Shareholders’ approval through a special resolution is a must for a ‘corporate debtor’ to apply for initiation of insolvency process.
Simply put, a company (corporate debtor) cannot now be an applicant for availing Corporate Insolvency Resolution Process (CIRP) unless its shareholders had, through a special resolution, approved the same.
This has been mandated in the new insolvency ordinance that was approved by the Union Cabinet on Wednesday, sources said.
The insolvency ordinance has also specified that the Limitation Act 1963 will apply for proceedings before the NCLT and NCLAT.
The other significant decision implemented through the ordinance is that the winning bidder — post the approval of the resolution plan — will have one year to get all regulatory approvals.
Also, the ordinance has made it clear that Section 29A restriction under the Insolvency and Bankruptcy Code (IBC) will not apply for MSMEs.
It may be recalled that the 14-member Insolvency Law Committee headed by Corporate Affairs Secretary Injeti Srinivas had 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 in case of a Limited Liability Partnership.
The panel 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, be provided in this regard,” the Committee suggested. Saurav Kumar, Partner, IndusLaw, a law firm, said mandating shareholders’ approval before initiating CIRP under section 10 has been done to fix a lacuna in law.
“Under the Companies Act too, any such major decisions like winding up, amalgamation etc require special resolution of the shareholders. Since CIRP is a major decision for the company, the owners of the company should be allowed to decide by special majority whether they want to go under CIRP or not,” Kumar told BusinessLine.
On the aspect of Limitation Act, Diwakar Maheshwari, Dispute Resolution Partner, Khaitan & Co, a law firm, said: “By inserting this provision, the ordinance has correctly put to rest the question of applicability of limitation law in IBC proceedings, given the fact that NCLT/NCLAT had to repeatedly deal with this specific aspect each time they were faced with this issue”.
Saurav Kumar said that applicability of Limitation Act to the CIRP process is a welcome change. “The intent of the code could not have been to give a new life to an otherwise time-barred debt. The new provision will now prevent creditors from filing a CIRP against such time-barred debts,” he said.
Also, it would prevent a creditor from bringing time-barred claim before a resolution professional against a corporate debtor, Kumar added.