NO SHAREHOLDER’S APPROVAL IS NECESSARY FOR A RESOLUTION PLAN UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC), SAYS MCA.

NO SHAREHOLDER’S APPROVAL IS NECESSARY FOR A RESOLUTION PLAN UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016 (IBC), SAYS MCA.

MCA CLARIFICATION

The Ministry of Corporate Affairs (MCA) yesterday issued a clarification stating that no resolution or approval of the shareholders of a debtor company will be required in order to give effect to a resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC).

SECTION 30(2)(E) OF THE IBC 

It appears that stakeholders sought the MCA clarification on account of section 30(2)(e) of the IBC, which requires the resolution professional to confirm that the resolution plan “does not contravene any of the provisions of the law for the time being in force”.

 Here, the MCA clarified that the intention was to ensure that the plan is compliant with applicable laws and regulations so that it can be implemented. The MCA provided examples such as compliance with foreign investment regulation, including sectoral caps.

SECTION 31(1) OF THE IBC

As far as shareholders are concerned, the MCA also pointed to section 31(1) of the IBC, which expressly states that an approved resolution plan shall be binding on several persons, including the shareholders of the company. Hence, 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”.

Effectively, the MCA clarification points to the fact that once the company is in within the corporate insolvency resolution process, matters go beyond the hands of the shareholders, and that all crucial decisions are taken by the creditors through the mechanisms stipulated in the IBC.

CREDITOR-FRIENDLY NATURE OF THE IBC

This is a reaffirmation of the creditor-friendly nature of the IBC, as separately enunciated by the Supreme Court as well. This is justifiable from a conceptual standpoint in that once the company in the process of insolvency, the interests of the shareholders will have to make way for that of the creditors.