NCLT (Mumbai) Sanctions Birla Cotsyn Revival Scheme Under S.230 Companies Act; Upholds Acquirer Eligibility Under S.29A IBC Despite SFIO Probe, Affirms Prior SEBI NOC Not Mandatory - 2025-05-23

NCLT Greenlights Revival Scheme for Birla Cotsyn, Overruling Objections on Acquirer Eligibility and SEBI NOC

Mumbai, January 9, 2025 – The National Company Law Tribunal ( NCLT ), Mumbai Bench, comprising Hon’ble Member (Technical) Mr. Sanjiv Dutt and Hon’ble Member (Judicial) Mr. Kishore Vemulapalli , has sanctioned a Composite Scheme of Compromise and Arrangement for the revival of M/s. Birla Cotsyn (India) Ltd., a textile company currently under liquidation. The scheme, proposed by the company's liquidator, Mr. Anil Goel , and backed by a consortium of acquirers, aims to bring the ailing company back on its feet.

The decision marks a significant step for Birla Cotsyn, which entered liquidation in September 2019, by paving the way for its continuation as a going concern. The Tribunal meticulously addressed and overruled objections raised by the Bombay Stock Exchange (BSE) concerning prior regulatory approvals and by the Regional Director (RD), Ministry of Corporate Affairs, regarding the eligibility of the acquirers under the Insolvency and Bankruptcy Code (IBC), 2016, particularly in light of ongoing investigations by the Serious Frauds Investigation Office (SFIO).

Case Background: From Financial Distress to a Revival Plan

Birla Cotsyn (India) Ltd., incorporated in 1941 and listed on the BSE in 2008, faced severe financial difficulties leading to its loan accounts being declared Non-Performing Assets (NPAs) in 2012-13. Corporate Insolvency Resolution Process (CIRP) was initiated against the company in November 2018. When no viable resolution plan emerged, the Committee of Creditors (CoC) opted for liquidation, which was ordered by the NCLT on September 24, 2019.

In February 2022, a Scheme of Compromise and Arrangement under Section 230 of the Companies Act, 2013, read with Regulation 2-B of the IBBI (Liquidation Process) Regulations, 2016, was proposed by Mr. Nikhil Jain (Acquirer No. 1), M/s. Rohstoffe International Private Limited (Acquirer No. 2), and M/s. Wendt Finance Private Limited (Acquirer No. 3). This scheme received approval from 78.22% of the creditors (by value) in December 2022, leading to the current petition for sanction by the NCLT , filed in July 2023. The total financial proposal under the scheme is Rs. 52.43 Crores, significantly higher than previous resolution offers and the company's liquidation value.

Key Objections and Tribunal's Stand

The path to sanctioning the scheme was not without its hurdles, with significant objections raised by regulatory bodies:

1. Bombay Stock Exchange (BSE) Objection: The BSE contended that the liquidator had not obtained a prior No-Objection Certificate (NOC) from the exchange as required under Regulation 37 of the SEBI (LODR) Regulations before submitting the scheme to the NCLT .

* NCLAT and Supreme Court Intervention: While the NCLT initially directed the liquidator to obtain the NOC, the acquirers successfully appealed to the National Company Law Appellate Tribunal (NCLAT). In its judgment dated August 20, 2024, the NCLAT held that prior NOC from stock exchanges is not mandatory for revival schemes of companies undergoing liquidation under the IBC. The NCLAT reasoned that such schemes are akin to resolution plans and that Regulation 37(7) of LODR, which provides an exemption, should apply. The Supreme Court, by its order dated November 14, 2024, dismissed BSE's appeal against the NCLAT order.

* NCLT 's Finding: In light of these apex rulings, the NCLT found that the BSE's objection no longer survived.

2. Regional Director (RD), Ministry of Corporate Affairs Objections: The RD raised multiple concerns:

* SFIO Investigations and Acquirer Eligibility (Section 29A IBC): The RD argued the scheme was a device to scuttle pending SFIO investigations against Birla Group Companies and alleged that the acquirers were ineligible under Section 29A of the IBC due to Mr. Nikhil Jain 's (Acquirer No. 1) relation to his father, Mr. O.P. Jain . Mr. O.P. Jain was briefly the Managing Director of Birla Cotsyn for 39 days in 2012, nearly six years before the CIRP commenced.

* Pending Section 241-242 Proceedings: The RD also pointed to pending proceedings under Sections 241-242 of the Companies Act, 2013 (alleging oppression and mismanagement concerning fixed deposit holders) as a reason to defer the scheme.

* Liquidator and Acquirers' Rebuttal: The liquidator and acquirers countered that the SFIO investigations could continue against erstwhile promoters, who were not protected by the scheme. They asserted the acquirers' eligibility under Section 29A IBC, stating Mr. O.P. Jain was not a 'related party' at the time of insolvency commencement, and no malfeasance was shown in his brief tenure.

NCLT 's Detailed Reasoning

The Tribunal systematically addressed each objection:

On Acquirer Eligibility (Section 29A IBC): The NCLT found no grounds to disqualify the acquirers. It noted that Mr. O.P. Jain had ceased to be MD of the corporate debtor approximately six years before CIRP initiation, thus not qualifying as a 'related party' under Section 5(24) of the IBC as of the insolvency commencement date. The Tribunal stated, "there is no cogent material on record to show that the vacation from his position of Managing Director of the Corporate Debtor by Mr. O.P. Jain on 17.12.2012, was either malafide and/ or collusive in nature." The liquidator's verification of the acquirers' compliance with all clauses of Section 29A was also found to be without material defects. The Tribunal further examined the relationship between the corporate acquirers (Rohstoffe International and Wendt Finance) and the corporate debtor, concluding they were not 'related parties' under Section 5(24)(f) or 5(24)(m) of the IBC.

On Pending Investigations and Proceedings: Relying on Supreme Court precedents like Miheer H. Mafatlal v. Mafatlal Industries Ltd. , the NCLT held that pending inquiries or prosecutions do not inherently bar the sanctioning of a scheme. The Tribunal emphasized, "All pending investigations by Governmental Authorities and/ or other such authorities may continue as against the erstwhile promoter(s) and all other key managerial personnel(s) who were in charge of affairs of the Corporate Debtor prior to sanction of this Scheme..." The scheme itself provides for payments to fixed deposit holders, addressing concerns from the Section 241-242 petition.

Scheme's Alignment with IBC Objectives: The NCLT referred to the Supreme Court's decision in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. , which clarifies that Section 29A ineligibilities apply to Section 230 schemes for companies in liquidation, and that such schemes, upon approval, allow the revived entity to start on a "fresh slate." The NCLAT's ruling in the acquirers' own appeal ( Nikhil Jain & Ors. v. Anil Goel ) was also cited, which equated a Section 230 scheme in liquidation to a resolution plan, deserving similar treatment regarding benefits and rigors.

The Scheme's Provisions and Implications

The sanctioned scheme includes:

* Infusion of funds totaling Rs. 52.43 Crores for repayment to stakeholders (including full payment of workmen's dues) and working capital.

* Continuation of the company as a going concern, aiming to preserve and generate employment.

* Extinguishment of existing promoter shareholding, with public shareholders retaining 5% of the total shareholding, and continued listing of shares subject to regulatory approvals.

The NCLT granted certain reliefs and concessions concomitant to the "Doctrine of Clean Slate," ensuring claims not part of the scheme are extinguished. However, it clarified that no waivers absolve the company from mandatory procedural compliances or protect erstwhile management from ongoing investigations.

Final Order

The NCLT , finding the scheme fair, reasonable, and not contrary to public policy or law, sanctioned it with effect from the date of the order's uploading. The Tribunal directed compliance with statutory requirements, including filing with the Registrar of Companies and cooperation with investigating authorities by the reconstituted Board of Directors.

This judgment underscores the judiciary's intent to prioritize revival of distressed companies where feasible, even amidst complex legal and regulatory challenges, aligning with the core objectives of the Insolvency and Bankruptcy Code.