the Scheme under Section 230 of the Act, later, this aspect was noted by the Hon’ble Supreme Court in Arun Kumar Jagatramka v. Jindal Steel and Power Limited, ((2021) 7 SCC 474).
Conclusion
The NCLAT’s decision has struck a balance between regulatory oversight and the need for flexibility in the revival of financially distressed companies. For companies undergoing liquidation, the decision liberates them from the requirement of securing an NOC unless specifically required by law. For liquidators, the judgement offers a much-needed guidance with regard to their obligations under the LODR, which would help them in reviving and resolving distressed companies without unnecessary delays. There is no doubt that this ruling stands as a landmark judgement on the interplay between corporate restructuring and regulatory compliance and oversight, paving the way for a much brighter and transparent path for Companies, Liquidators and Investors alike.
The Respondent challenged the Order passed by the NCLAT before the Hon’ble Supreme Court of India by filing a Civil Appeal (Civil Appeal No. 12149 of 2024- Bombay Stock Exchange vs. Nikhil Jain & Ors.) . However, the Hon’ble Supreme Court vide its Order dated 14th November, 2024 observed that there was no error in the judgement passed by the NCLAT and accordingly, the Appeal is dismissed.
This article has been authored by Aalisha Sharma, Associate at Dhruve Liladhar & Co., Advocates, Solicitors & Notary.