Shareholders To Have No Say In How Creditors Restructure An Insolvent Company

An effort to smoothen the implementation of the insolvency resolution process may result in creating more confusion.

On Wednesday evening, the Ministry of Corporate Affairs issued a clarification regarding the Insolvency and Bankruptcy Code, 2016.

The question before the ministry was: whether shareholder approval is required for actions envisaged under a resolution plan being considered by the resolution professional or one approved by the National Company Law Tribunal.

The approval of shareholders/members of the corporate debtor/company for a particular action required in the resolution plan for its implementation, which would have been required under the Companies Act, 2013 or any other law, if the resolution plan of the company was not being considered under the Insolvency and Bankruptcy Code, is deemed to have been given on its approval by the adjudicating authority.
MCA Circular

Why A Clarification Was Needed

The difficulty arose from two provisions in the IBC.

1. That the resolution professional should confirm that each resolution plan received by him does not contravene any law.
The circular explains that the provision does not imply the need for shareholder approval and is only meant to prevent approval of a resolution plan that is not legally implementable.

For instance...

A resolution plan must not contemplate 100 percent foreign investment in a corporate debtor if the FDI policy/relevant foreign exchange laws permit investment only up to 75 percent in the relevant sector of the industry; it should be compliant with requirements such as restrictions on an Indian entity to issue securities to a person resident outside India under Foreign Exchange Management Act, 1999 etc.
MCA Circular

2. The other IBC provision makes an NCLT-approved resolution plan binding on all stakeholders.
The concern here was that if a plan required, say a sale of assets, that would need shareholder approval as per company law. But the ministry has clarified that shareholder approval is not necessary.

Once the resolution plan is approved by the adjudicating authority under the insolvency code, then any action forming part of such resolution plan, which would have otherwise required a shareholders’ approval under the Companies Act, 2013 or any other law, can now be implemented without securing any such shareholders’ approval, Anshul Jain, a corporate law partner at Luthra & Luthra explained.

The ministry’s clarification quells concerns that a resolution plan would fail to find shareholder approval if the controlling shareholder is not in favour of the process or the plan. But it’s not clear if minority or public shareholders would feel left out.

Corporate lawyer Nilang Desai, practicing insolvency law at AZB & Partners, said they’d have no basis to complain.

If the committee of creditors thinks that a certain corporate action is okay, then why should shareholders, who have no economic value left, have any powers. So for proposing mergers, demergers, issue of shares, slump sale, delisting in resolution plans, no shareholder approval would be required.
Nilang Desai, Partner, AZB & Partners

The Twist

In resolving the company law confusion, the circular seems to have exempted the requirement for shareholders’ approval emanating from ‘any other law’, as well, Jain added

So as an example, if the resolution plan also requires a material related-party transaction, which would otherwise require approval under SEBI’s Listing Regulations, now by virtue of this circular, no such shareholders’ approval would be required.
Anshul Jain, Partner, Luthra & Luthra

Desai insists that it’s only appropriate that shareholders of an insolvent company have no decision making powers.