India: Whether It Is A Creditor Or Investor Regime

Last Updated: 3 November 2017
Article by Ashu Kansal

 In 2016, the Government enacted the Insolvency & Bankruptcy Code, 2016 (IBC), which came as a rescue for the snail-paced debt recovery regime and provided a consolidated legal framework in place of the highly fragmented Insolvency and Bankruptcy regime in India. The IBC has been subject to extensive discussion and debate. Certain discrepancies have been noticed in the corporate insolvency resolution regime. However, the Government is implementing changes in alternating phases and recently, the Ministry of Corporate Affairs issued a circular that shareholders' approval need not be sought separately for approving the resolution plan.

Section 30(2) of the Insolvency and Bankruptcy Code states that the resolution plan approved by the committee of creditors of the adjudicating authority with the provisions of the applicable laws makes it legally implementable.

According to the IBC, once the resolution professional places the approved plan before the NCLT, a decision is made whether it is to be implemented or not. Once approved, the company focuses on clearing its dues. If the resolution plan is rejected by the Tribunal, the company goes in for liquidation, unless the matter is challenged at the National Company Law Appellate Tribunal (NCLAT). The ambiguity arose under the Companies Act 2013, wherein it is given that transactions pertaining to transfer of assets or shares usually require shareholders' approval.

First, it is sought to counter or rather, reason with a seemingly valid loophole in the CIRP which states that, as per Section 30(2)(e) of the IBC, any Resolution Plan must be in compliance with the provisions of any law in force - thus shareholder' approvals as required under the Companies law cannot be dispensed with. While at first look, one might say that the IBC under Section 238 has overriding effect over any other law, the need to comply with applicable provisions of the law under Section 30(2)(e) is a specific requirement of the IBC itself, which cannot be overlooked. After all, the National Company Law Tribunal (NCLT) can reject a Resolution Plan, if the same does not comply with provisions of any law in force. To cast further doubt onto the actual intention of the IBC in accommodating shareholder approvals, Regulation 39(6) of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, specifically dispenses with the approval of members, partners or shareholders of the corporate debtor as is required only as per the constitutional documents of a company, the shareholder agreements, joint venture agreements, and such other documents. However, Regulation 39(6) does not in any way oust the requirements of shareholder approvals as per the Companies Act, 2013.

As stated earlier, a legal ambiguity is visible in the provisions of the IBC and its Regulations. While one might simply argue that the IBC envisages shift of control of the corporate debtor over to the Resolution Professional and the Committee of Creditors, it must be pointed out that this control pertains to the management of affairs of the Corporate Debtor. Thus, there is cause to debate as to what extent shareholders' approval is necessary to effect a Resolution Plan that complies with the applicable provision of law as per Section 30(2)(e) of the IBC. For example, in order to effect a valid resolution plan, does the IBC mandate shareholders' approval for sale and disposal of substantially the whole of a public companies undertaking as per Section 180(1) of the Companies Act, 2013?

The explanations that could help iron out the above described legal ambiguity are admittedly based on statutory interpretation, more so than any explicit provisions of the IBC itself. To explain the same, the Corporate Insolvency Resolution Process (CIRP) of a Corporate Debtor can be seen as divided into two main stages: Stage 1 being 'Before the Resolution Plan', i.e., during the corporate insolvency process and Stage 2 being 'After the Resolution Plan', i.e. during the stage of its approval and implementation.

During Stage 1, the management of the Corporate Debtor vests in the Resolution Professional by virtue of two main provisions of the IBC: Section 17 read with Section 23. As per these Sections, the entire management of the affairs of the Corporate Debtor vests with the interim resolution professional, and then the resolution professional who is confirmed by the Committee of Creditors for the entire duration of the CIRP. It is explicitly laid down in Section 25(1) that the Resolution Professional shall "preserve and protect" the continued business operations of the Corporate Debtor, i.e. run the defaulting corporate entity as a going concern. Also, Section 28 explicitly mandates the approval of the Committee of Creditors, in order for the Resolution Professional to carry out any action that might affect the capital structure, ownership or management of the Corporate Debtor, or the rights of the creditors.

It can be argued from the above provisions that in respect of Stage 1, the Code vests the entire management of the Corporate Debtor in the hands of the Resolution Professional, and subjects all substantial actions to approval of only the Committee of Creditors. It may be argued that due to the unsuccessful management of the corporate entity by those earlier in charge, i.e. the promoters, directors and majority shareholders, the IBC has intentionally transferred all decision making power to the Committee of Creditors, which the IBC recognizes as best suited to assess the business viability of the defaulting corporate entity. This is even truer for a private and closely held company, where the promoters are the main majority shareholders - it makes no sense to allow the decision making power to vest with the shareholders once the corporate entity has defaulted in loan repayment and a CIRP has been initiated. As it is, the shareholders and promoters are responsible for business failure of the defaulting corporate entity - vesting any decision making power under the IBC will mean that they will never allow any Resolution Plan to go through.

In any case, it would be consistent with provisions of the IBC that during the CIRP, the Resolution Professional merely looks over the assets of the company and manages its business as a going concern. Such routine administration of the company should ideally not involve taking any major decisions that would require shareholders' approval.

Coming to Stage 2, once a Resolution Plan is decided, any strategies for restructuring of the defaulting company's debts, or selling its assets, etc. could require shareholders' approval. In response to this, it can be argued that the National Company Law Tribunal's (NCLT) approval of a Resolution Plan impliedly dispenses with the requirement of shareholder approval. Once the Resolution Plan is placed before the NCLT, the NCLT must, inter alia, satisfy itself that the Resolution Plan is in compliance with all laws in force. Once the Resolution Plan is approved, it is binding on the corporate debtor and its employees, members, creditors, guarantors and all other stakeholders involved in the resolution plan. Thus, the NCLT's approval is presumed to have looked into the satisfaction of all interests, on account of which, shareholder approvals is dispensed with. A comprehensive reading of the provisions of the IBC seems to show that only two entities, namely, the Committee of Creditors and the NCLT are involved in approving the Resolution Plan. Further, it may also be argued that any Resolution Plan, as approved by the Committee of Creditors and the NCLT, must show awareness and adherence to the applicable regulatory compliances. For example, a Resolution Plan approved by the Committee of Creditors must still comply with the notification requirements as per Section 5 and 6 of the Competition Act, 2002.

Thus, the arguments above rely on the law of interpretation to respond to the legal ambiguity raised. It is assumed that during the CIRP, the Resolution Professional will not be taking any drastic decisions that require shareholder approval, and that after the Resolution Plan is placed before the NCLT, the NCLT will assess whether the Resolution Plan accommodates all interests at stake, and only then gives its stamp of approval.

Having addressed the valid concerns, the incorrect claims are briefly clarified. It is stated that promoters could oppose key resolutions to frustrate creditors/lenders, and could try to derail the whole insolvency process. The management or creditors with at least 75% of the outstanding loans could turn down the revival package, resulting in the Corporate Debtor's liquidation. This cannot be the case. Promoters and all other members involved earlier in the management of a Corporate Debtor have no say whatsoever in the insolvency process envisaged by the IBC. Once an insolvency application is admitted by NCLT, the entire management/board of the Corporate Debtor is suspended and vests with the Resolution Professional. Thus, the Code brings forth a shift towards a "creditor-in-control regime", with the promoters/board of directors and members no longer having a say as well as any voting rights in the running of the defaulting corporate entity.

As questions regarding the valid and lawful application of the IBC keep coming up, it is hoped that our Tribunals and Courts keep in mind the very basic intent for which a new Insolvency regime was brought in place. Whether shareholders' approval is accommodated under the IBC, or not, it is hoped that the provisions of the IBC are implemented keeping in mind the goals of efficiency and value enhancement that will bring in additional gains to both the economy and the exchequer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.