NCLAT Removes 5% Public Shareholding Requirement Imposed During Insolvency

New Delhi, Jan 6 (KNN) The National Company Law Appellate Tribunal (NCLAT) at Delhi has reiterated that an insolvency court cannot add new conditions to a resolution plan approved by lenders. It set aside a direction that required 5 percent equity of the corporate debtor to be reserved for public shareholders.

Tribunal Finds Clause Had No Basis in Approved Plan

A bench of Judicial Member Justice N. Seshasayee and Technical Member Arun Baroka held that the clause had found its way into the order without any basis in the approved resolution plan. The tribunal observed that such an insertion materially alters the nature of the plan and cannot be sustained.

“This wrong or inadvertent insertion of a clause in the resolution plan changes the complexion of the plan as regards the existence of the CD post CIRP. It is therefore imperative that this term which is not part of the original resolution plan may have to be deleted,” the bench said.

Background of the Insolvency Proceedings

The appeal was filed by the suspended directors and CFO of Techno Forge Limited, which was undergoing insolvency proceedings before the NCLT, Ahmedabad. As an MSME, the company’s promoters were permitted to submit a resolution plan.

The committee of creditors consisted of two financial creditors, with Bank of India holding the dominant voting share. The joint resolution plan submitted by the appellants was approved by the lenders.

Dispute Over Personal Guarantees and Equity Structure

One term of the plan exonerated the personal guarantors. Although a creditor objected, the objection was overruled by a majority vote, but the NCLT later approved the plan with modifications.

The NCLT kept the liability of personal guarantors alive and also added a clause stating that public shareholding would be reduced to 5 percent. These changes were challenged before the appellate tribunal.
During the appeal, personal guarantee issues were settled, leaving only public shareholding.

The NCLAT found no provision in the resolution plan for reserving equity for public shareholders and held that an insolvency court cannot rewrite commercial terms approved by the Committee of Creditors.

NCLAT Sets Aside Equity Reservation Clause

Noting that the equity structure directly affects post-resolution control of the corporate debtor, the tribunal held the clause unsustainable. The NCLAT allowed the appeal and modified the NCLT order by deleting the requirement to reserve 5 percent equity for public shareholders.

(KNN Bureau)