This article is written by Anirudh Singh.
Section 10 of “Insolvency and Bankruptcy Code, 2016” (Hereinafter referred as “IBC”) gives power to a corporate applicant to file a suo moto application for commencing corporate insolvency resolution process with the Adjudicating Authority. Prior to 6th June 2018, no provisions under the IBC or Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 made it compulsory for the Corporate Debtor to have the validation of shareholders before initiating the application process for Insolvency.
However, Form-6, which is the requisite form for application by Corporate Applicant for commencing insolvency, contains instructions of the attachments to be made along with the form and Annexure-VII. These instructions mandate the attachment of a document which records the authority of the Corporate Applicant to make such application. As per Annexure VII,
“A copy of:
(a) relevant extract of any constitutional document or shareholders’ agreement that records the authority of the corporate applicant to make this application, where the corporate applicant is a member or partner of the corporate debtor; or
(b) relevant extract of an employment agreement, constitutional document or fillings made to the Registrar of Companies confirming the authority of the corporate applicant to make this application, where the corporate applicant is an individual in charge of managing the operations and resources of the corporate debtor or has control and supervision over the financial affairs of the corporate debtor.”
Although the instructions given in Form-6 stipulates the attachment of document which records the Authority of the Corporate Debtor to make such application, there was no manifest requirement of taking the authorization of the shareholders before initiating the process of Insolvency, and therefore, in some cases it seemed that such applications were filed on behalf of Corporate Debtor without shareholder’s authorization.
Relevant Provisions under Companies Act, 2013
Under Companies Act, 2013, the approval of shareholders was obtained through special resolution passed for major decisions of company, before the commencement of IBC. For example-
- The provision of winding up of the Company as per Section 271(1)(a) of Companies Act, 2013.
- The amalgamation procedure of a sick company with any other company, under Section 262(2).
- The approval of arrangement by liquidator, as per Section 319.
Owing to the enactment of the IBC such rights of the shareholders have taken a back seat. Though it is evident that the beginning of CIRP process may lead to amalgamation, merger or liquidation of the Company, the shareholders who were given rights of validating or invalidating major decisions of the Company before the introduction of IBC, have been dispossessed of their powers after the enactment of IBC, which is a contentious issue.
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The “Report of the Insolvency Law Committee”
The Insolvency Law Committee, which was set up on 16th November 2016, observed that a need for approval by shareholders of the Corporate Debtor may be important as CIRP is a momentous event for a Corporate Debtor which may also lead to its liquidation.
The Committee noted that “in order to prevent misuse of section 10 of the Code, which permits initiation of CIRP by Corporate Applicant, it has been recommended to provide for the requirement of special resolution passed by the shareholders of the Corporate debtor or resolution passed by at least three-fourth of the total number of partners of the corporate debtor as the case may be….”
The Committee further recommended that “The Committee felt that the shareholders or partners, as the case may be, must be given the power to approve initiation of CIRP by a corporate applicant and a provision mandating approval by them may be inserted. Since commencement of CIRP is a major decision for the corporate debtor and may have a huge impact on its functioning or even lead to its liquidation, a special resolution or a resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, may be provided in this regard. Thus, the Committee recommended that section 10 of the Code may be suitably amended to provide for the requirement to obtain an approval of shareholders by special resolution or an approval of at least three-fourth of the total number of partners, as the case may be, as a precondition for filing for CIRP.”
The Ordinance of 6 June 2018
On the advice of “Insolvency Law Committee”, an amendment was bought in Section 10 of the Code. Now Corporate Debtor would compulsorily necessitate a special resolution from the shareholders of the company to initiate insolvency resolution under the Code.
The amended Section 10(3) is as follows:
(3) “The corporate applicant shall, along with the application, furnish—
(a) the information relating to its books of account and such other documents for such period as may be specified;
(b) the information relating to the resolution professional proposed to be appointed as an interim resolution professional; and
(c) the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.”
Approval of Resolution plans under Section 30 & 31 of the IBC: Clarification by the Ministry of Corporate Affairs (MCA)
The Ministry of Corporate Affairs (MCA), via the General Circular Number IBC/01/2017 on 25th October had clarified that once the resolution plan is sanctioned by the Adjudicating Authority, no further approval of the resolution plan is needed from the members of Corporate Debtor.
There was a clarification needed as to what the resolution plan may consist of which necessitates the approval of shareholders under the Companies Act, 2013 (For example, in case of the reduction of share capital or further issue of shares- The consent of shareholders needs to be taken). Even if the consent of members is required, it is pertinent to mention that on which the stage such consent needs to be taken. It was clarified by the MCA that approval of members is not needed either before authorization of the resolution plan by COC/NCLT or thereafter, i.e, while its implementation.
Before the commencement of IBC, 2016, Companies Act needed the consent of shareholders in major decisions of the company. However, the enactment of the Code tinkered away the legal requirements under the previous Act and no power was given to the shareholders to protect their interests or consent in the instance of initiation of insolvency proceedings of the company. In the case of listed companies which comprises of thousands of shareholders, significant investments have been made by the said shareholders, implying the substantial role they play in the decision making of the company. All of a sudden, the inherent rights of these members are taken away and they cannot stage their opinion in such a major decision of the company. Rights of large number of people are affected and no provision was made for fulfilling the interest of such large group.
Final Position
Owing to the recommendation made by the Insolvency Law Committee, an amendment is made in IBC which means that the approval of shareholders is mandatory for initiating CIRP process by corporate debtor. After the ordinance dated 6 June 2018, the shareholders of the companies will have the power to decide that whether the company should go for insolvency or not. However, such power cannot be availed by the shareholders of the company which initiated insolvency process before the date of ordinance.
