By Abir Roy 

The Insolvency and Bankruptcy Code (IBC) is in the tenth month of its implementation and most of the issues which have been settled by judicial authorities, including the Supreme Court, till date are on the admission process. Now, we are in the second phase which is the most important aspect of the IBC—the resolution plan and the legal issues emanating thereof. There has been a recent clarification which has been issued by the ministry of corporate affairs (MCA) stating that the approval of the shareholders/members of the corporate debtor for an action required in a resolution plan for its implementation, which would have been required under the Companies Act or any other law if the resolution plan was not being considered under the IBC, is deemed to have been given on approval on the resolution plan from National Company Law Tribunal (NCLT). This clarification has been put forth by MCA since under the IBC, the resolution plan would have to be in accordance with law, and one issue that has been frequently falgged was whether actions under the resolution plan require a separate shareholders’ approval as prescribed by the Companies Act, and, if yes, could the company then go into liquidation if shareholders’ approval can’t be obtained. This clarification seeks to address such concerns; having said that, whether a “clarification” instead of an amendment solves the purpose from a “risk of litigation” perspective remains to be seen. Be that as it may, this piece seeks to address other issues which may come up.

To revisit the intent of IBC, entrenched managements are no longer allowed to continue if they cannot pay debts. A detailed process of Corporate Insolvency Resolution Process (CIRP) has been enshrined under the IBC. The management’s powers are suspended, and they are given to the interim resolution prrofessional (IRP)/resolution professional (RP). It can be argued that the doctrine of subrogation applies where the powers and duties of the director are transferred to the IRP/RP during the CIRP, and if the said doctrine does apply, the fiduciary duties under the Companies Act would also be transferred to IRP/RP during the CIRP. The RP, along with the Committee of Creditors (CoC), is tasked with reviving the corporate debtor within a short timeframe and come up with a resolution plan. The said resolution plan may contemplate transactions like issue of shares to a new investor, hive-off, merger, etc, which would otherwise require an approval from the shareholders under the Companies Act. Now, this clarification seeks to clarify that a resolution plan under the IBC, once approved by NCLT, would not require a separate shareholder’s approval. While this clarification seeks to assuage the concerns of a new investor who would be interested in buying the assets of the corporate debtor, the move may still not be immune from challenges. The resolution plan is binding on all members, creditors and stakeholders; however, apart from the financial creditors, there is no participation from the other stakeholders in the CIRP.

The non-promoter shareholders, including the institutional shareholders, have no right of participation in the CIRP even though they may not be entities responsible for the default which triggered the CIRP in the first place. In this regard, whether a representative of such non-promoter shareholders should be allowed to participate in the CIRP, either by way of an observer right in the CoC meeting (akin to the Jaypee process where the representative of home-buyers are participating in the CoC meeting) or the RP should seeking his views on the resolution plan separately, is an operational issue which may be explored. The IBC provides that the financial creditors who are related parties to the corporate debtor would not be entitled to participate in the CoC meetings. On the same lines, barring a promoter shareholder is OK, but the resolution process should pay heed to the non-promoter shareholders’ concerns, by way of allowing their participation in the CoC meetings, since the resolution plan would be binding on the said non-promoter shareholders too.

A limited recourse that has been given to stakeholders spearate from the financial creditors is that the resolution plan must have an explanatory memorandum as to how the interest of all stakeholders are being taken care of. When it is mentioned under IBC that resolution plan must adhere to the provisions of law, it may be argued that the scope of “law” under Section 30 of IBC would include the IBC and its rules, regulations and circulars made thereunder—and when the interest of the members (which would include institutional shareholders) are not taken care of, they can challenge the resolution plan, especially now that their rights under the Companies Act are being sought to be taken away by the said clarification. The IBC has sent positive signals in the market, and there are emerging issues like interest of stakeholders, reduction or abrogation of statutory liabilities and these issues would be judicially settled in the days to come.

Abir Roy is a Partner, Lakshmikumaran & Sridharan