The (Negligible) Role of Shareholders in Corporate Insolvency

The Ministry of Corporate Affairs (MCA) yesterday issued a clarification stating that no resolution or approval of the shareholders of a debtor company will be required in order to give effect to a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC).

It appears that stakeholders sought the MCA clarification on account of section 30(2)(e) of the IBC, which requires the resolution professional to confirm that the resolution plan “does not contravene any of the provisions of the law for the time being in force”. Here, the MCA clarified that the intention was to ensure that the plan is compliant with applicable laws and regulations so that it can be implemented. The MCA provided examples such as compliance with foreign investment regulation, including sectoral caps.

As far as shareholders are concerned, the MCA also pointed to section 31(1) of the IBC, which expressly states that an approved resolution plan shall be binding on several persons, including the shareholders of the company. Hence, even though the Companies Act, 2013 may require shareholders’ approval for various actions by the company (such as sale of significant undertakings or issue of shares), such approval is “deemed to have been given on its approval by the Adjudicating Authority”.

Effectively, the MCA clarification points to the fact that once the company is in within the corporate insolvency resolution process, matters go beyond the hands of the shareholders, and that all crucial decisions are taken by the creditors through the mechanisms stipulated in the IBC. This is a reaffirmation of the creditor-friendly nature of the IBC, as separately enunciated by the Supreme Court as well. This is justifiable from a conceptual standpoint in that once the company in the process of insolvency, the interests of the shareholders will have to make way for that of the creditors. However, from a drafting standpoint, it may have been desirable for the legislation to have expressly dealt with it than for the Government to address it through a clarification.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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