Answer By law4u team
Shareholders are the owners of a company, but during bankruptcy or insolvency, their rights become limited due to the legal priority of creditors. While shareholders retain certain fundamental rights, many rights such as management control and dividend entitlement are curtailed or suspended during the insolvency process. Understanding these rights helps shareholders navigate their position in such proceedings.
Rights of Shareholders During Bankruptcy
Right to Receive Notice and Participate in Meetings
Shareholders have the right to be informed and participate in general meetings related to insolvency proceedings, including creditor meetings when allowed.
Voting Rights on Resolution Plans
Shareholders may have voting rights on resolution plans if provided under the Insolvency and Bankruptcy Code (IBC), though their influence is usually minimal compared to creditors.
Right to Information
Shareholders have the right to access information about the company’s financial status, insolvency proceedings, and proposed plans.
Right to Challenge Resolution Plans
Shareholders can raise objections or file appeals against the approval of resolution plans or liquidation orders in appropriate forums such as NCLT or appellate tribunals.
Limited Control Over Management
Upon initiation of insolvency proceedings, management control shifts to the insolvency professional or liquidator, suspending shareholders’ power to make decisions regarding day-to-day operations.
No Rights to Dividends or Profits
During insolvency, dividends are generally not declared or paid as the company focuses on debt repayment.
Residual Claimants
Shareholders’ claims on assets are subordinate and only arise after all creditor claims are settled; often, this results in loss of investment.
Legal Framework
- Section 21 and 30, IBC – Rights related to participation in insolvency proceedings and resolution plans
- Companies Act, 2013 – Shareholders’ statutory rights
- NCLT and NCLAT Jurisprudence – Case laws on shareholder rights during insolvency
Example
In the insolvency of DEF Ltd., shareholders attend the creditors’ meeting and express concerns over the proposed resolution plan that significantly dilutes their equity. While they submit objections, the NCLT approves the plan due to creditor majority and compliance with the law, limiting shareholder influence.
