Introduction: The National Company Law Appellate Tribunal (NCLAT), Chennai, in its recent judgment dated 13.06.2023 in the case of Dr. Ravi Shankar Vedam vs. Tiffins Barytes Asbestos and Paints Limited & ors., has delineated the scope of shareholders’ rights in challenging resolution plans under the Insolvency and Bankruptcy Code (IBC), 2016. This ruling has significant implications for the stakeholders involved in the Corporate Insolvency Resolution Process (CIRP), particularly highlighting the shift from a debtor-in-possession to a creditor-in-control framework.
The Hon’ble NCLAT, Chennai has taken view that the question whether a shareholder of the Corporate Debtor has locus standi, to challenge the Resolution Plan, is to be adjudicated. In an Insolvency process, when an insolvency of Debtor is imminent, the fiduciary duty of the Directors and Managers, who are Agents of the Shareholders, shifts to the Creditors to preserve the value of the Enterprise for maximising the returns for Creditors. The Legislature in its wisdom, has curtailed the ‘Rights of the Shareholders’ based on the established ‘Principles of Creditors’ in the control framework. The Court provides the ‘shareholders’ right to file a ‘Claim’ only in the Liquidation Process as ‘stakeholders’ and the advances of stakeholders as stated in Regulation 2(k) includes shareholders only because unlike ‘CIRP’, in Liquidation, distribution to stakeholders is in accordance with the waterfall mechanism. Shareholders are excluded from representation, participation or voting in the CoC and are represented in the CoC only through the Directors and can speak only through the Directors.
The Hon’ble Appellate Tribunal has taken a view that once the ‘CIRP’ is triggered, the Management of the affairs of the Corporate Debtor lies with the Interim Resolution Professional and the shareholders do not have a Right to file any claim in the ‘CIRP’ but can only do so in the Liquidation Process. It is seen from the provisions of the Code that the Shareholders are excluded from ‘representation’, ‘participation’ or ‘voting in the CoC’ and are represented in the CoC only through the Directors. Further, the Hon’ble Appellate Tribunal point out that it can be seen from the Explanation to Section 30(2) of the ‘I&B Code, 2016’, the Code contemplates for ‘Deemed Approval’ of the Shareholders of the Resolution Plan and its implementation and even a Shareholder, is deemed to have given its approval for implementation of the Resolution Plan, and such ‘Deemed Approval’ cannot be taken away or undone by objecting to the Resolution Plan.
“[Explanation. — For the purposes of clause (e), 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.”
The Hon’ble Appellate Tribunal has taken a view that giving the shareholder a Right to challenge the Resolution Plan or raise objections against its Approval, would ‘render the Explanation redundant’.
The ‘CIRP’ proceedings are proceedings ‘in rem’, to the extent that once a Petition filed by a Financial Creditor/ Operational Creditor against the Corporate Debtor is admitted, it becomes a collective Creditors Proceedings and all Creditors, pool their Security Interest, in a common manner and the same is distributed as provided for, under Section 30(4) of the Code, subsequent to the approval of the ‘plan’ by the CoC. The Provisions of the Code does not provide for the shareholders to seek ‘representation’, ‘participation’, or otherwise and to agitate their views only through the Directors.
The scope and intent of the Legislature, and that the ‘I & B Code, 2016’ is a distinct shift from ‘Debtor in Possession’ to ‘Creditor in Control’ Insolvency System, where the Shareholders have a limited role and are only confined to co-operate with the Resolution Professional as specified under Section 19 of the Code, are entitled to receive the Liquidation value of its equity, if any, in accordance with Section 53 of the Code, therefore the Hon’ble Appellate Tribunal has taken a view that a ‘Shareholder’ has ‘no locus standi’ to challenge the Resolution Plan.
Hon’ble Apex Court in the matter of ‘Kalparaj Dharamshi v. Kotak Investment Advisors Ltd.’ reported in [(2021) 10 SCC 401], in which the Hon’ble Apex Court has clearly laid down that the Commercial wisdom of the CoC cannot be set aside unless there is a ‘material irregularity’ as defined under Section 30(2) of the Code.
It is clear that the legislative scheme, as interpreted by various decisions of Apex Court, is unambiguous. The commercial wisdom of CoC is not to be interfered with, excepting the limited scope as provided under Sections 30 and 31 of the I&B Code. It is clear from the afore noted Judgment of the Hon’ble Apex Court that the Commercial Wisdom of the CoC has been given paramount importance and that there can be judicial intervention only when there is any material irregularity or if the Plan is not in adherence to Section 30(2) of the Code.
The Hon’ble Apex Court, in the matter of ‘Ebix Singapore Pvt. Ltd. & Ors. v. Committee of Creditors of Educomp Solutions Private Limited’, reported in 2022 (2 SCC 401) has clearly laid down that subsequent to the approval of the Resolution Plan of the CoC and before the approval by the Adjudicating Authority, no modifications / alterations can be called for as IBC is a time bound process.
The Hon’ble NCLAT, Chennai in the matter of Mr. Ramesh Kesavan Vs. Ca Jasin Jose & Ors. dated 10.01.2024 (Company Appeal (AT) (CH) (INS.) No. 422 / 2023) has confirmed the decision of Ravi Shankar Vedam (Supra) that the Promoter /Shareholder of the Corporate Debtor Company has no locus to challenge the Plan, after its approval. Whereas placing the reliance on the judgment by the appellant, of the Apex Court in ‘M.K. Rajagopal v. Dr. Periasamy Palani Gounder’ in Civil Appeal No. 1682-1683 of 2022, that the Appellant, being a Promotor has the locus to challenge the approval of the Resolution Plan, the Hon’ble NCLAT, Chennai held that the ratio of the Judgement in the matter of ‘M.K. Rajagopal’ (Supra), is not applicable to the facts of the attendant case on hand as the subject matter of that case is that there was an established material irregularity in the approval of the Plan and the issue of the ‘locus’ has not been specifically been addressed to. More ever, the Judgement of the Hon’ble Apex Court in the matter of ‘Ravi Shakar Vedam’ (Supra) is dated 06.11.2023 and is later than ‘M.K. Rajagopalan’ (Supra) which is dated 03.05.2022. Further the Hon’ble the Hon’ble NCLAT, Chennai held that the approval of the Resolution Plan below the Liquidation value is within the commercial wisdom of the CoC as the Code does not expressly bar that the Resolution Plan value should be over and above the Liquidation value. Hence, there is no material irregularity.
Conclusion: The NCLAT’s ruling in Dr. Ravi Shankar Vedam vs. Tiffins Barytes Asbestos and Paints Limited & ors. marks a significant milestone in the insolvency jurisprudence of India. It reaffirms the creditor-centric approach of the IBC, limiting shareholders’ ability to challenge resolution plans and underscoring the commercial wisdom of the CoC as the guiding principle. This judgment not only provides clarity on the roles and rights of shareholders in the CIRP but also strengthens the framework for a more efficient and effective insolvency resolution process in India.
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