By Sanjana Saraiya, Legal Intern at Singhania and Co. LLP.
INTRODUCTION:
The morality of a company has a significant impact not only upon the company itself but also on several stakeholders. The true test for a company is its financial resilience and its commitment to its true owner, the Shareholders. It often comes when all the external obligations are met. After a company fulfills its duties to creditors, the value and what remains belongs to the equity investors. A company is morally sound when its financial decisions uphold transparency and equity. In the process of liquidation, ethical corporate governance requires that the shareholders are treated with due regard to their legal and equitable rights.
Moreover, the ethical aspect goes beyond the compliance of the legal framework. A company’s true goodwill shows its determination and responsibility towards their employees, creditors as well as the shareholders. This is how the company can honor its morality in a legal as well as ethical manner.
Additionally, this article delves into the examination as well as a critical analysis towards the stake of a shareholder and risk that is held by this position. Moreover, the article places readers in the shoes of shareholders to understand how their stakes and rights are placed and their side of taking the risk by examining the law.
DISTRIBUTION UNDER SECTION 53 OF THE INSOLVENCY AND BANKRUPTCY CODE:
The sale of the liquidation assets is distributed as mentioned under section 53 of the Insolvency and Bankruptcy code. The shareholders are given stake under section 53(1)(g) preference shareholders and 53(1)(h) equity shareholders or partners as the case may be. The preference shareholders and equity shareholders have the second last and last priority when liquidation takes place according to IBC.
The Insolvency and Bankruptcy Code, 2016 was enacted to bring together and simplify the various laws dealing with insolvency and restructuring of corporate persons, partnership firms and individuals in a specific timeframe. Its objective includes maximizing the value of assets, encouraging entrepreneurship, ensuring the availability of credit and balancing the interests of all stakeholders, which includes alteration in order of priority of payment of government dues and to establish an insolvency and bankruptcy board of India.
This seems as an attempt to bridge the gap to clear the ambiguity as well as to sooth the process and structure of liquidation, the same can be understood by a few precedents mentioned below.
CASE LAWS ANALYSIS ON DISTRIBUTION OF LIQUIDATION PROCEEDS:
- The matter of Prowess International Pvt. Ltd. Vs. Parker Hannifin India Pvt. Ltd. articulates and provides the wordings of the Hon’ble NCLAT held: “In the circumstances, instead of interfering with the impugned order, we remit the case to the Adjudicating Authority for its satisfaction whether the interest of all stakeholders have been satisfied and whether one or other creditor has not raised any claim like Punjab National Bank, after giving notice to individual claimant and taking into consideration of the Insolvency Resolution plan and report of the Insolvency Resolution Professional as may be prepared, the Adjudicating Authority may close the proceedings.”
- Another matter of Innoventive Industries Ltd. Vs. ICICI Bank and ANR, the Hon’ble Supreme Court gave wordings which reads, the limited liability company is a contract between equity and debt. As long as debt obligations are met, equity owners have complete control, and creditors have no say in how the business is run. When default takes place, control is supposed to transfer to the creditors; equity owners have no say. It held: “we thought it necessary to deliver a detailed judgment so that all Courts and Tribunals may take notice of a paradigm shift in the law. Entrenched managements are no longer allowed to continue in management if they cannot pay their debts.”
Hence, the Code is based on the premise that a corporation has two broad categories of stakeholders, namely, creditors and equity owners, who can be in control, and when the equity owners have failed to service the debts, the creditors would have control over the corporate debtor in default to work out a resolution plan.
UNDERSTANDING OF JUDICIAL PRECEDENTS IN RELATION TO LEGAL FRAAMEWORK:
The Code provides specific balances, such as repayment to operational creditors under section 30(2)(b) and the order of priority for distribution of proceeds from sale of liquidation assets under section 53.
In a simplest manner the mentioned framework articulates that this code introduces both opportunities and risk for the shareholders and as mentioned, they can claim the residual value, which places them at the highest risk as their investment is the first which will be affected when a company faces financial distress. Creditors may recover their dues through the legal framework. Shareholders stake is completely reliable on how efficient the assets of the company are realised and how efficiently the resolution plan has been established.
This throws light and makes us understand that largely, the stake of the shareholders depends on the resolution plan and the corpus which is left after liquidation which is then divided in accordance with section 53 of the IBC. Overall, the rights of the shareholders must be balanced and they must be treated fairly, however they lie on the bottom of the hierarchy in retrieving the proceeds from the sale of liquidation of assets.
The code and case laws emphasize that this code needs to pay attention towards balancing the stakeholder’s interests.
CRITICAL ANALYSIS:
Although the interpretation contours the shareholder’s protection under IBC, courts have emphasized on protection and the risk through which a shareholder can suffer, not only that but also it suggests there is a need for a more transparent framework and policies with which a shareholder can build the trust while choosing their risky position. The overall challenge lies in balancing the interests, ensuring obligation towards creditors while maintaining faith towards its shareholders.
IN THE SHOES OF SHAREHOLDERS:
Firstly, it sounds empowering, owning a piece of a company but what happens when this piece is prioritised last is exactly when the risk of a shareholder arrives. When the company starts sinking, that ownership can feel like a big mountain to climb. Legally, shareholders are the last in line, far behind creditors, employees, and other claimants. Under the Insolvency and Bankruptcy Code, 2016, equity is risk capital, which essentially means your reward depends on everyone else getting paid first. You have the privilege to get reports and attend meetings, your opinion matters too but it can also feel like formalities, rituals in a process already decided. The system doesn’t cheat you; it just reminds you, quite politely, that optimism doesn’t rank in the priority list of claims.
CONCLUSION:
While shareholders bear the greatest risk, they have the least control and lowest prospects of recovery. The irony is sharp: shareholders shoulder the highest risk but enjoy the least protection. A mature insolvency regime needs to be advanced from mere creditor dominance towards the equal treatment and transparency with accountability for all stakeholders. In short, being a shareholder is almost like, you own everything when things go right, and almost nothing when they don’t.
SOURCES:
- India. (2016). The Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016). India Code. https://www.indiacode.nic.in/handle/123456789/2154
- [2017] ibclaw.in 41 NCLAT
- Innoventive Industries Ltd. Vs. ICICI Bank and ANR, AIR 2017 SUPREME COURT 4084
Insolvency and Bankruptcy Board of India Sub: Balancing the Interests of Stakeholders and other matters related to CIRP, Agenda_8_210917.pdf (Last visited November 1, 2025)
