1. In the backdrop of an overhauled Insolvency & Bankruptcy Code (IBC), shareholders’ democracy may not be truly attainable. Further, the Ministry of Corporate Affairs is also considering allowing the Committee of Creditors (CoC) of a company to sell various assets through different resolution plans. As we know, an overly leveraged company is highly vulnerable to being dragged into IBC proceedings. Once this happens, regardless of good or poor business judgment decisions, under the waterfall payment mechanism, minority shareholders will be ones who will be worst impacted.
Therefore, a company contemplating to raise debt by seeking shareholders’ approval under Section 180(1) (c) of the Companies Act, 2013 should be allowed to do so only with the prior approval of the lenders. To assess the risk, the lenders, amongst others, would need management accounts and cash flow. These statements are already made available to lenders in majority of the cases, on the basis of the covenants under the loan agreement. By conferring responsibility on the lenders, one can cast an insider ownership.
In the future, this may also enable the government to decide priority of payment to such class of creditors against others. The lenders possess better wherewithal than the minority shareholders to understand the financial implications of an over-leveraged company. They are also the ones who eventually decide the fate of the company, in the event of IBC proceedings. Therefore, it is important that they are held accountable for actions which they are best suited to assess. This will also reduce the frequency of companies getting into insolvency and reduce book fraud.
Source: Barandbench
