Introduction: The CIRP Conundrum – Shareholders Caught in the Crossfire
The Corporate Insolvency Resolution Process (CIRP) is governed by the Insolvency Bankruptcy Code (Code) in India, wherein the preamble explicitly notes that the code provides for re-organisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets1. From a practical standpoint, CIRP’s fundamental purpose is to facilitate the corporate debtor’s emergence from insolvency while optimizing asset value and maintaining balance among creditors’ interests.2 Moreover, the Supreme Court’s landmark judgment in Essar Steel emphasized that the corporate debtor does not merely survive but thrives as a going concern.3 Through subsequent judicial pronouncements, the Supreme Court has consistently emphasized that the Code’s paramount objective is to harmonize the interests of all stakeholders while maximizing asset value to foster entrepreneurship, enhance credit availability, and maintain stakeholder equilibrium.4 This interpretation extends to encompass shareholders’ rights to maximise their investments.5
In the corporate world, insolvency is often seen as the end of the road for businesses, but for shareholders, it can feel like falling into a financial abyss. The CIRP under the Code is designed to revive struggling companies while maximizing asset value. However, in this intricate process of debt restructuring, shareholders especially minority and retail investors often find themselves sidelined, with little say in the resolution plan and minimal chances of recovering their investments. As the Waterfall Mechanism prioritizes creditors over equity holders, shareholders are left vulnerable, stripped of influence and financial security. This article explores the rights, risks, and reforms surrounding shareholders in CIRP, shedding light on the growing debate over their role in corporate insolvency.
The Waterfall Wipeout: Why Shareholders Come Last
Section 53 of the Code establishes a comprehensive Waterfall Mechanism that prescribes the hierarchical distribution of liquidation proceeds among corporate stakeholders.6 The section’s “non-obstante clause” affirms Code’s over riding effect over other central and state legislation. While promoters and directors maintain fiduciary obligations to the company,7 the mechanism positions equity shareholders at the lowest fall, significantly impacting their standing within the current structure. Given the substantial nature of creditors’ claims in most insolvency proceedings, shareholders often receive no liquidation proceeds, highlighting their vulnerable position as Residual Claimants with minimal protection under the IBC framework.8 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”.9 Even In countries like France, the USA, and Russia, shareholders have limited involvement in insolvency proceedings, with no direct voting rights and priority only after creditors in liquidation. They may lose their equity, reflecting a similar position to that of shareholders under India’s CIRP framework.
Shareholder Rights in Insolvency Proceedings: A Global Perspective
In most jurisdictions, including France, the USA, and Russia, shareholders are placed at the bottom of the financial hierarchy during insolvency proceedings. Their role in decision-making is minimal, if not entirely absent, as insolvency laws prioritize creditors, employees, and other stakeholders over equity holders. The CIRP in India follows a similar approach, where shareholders have no direct voting rights in the resolution process and are the last to receive proceeds from asset liquidation.
France: Minimal Shareholder Control in Insolvency
In France, corporate insolvency is governed by the French Commercial Code, particularly the “Sauvegarde” (Safeguard), “Redressement Judiciaire” (Judicial Recovery), and “Liquidation Judiciaire” (Judicial Liquidation) procedures. During these processes shareholders are not part of the creditor committees and have no direct role in approving or rejecting restructuring plans. Even if a company undergoes judicial liquidation, equity holders stand at the bottom of the distribution list, meaning they are unlikely to recover their investment. The court-appointed administrator and the creditors determine the company’s future, often leading to equity dilution or total loss of shareholder value. If a turnaround is attempted, new capital can be raised, potentially wiping out existing shareholders’ stakes.
United States: Shareholders at the Mercy of the ‘Absolute Priority Rule’
In the United States, insolvency is governed by the U.S. Bankruptcy Code, particularly Chapter 7 (Liquidation) and Chapter 11 (Reorganization). The Absolute Priority Rule (APR) plays a crucial role in determining payment priority:
- Creditors come first: Under APR, secured creditors, unsecured creditors, and priority claims (such as employees and government dues) must be paid in full before any remaining value is allocated to shareholders.
- In Chapter 11 restructuring, shareholders may have a slight advantage if a “cramdown” plan is approved, but their voting power is limited unless they provide fresh capital.
- If a company liquidates under Chapter 7, shareholders typically receive nothing unless all creditors are fully repaid, which is rare.
One notable example is the Lehman Brothers’ 2008 collapse, where shareholders suffered massive losses, as bankruptcy proceedings prioritized repaying creditors, leaving equity investors with virtually worthless shares.
Russia: Strong Creditor Rights, Weak Shareholder Protections
In Russia, corporate insolvency is regulated under the Federal Law on Insolvency (Bankruptcy), which follows a creditor-dominated model. Therein shareholders do not participate in the creditor meetings or decision-making processes. Majority voting rights lie with creditors, and they have control over asset distribution and business restructuring. Often Equity holders lose their shares entirely when a business is sold or restructured under a bankruptcy auction. Russian courts strictly enforce creditor primacy, leaving shareholders with limited legal recourse to challenge insolvency decisions. One of the major example illustrating this principle was the bankruptcy of Transaero Airlines, where shareholders had no control over restructuring decisions, leading to total equity loss.
How This Compares to India’s CIRP Framework
Much like in these jurisdictions, India’s IBC framework places shareholders at a significant disadvantage:
- No direct role in CoC: Shareholders cannot participate in the Committee of Creditors (CoC), meaning they lack voting rights on key restructuring decisions.
- Waterfall Mechanism prioritizes creditors: Equity holders rank last in the liquidation payout structure, meaning their investments are often wiped out.
- Judicial stance favors creditors: Courts have consistently reinforced that insolvency proceedings exist primarily to resolve creditor claims, not to protect shareholder
The exclusion of shareholders from insolvency proceedings is not unique to India; rather, it follows a global precedent. France, the USA, and Russia all follow creditor-centric insolvency models, reinforcing the principle that shareholders bear the greatest risk when a company fails. However, in some cases, jurisdictions have introduced mechanisms such as restructuring safeguards or equity compensation options to provide limited relief to shareholders. India’s CIRP, while aligned with global practices, could benefit from regulatory reforms that ensure fairer treatment of minority shareholders, such as the SEBI proposals aimed at protecting retail investors from complete equity dilution.
Locked Out? The Great Shareholder Exclusion from CoC
A significant limitation within the current framework is the lack of shareholder representation in the Committee of Creditors (CoC), which effectively excludes their interests from meaningful consideration during the formulation of the Resolution Plan. This limitation was further reinforced in Anant Kajare Vs Eknath Aher & Anr, where the Ld. NCLAT determined that shareholders lack the requisite locus standi to challenge the orders passed by the Adjudicating Authority.10 Furthermore, the position has been elaborated in Dr. Ravi Shankar Vedan vs Tiffins Barytes Asbestos And Paints Ltd11, wherein the Ld. NCLAT observed:
"It is seen from the provisions of the Code that the Shareholders are excluded from 'representation', 'participation' or 'voting in the CoC' and are represented in the CoC only through the Directors. The provisions of the Code do not provide for the shareholders to seek 'representation', 'participation', or otherwise and to agitate their views only through the Directors.” (emphasis supplied)
This position is further strengthened by BLRC’s foundational perspective, explicitly mentioned in the opening statement:
"The limited liability company is a contract between equity and debt. As long as debt obligations are met, equity owners have complete control, and creditors have no say in how the business is run. When default takes place, control is supposed to transfer to the creditors; equity owners have no say." (emphasis supplied)12
The aforementioned legal framework highlights the necessity for enhanced shareholder protection within the current insolvency regime. A notable example of this is the DHFL CIRP, wherein the paid-up share capital of the company was entirely wiped out without any compensation. Similarly, in Jaypee Kensington Boulevard,13 the Supreme Court approved a resolution plan that effectively rendered the paid-up share capital null and void, offering only a nominal consideration in return. These cases underscore the significant risks shareholders face in the current insolvency framework, where their investments can be entirely extinguished with minimal or no compensation. These instances also highlight the need for a more equitable approach to shareholder protection in corporate insolvency proceedings.
During CIRP, the shareholders encounter various challenges stemming from creditor dominance. The CoC exercises substantial decision-making authority, practically marginalizing shareholders, in the resolution process.
Furthermore, minority shareholders face significant hindrances in accessing important information throughout the CIRP. The Resolution Professional’s (RP) primary communication channel remains with the CoC, resulting in reduced transparency and creating substantial barriers for shareholders looking to contest decisions through appropriate legal channels.
Retail investors, who often hold small stakes, incur significant financial losses as their equity is extinguished or diluted in the resolution plan. The absence of statutory safeguards to protect the interests of the shareholders leaves them vulnerable during the process, as their rights are subjugated to those of creditors.14
In order to strengthen shareholder protection within the CIRP framework, it is essential to consider several key reforms. These can include more stringent disclosure requirements, establishing dedicated advisory committees for minority shareholders, and facilitating direct representations before the Adjudicating Authority. Reforming the liquidation waterfall for fairer distribution of proceeds and enabling shareholder participation in CoC proceedings would further enhance the framework, ensuring more balanced consideration of shareholder interests in the resolution process. Such reforms would create a framework where shareholders can meaningfully engage in the process and have their interests considered more equitably. Moreover, enhanced judicial activism could provide a crucial safeguard against unwarranted dismissal of legitimate interests of the shareholders.
The Courtroom Battles for Shareholder Rights
Judicial interpretation has significantly expanded shareholders’ rights under Sections 60(5)(c)15 and 61(3)16, conferring upon them the status of “aggrieved persons”. These statutory provisions have allowed the shareholders to challenge both substantive and procedural irregularities in insolvency proceedings, without the formal shareholder approval requirements. The same has been duly noted in the judgements of Synergy17 and Dr. Periasamy Palani Gounder,18 which have recognised the capacity of the shareholders in cases when the plan contravenes the provision of law or if there is a material irregularity in the powers exercised by the resolution professional. It is pertinent to note that SEBI, through its consultation paper19 released in November 2022, has proposed the following framework:
- Resolution applicants (RAs) shall extend an opportunity to minority shareholders to participate in equity ownership of the restructured The RA may offer up to 25% equity stake, with a mandatory minimum acceptance threshold of 5%, to be facilitated through a compulsory open offer mechanism.
- To maintain the entity’s listed status post-CIRP, a minimum public shareholding threshold of 5% must be maintained in accordance with regulatory requirements.
- Delisting proceedings shall be permitted exclusively in circumstances where the mandatory open offer fails to achieve the 5% minimum acceptance threshold.
- A comprehensive review of existing delisting regulations is warranted, wherein regulatory exemptions should be restricted to specific scenarios: either when the entity enters liquidation or when public shareholding persistently remains below the prescribed 5% threshold.
The resolution framework must achieve balance among interests of various stakeholder while incorporating broader socio-political and policy considerations to ensure equitable outcomes. The fundamental objective is to successfully restructure the financially distressed entities while at the same time preserving the legitimate interests of all participating stakeholders. Notably, in Prowess International, the ld. NCLAT emphasized the importance of ensuring satisfaction regarding the protection of all interests of all the stakeholders.20
The Road Ahead: Making CIRP Fair for All
The CIRP in India, much like in France, the USA, and Russia, prioritizes creditor rights over shareholder interests, often leaving equity holders with minimal recourse and financial losses. The Waterfall Mechanism under Section 53 of the IBC reinforces this hierarchy, ensuring that secured and unsecured creditors are repaid first, while shareholders, particularly minority and retail investors, are often left with nothing. The exclusion of shareholders from the CoC further weakens their position, denying them a voice in restructuring decisions that directly impact their investments. While this approach aligns with international insolvency principles, it raises important concerns about fairness and investor protection in India's rapidly growing corporate sector. As seen in cases like DHFL and Jaypee Kensington Boulevard, shareholders risk complete equity wipeout, even in scenarios where companies emerge successfully from insolvency. With increasing retail participation in Indian stock markets, the need for a balanced framework that protects both creditors and shareholders has never been more pressing.
To create a more equitable insolvency framework, India must adopt targeted reforms that ensure shareholder protection without compromising the efficiency of CIRP. One of the most crucial steps is introducing a structured mechanism for shareholder representation, such as a Shareholder Advisory Committee (SAC), which could allow minority investors to express concerns during the resolution process, even if they do not have voting rights. Additionally, revising the Waterfall Mechanism to provide minimal compensation or an alternative equity stake to shareholders in cases where a company successfully emerges from CIRP would prevent the complete erosion of investments. Greater transparency and accessibility of information are also essential, as shareholders often face difficulties obtaining real-time updates on CIRP proceedings. Strengthening the disclosure obligations of Resolution Professionals (RP) and mandating regular reporting on corporate resolutions, restructuring plans, and asset valuations would enhance accountability. Furthermore, SEBI’s proposed reforms such as requiring a minimum 5% public shareholding post-CIRP and facilitating mandatory open offers for minority shareholders are steps in the right direction, ensuring that shareholders are not entirely excluded from the company’s future. However, further judicial oversight is necessary to provide shareholders with legitimate grounds to challenge unfair resolutions or procedural irregularities under Sections 60(5)(c) and 61(3) of the IBC. The NCLAT should also establish clear guidelines for shareholder rights in CIRP, ensuring that they have at least a limited recourse to seek legal redress in cases of unfair treatment. By implementing these reforms, India can align its insolvency framework with global best practices, fostering a system where shareholders are not just passive bystanders but recognized stakeholders in the insolvency resolution process.
Footnotes
1 Insolvency & Bankruptcy Code, 2016, § Preamble.
2 Arcelormittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1.
3 Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531.
4 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17.
5 Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531.
6 Insolvency & Bankruptcy Code, 2016, § 53.
7 Nanalal Zaver and Ors. vs. Bombay Life Assurance Co. Ltd. and Ors., MANU/SC/0003/1950.
8 Sung Eun (Summer) Kim, Dynamic Corporate Residual Claimants: A Multicriteria Assessment, 25 CHAP. L. REV. 67 (2021).
9 Insolvency & Bankruptcy Code, 2016, § 31.
10 Anant Kajare v. Eknath Aher, 2018 SCC OnLine SC 3711.
11 Ravi Shankar Vedam v. Tiffins Barytes Asbestos & Paints Ltd., (2024) 244 Comp Cas 785.
12 Report of Bankruptcy Law Reforms Committee, Pg. No. 10.
13 Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd., (2022) 1 SCC 401.
14 Bank of Baroda v. MBL Infrastructures Ltd., (2022) 5 SCC 661.
15 Insolvency & Bankruptcy Code, 2016, § 60(5)(c).
16 Insolvency & Bankruptcy Code, 2016, § 61(3).
17 Synergy Technologies v. Parthiv Parikh, 2022 SCC OnLine NCLAT 2797.
18 Periasamy Palani Gounder v. Radhakrishnan Dharmarajan, (2023) 23 Comp Cas-OL 682.
public-equity-shareholders-in-case-of-listed-companies-undergoing-corporate-insolvency-resolution-process-cirp-under-the-insolvency-and-bankruptcy-code-ibc-_64850.html.
20 Prowess International Pvt. Ltd. v. Parker Hannifin India Pvt. Ltd., 2017 SCC OnLine NCLAT 388.
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