Rights of Preference Shareholders under the Insolvency Code

[Shubham Jain and Kannan Jhunjhunwala are BA.LLB (Hons.) students at National Law University, Delhi]

The National Company Law Appellate Tribunal (NCLAT) in Brij Bhushan Singhal v Bhushan Steel Ltd. (10 August 2018) allowed for preference shares to be redeemed outside the purview of section 55 of the Companies Act, 2013 when required by the resolution plan. In this case, with Tata Steel Ltd. as the resolution applicant, the appellant, a preference shareholder of Bhushan Steel (corporate debtor), filed an appeal that the resolution plan sought to automatically redeem and cancel his preference shares, in contravention of section 55. That provision mandates that preference shares can only be redeemed in the manner, and after fulfilment of the conditions, prescribed in the terms of issue. According to section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016 (IBC), a resolution plan cannot be approved if it contravenes any provision of law.

However the NCLAT, without a consideration of the question raised regarding section 55, upheld the impugned order of the National Company Law Tribunal (NCLT), which approved the resolution plan on 17 April 2018. Paragraph 98 of the judgment states:

“98. The ‘Resolution Plan’ automatically does not amount to transfer or reduction of shares, including preferential shareholding. It is merely a proposal of one or other ‘Resolution Applicants’ and once it is approved by the ‘Committee of Creditors’ and thereafter by the ‘Adjudicating Authority’ under Section 31, will be binding on all the stakeholders, including the ‘Corporate Debtor’, ‘Members’ (shareholders), ‘Financial Creditors’, ‘Operational Creditors’ etc. If the provision of Section 55 of the Companies Act, 2013 is to be complied, it can be complied only after the approval of the ‘Resolution Plan’. Before the approval of the ‘Resolution Plan’ is approved by the Adjudicating Authority, the ‘Resolution Plan’ being mere a proposal, the question of following Section 55 of the Companies Act, 2013 does not arise.”

The decision considered the resolution plan to be a mere proposal that could not affect the position of Bhushan Steel’s preference shareholders until it was approved by the committee of creditors and the adjudicating authority. However, in order for it to be approved by the adjudicating authority, the resolution plan cannot contravene a position of law. Thus, it was essential for the NCLAT to decide upon the applicability of section 55 for the resolution plan to be approved in the first place. As a result, the contravention of section 55 was allowed without any consideration.

If such a position is held to be valid, a resolution plan may propose contravention of any law in force with full immunity and, if it receives approval like it did in Brij Bhushan Singhal, then, an aggrieved party may have no recourse at all since before approval it was merely a proposal, and after approval, it cannot be challenged.

Redemption of Preference Shares

Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 prescribes the manner in which preference shares can be redeemed under section 55 of the Companies Act. Sub-rule (6) of rule 9 reads:

“(6) A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act and the preference shares may be redeemed:—

(a) at a fixed time or on the happening of a particular event;

(b) any time at the company’s option; or

(c) any time at the shareholder’s option.”

According to section 30(2) of the IBC, a resolution plan must fulfill the mentioned conditions:

“(2) The resolution professional shall examine each resolution plan received by him to confirm that each resolution plan –

(a) provides for the payment of insolvency resolution process costs in a manner specified by the Board in priority to the payment of other debts of the corporate debtor;

(b) provides for the payment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;

(c) provides for the management of the affairs of the Corporate debtor after approval of the resolution plan;

(d) The implementation and supervision of the resolution plan;

(e) does not contravene any of the provisions of the law for the time being in force

(f) confirms to such other requirements as may be specified by the Board. 

Explanation. — For the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013(18 of 2013) or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law.”

The explanation to section 30(2) came into effect from the 6 June 2018, through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 while the resolution plan had been approved by the adjudicating authority on 17 April 2018. The explanation does not expressly mention retrospective application, unlike the proviso added to sub-section (4) dealing with rejection of resolution plans submitted by persons barred under section 29A. The Supreme Court in Smt. Dayawati vs Inderjit 1966) has declared the law on retrospective application of legislation. A court of appeal cannot ordinarily take into account new law that came into force after the filing of the suit unless explicitly mentioned in the amendment.

On a combined reading of section 55 of the Companies Act, rule 9 of the Share Capital Rules, and the explanation to section 30(2) of the IBC, preference shares may be redeemed without obtaining the approval of shareholders. However, in the judgment in Brij Bhushan Singhal, the NCLAT erroneously denied any consideration of the question of contravention of section 55. While the judgment does not delve into the question of retrospective application of the explanation, the authors believe that the effect of the verdict may result in such an interpretation, and must thus be clarified.

– Shubham Jain & Kannan Jhunjhunwala