Confusion over shareholders’ nod for insolvency
Legal fraternity and insolvency professionals appear divided over shareholders' approval for certain resolutions under Insolvency and Bankruptcy Code (IBC).
Various stakeholders in insolvency resolution process are apprehensive of the company law and Sebi (Securities and Exchange Board of India) regulations. Many feel, unless there is alignment of IBC with these laws, promoters of companies going through insolvency resolution may have more say in the turnaround process, including blocking any part of the resolution. This may stretch the insolvency resolution process, they add.
According to IBC, a resolution plan for a distressed company has to be firmed up by the Committee of Credits within 180 days; the time period can be extended by 90 days, taking the total period to 270 days. Within this period, the promoters do not have a say in the management of the company that is handled through a courtappointed professional.
However, under certain provisions of the Companies Act, any changes in the capital structure of a company requires shareholder approval. According to Neha Malhotra, executive director, Nangia and Co, Section 30 of IBC says any resolution plan has to be in line with law. "By that logic, all statutory requirements under company law have to be met, in order to implement the resolution plan, which could be in the form of preferential issue of shares, sale of assets, etc," says Malhotra.
Not everyone agrees. "Going back to shareholders at that stage for approval defeats the whole purpose of the re-structuring exercise," says Sumant Batra, an insolvency professional. This may further delay the whole resolution process that has to be completed within 270 days, he adds.
Legal experts point out Section 238 of IBC; this provision gives IBC an overriding effect over other laws, says Shyam Agrawal, president, Institute of Companies Secretaries of India. Agrees Atul Sharma, managing partner of law firm Link Legal: "IBC being a special statute will prevail over Companies Act, a general statute."
Legal experts say that going by Section 31 of IBC, any resolution plan is binding on corporate debtor, its employees, members, creditors, guarantors and other stakeholders. Further, Regulation 39 (6) of the IBC states that a resolution plan would take effect irrespective of consent among shareholders, add lawyers.
However, most legal experts and insolvency professionals agree that IBC could be tweaked to better align it with existing laws. According to Pratik Datta, a public policy researcher, the corporate affairs ministry should create a constant feedback loop between stakeholders and policymakers.