Minority shareholders under IBC

-Sikha Bansal


Below we provide a quick snapshot of the extant provisions of the insolvency framework in India vis-a-vis Minority Shareholders, in light of related laws and judicial developments so as to assess their rights and standing in the current insolvency ecosystem –

  • Present provisions under IBC relevant to the context:
    • Section 21(2): The committee of creditors shall comprise all financial creditors of the corporate debtor.
    • Regulation 38(1A) of CIRP Regulations – A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.
    • Section 24(3): The resolution professional shall give notice of CoC meetings to members of the board of CD, and operational creditors or their representatives.
    • Section 30(2): Resolution plan shall provide for payment of insolvency resolution process costs, and payment of a ‘minimum value’ to operational creditors. However, no such stipulation for minority shareholders.
    • Also, and more importantly, Explanation to section 30(2) provides that “if any approval of shareholders is required under the Companies Act, 2013(18 of 2013) or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law”. Similar stipulation was made vide MCA General Circular No. IBC/01/2017.
    • Thus, even where the proposed resolution plan would have, in normal course, required shareholders’ sanction, the rights of the shareholders are completely ousted. Neither the rights of the minority shareholders nor the promoters.
  • Relevant provisions of SEBI Delisting Regulations
    • Regulation 3(2) provides that the said regulations will not apply to delisting made pursuant to a resolution plan approved under IBC if such plan provides for “exit opportunity to the existing public shareholders at a specified price”. The regulations further provide that the existing public shareholders shall be provided the exit opportunity at a price which shall not be less than the price, by whatever name called, at which a promoter or  any  entity  belonging  to  the  promoter  group  or  any  other  shareholder,  directly  or indirectly, is provided an exit opportunity.
    • In short, the only protection is that the minority shareholders cannot get a worse treatment than the promoters; however, there is nothing in the Regulations, except on account of magnanimity of the resolution applicant, to provide any value to the minority shareholders.
    • Note that promoters, despite facing a write-off of their capital, may not be in a level playing position as compared to the minority shareholders. Mostly, promoters would have benefited from working of the corporate debtor over the years; would have created offspring entities which are not direct subsidiaries of the corporate debtor.
    • However, mostly, promoter’s equity would be written off. As such, chances of public shareholders getting any value on the strength of this provision are negligible.
  • The Supreme Court in Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd and Ors. dealt with the issue of protection of minority shareholders. The minority shareholders asserted the following –
    • The resolution plan approved by CoC ought to consider the interests of minority shareholders by giving fair market value of the equity shares held by them;
    • The minority shareholders, even if not a part of the CoC, have a right to know and participate in any compromise or arrangement which affects their rights; that they have a right to dissent with any terms of the compromise or arrangement which affects their rights and for that matter, they would be deemed to be dissenting shareholders, who need to be provided a reasonable exit option or opportunity.
    • The resolution plan, as approved by the NCLT, is not in accord with Regulation 38(1A).
    • When the intent of the IBC is to keep the corporate debtor as a going concern, the action of delisting the public shareholding of the corporate debtor totally defeats the objective.
  • SC held that “the grievances as suggested by these shareholders cannot be recognised as legal grievances; and do not provide them any cause of action to maintain their objections.”, on the following grounds –
    • The attempt on the part of minority shareholders to raise objection against the resolution plan simply flies in the face of this Explanation to Section 30(2)(e) of the Code.
    • Under the scheme of IBC, only the CoC is entrusted with the task of dealing with and approving the resolution plan, and shareholders have no participation.
    • Shareholders would stand last in order of priority under section 53, in the event of liquidation; hence, when promoters’ shareholding is extinguished and cancelled in toto without any consideration, even nominal exit price for minority shareholders cannot be termed as unfair or inequitable.
    • In any case, the decision is based on commercial wisdom of CoC and is not amenable to judicial review.
    • Also, by virtue of section 238, approved resolution plan shall be binding on all stakeholders.
  • Hence the issues seems to have been settled, and we have the following observations –
    • The treatment of minority shareholders under IBC is subject to the very structure of IBC, which accords superior rights to CoC. The rights of CoC are further strengthened by provisions like Explanation to section 30(2)(e).
    • BLRC in the opening lines of its report noted, “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.”
    • Also, while section 29A carves out a distinction between promoters and non-promoters as to eligibility to submit a resolution plan, no such differential treatment has been carved out with respect to payments under the plan.
    • In any case, if one contends that a minority shareholder is paid with all kinds of creditors taking “haircuts”, the same would amount to ‘shareholder enrichment’ at the cost of creditors. This would be against the fundamental priority principles in insolvent winding up.
    • BLRC observed that insolvency proceedings should be the proceedings as a last resort. That is, IBC should come into picture after all negotiations between the debtor and the creditors, to resolve the conflict, fail. The extract is reproduced below –

“The proposed Code assumes that, under situations of stress in the entity, the debtor and creditors have already have gone through negotiations to reach a solution to keep the entity as a going concern. The IRP is considered as a last course effort to resolve conflicts in the negotiations. Then triggering the IRP can be assumed to be a considered step, after deliberation and preparation.”

  • Hence, the construct of law is such that the resolution under IBC is unlike a consensual arrangement (say, under section 230). While s. 230 schemes provide protection to creditors and members as well; resolution plans are forced.
  • Therefore, the idea of minority protection under IBC, by way of providing for a minimum value under the resolution plan, does not seem to fit into overall scheme of IBC.
  • However, despite the above, there are certain implicit positive points for minority shareholders –
    • Non-controlling/non-promoter/minority shareholders are out of ambit of section 29A. That is, it is open for the minority shareholder to submit a resolution plan either singly or collectively (provided they are not otherwise disqualified under other clause of section 29A). However, practically, such a scenario would be rare.
    • At present, there is no bar on minority shareholders proposing a section 230 scheme under the Companies Act, when corporate insolvency resolution process has already started. Hence, if there is a proposal better than insolvency resolution, the minority shareholders may present a scheme before the NCLT. However, parallel operation of a sec 230 scheme, and the insolvency resolution process, is a challenge that needs to be resolved.
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