Circular on anomaly shows goals of code take priority

The Insolvency and Bankruptcy Code, 2016 (IBC), implements a “creditor-in-possession” regime that vests decision making powers of the insolvent company with a “committee of creditors” (CoC), astutely recognizing that financial creditors will be better motivated than the previous managers to preserve the asset base of an insolvent company.

Despite shifting such control to the CoC, the provisions of the IBC and its regulations create an anomalous situation in which a provision of the Companies Act, 2013, could make a resolution plan agreed by the CoC subject to approval by shareholders of the insolvent company. While section 238 of the IBC states that the IBC will have overriding effect over the provisions of any other law, section 30(2)(e) of the IBC mandates that a resolution plan must be in conformity with the provisions of any law in force.

Under section 31 of the IBC a resolution plan that does not comply with section 30(2)(e) may be rejected by the National Company Law Tribunal (NCLT). Further, regulation 39(6) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, expressly dispenses with shareholder approvals that may be mandated by the constitutional documents of a company, the shareholder agreements, joint venture agreements, and other such documents, but does not dispense with shareholder approvals that are required under the Companies Act.

Dhir & Dhir Associates is a leading full-service law firm in India. Sachin Gupta is a partner at Dhir & Dhir Associates.