Confusion over shareholders' approval for resolution plan under IBC

Need for alignment of the Code with the existing laws, say experts

Legal fraternity and insolvency professionals appear divided over whether shareholders' approval under Companies Act, 2013 and the SEBI regulations would be necessary to pass certain resolution plans under Insolvency and Bankruptcy Code (IBC).  

Various stakeholders in the insolvency resolution process are apprehensive of the interplay between the Code and some provisions of company law and the Sebi regulations. Many feel, unless there is alignment of the Code with the existing laws, this may give the promoters of companies going through insolvency resolution more say in the turn round process, including blocking any part of the resolution plan. This may in turn stretch the deadlines for insolvency resolution, they add. 

As per the Code a resolution plan for a distressed company has to be firmed up by the Committee of Credits within 180 days that is extendable by another 90 day.  Within this period the promoters do not have say in the management of the company that is handled through a court-appointed insolvency resolution professional. 

However, under certain provisions in the Companies Act, 2013 any changes in the capital structure of a company requires shareholder approval.  According to Neha Malhotra, executive director, Nangia & Co, as per Section 30 of  the Code any resolution plan of a company under insolvency has to be in compliance with any law in force. “By that logic, all statutory requirements under company law have to be met, in order to implement the resolution plan, which could be in form of preferential issue of shares, sale of assets etc,” says Malhotra.

However, not everyone agrees with this line of thinking.  “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 that Section 238 of the Code states that its provisions “shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”. This provision gives the Code 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: “The Code being a special statute will prevail over Companies Act which is a general statute.” 

Legal experts say as per Section 31 of of the Code any resolution plan is binding on corporate debtor, its employees, members, creditors, guarantors and other stakeholders. Further, Regulation 39 (6) of the Code states that a resolution plan would take effect irrespective of whether consent has been reached among shareholders, add lawyers.

However, most legal experts and insolvency professionals agree that the Code could be better drafted to align it with existing laws. According to Pratik Datta, a public policy researcher, Ministry of Corporate Affairs should create a constant feedback loop between the stakeholders and policymakers. “That way, policymakers would be informed of the legislative ambiguities that stakeholders are encountering. This will help subsequently if the ministry intends to clarify these issues by amending the Code,” he says.