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ROLE OF THE COURT TO PROTECT THE INTERESTS OF CREDITORS AND SHAREHOLDERS

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This article is written by Duvada S H Neha Choudhury of 3rd Semester of Damodaram Sanjivayya National Law University, DSNLU.

ABSTRACT

The capital raised by a company or firm has both equity and debt capital. People who provide funds through equity capital are the shareholders and if the same funds are provided through debt capital, then they are called creditors. Both actors are equally crucial to the company. These people constitute the security market and are the sole reason the security markets work. They act as a backbone of the security market and play an essential role in determining the share value in the market. When funding is done then a return is expected, to satisfy this, the company provides interest to the shareholders and creditors.

During these transactions, it is important to protect the interests of the shareholders and creditors because they are prone to many risks in the market. These include irregular payment of dividends and interests; insider trading; fluctuations of share value; discrimination among shareholders based on the number of shares held by them. Creditors have to face risks like non-payments of interests, liquidation of the company, etc. To avoid these kinds of risks in the market and to safeguard them, there are laws and regulatory bodies like SEBI; Company Act, 2013; Insolvency and Bankruptcy Act, 2006; etc. to protect the interests of the creditors and shareholders in the Security Market. This article deals with the security market, shareholders, creditors; their rights, and how the courts and law protect their interests. 

Keywords:  Creditors, Shareholders, Rights, Company act, Regulatory bodies, Courts, Protection of interests.

INTRODUCTION

A company is an artificial person regulated by law. This body has two essential actors i.e., the creditors and the shareholders. They are the investors of the company who help in the company’s capital allocation. A creditor is an individual or a body that provides capital to the company in the form of debt. A shareholder is a person who owns the shares of a company and receives dividends on those shares. A share generally represents ownership of the shareholder in the company as it is used to raise capital and funds in the company. These investments are made in the company in return for dividends and profits. Shareholders are the group of people who have ownership of the company based on the number of shares purchased. There are major and minor shareholders on this basis. Shareholders generally enjoy ownership of the company and have voting rights for the smooth functioning of the company.  As long as the shareholders and creditors are happy with the company’s functioning, the company will grow as the shareholders would provide more capital based on its performance.

These creditors and shareholders are prone to many risks in the market. These include insider trading, manipulation, misrepresentation, price fluctuations, and problems created due to stock brokers like unfair treatment, stock market scams, lack of liquidity, etc.[1] During the time of liquidation of the company, the shareholders are the people who are given the least preference even though they are long-term investors.

There are many regulatory bodies, laws, etc. like SEBI and Company Act,2013 to protect the interests of the creditors and shareholders. The National Company Law Tribunal is the quasi-judicial body that can protect the interests of creditors and shareholders. Various provisions in the law help investors to protect their interests and their rights.

 CREDITORS AND SHAREHOLDERS 

CREDITOR:

A creditor is a body or person who provides debt capital to the company in return for financial benefit. There are secured and unsecured creditors. Creditors are protected by various provisions of the law. They carry the highest amount of risk in the security market compared to the shareholders. They can get affected if the company undergoes financial distress and avoids insolvency, then the interests of creditors can be affected. The rights of the creditors are as follows,

SHAREHOLDER:

 A shareholder is an individual who purchases stock in the company which helps in the allocation of capital. By owning shares, the shareholders hold partial ownership in the company and take part in the decision-making process of the company. They also enjoy voting rights and have limited liability. Based on the number of shares held there are major and minor shareholders. Minority shareholders are people who have invested money in the firm but do not own enough shares to exercise control; as a result, their interest in the company and its affairs is frequently disregarded.[3]

Shareholders are subjected to many risks in the market. There are rights, provisions, and regulatory bodies provided by law. The rights of the shareholders are:

PROVISIONS BY LAW TO PROTECT THE INTERESTS OF SHAREHOLDERS AND CREDITORS

OTHER PROVISIONS

ROLE OF THE COURT TO PROTECT THE INTERESTS OF SHAREHOLDERS AND CREDITORS

The court plays a vital role in protecting the interests of creditors and shareholders which is discussed below:

CASE LAWS

Here are a few case laws regarding how various matters were dealt regarding protection of interests.

In this case, a table in the prospectus revealed that the firm had paid dividends ranging from 8% to 10% in the prior years, except for the exception of those two years when no dividend was given. The statement indicates that the company in question was in good fiscal condition, but the truth was that the company had suffered significant losses in trading in the seven years preceding the prospectus date, and dividends had been paid from funds earned during the unusual duration of the war, rather than current earnings. The Prospectus was found to be untrue as there was a misrepresentation of a fact necessary to understand the assertions provided in the prospectus.

This case comes under the exception of the majority rule which says that the major shareholders have more power than compared to the minority shareholders. In this case, the respondent is the company and the plaintiff is one of the shareholders of the company. One of the company’s goals was to “advance money at interest on the security of the land, houses, machinery, and other property in India.” One shareholder filed a lawsuit alleging that the corporation made multiple investments without enough security and was in violation of the terms of the memorandum. The Court ruled that he may sue because the majority rule does not apply to the ultra vires statute.

In this case, Two defendants and plaintiffs shared ownership of a business. The two plaintiffs filed a lawsuit against the defendants, alleging that they had illegally diverted the organisation’s resources to their benefit. The court allowed the action, observing that normally, it is for the organisation itself to bring an action where its advantage is adversely influenced, but in this case, the two plaintiffs were justified in bringing the action for the benefit of the organisation because the two defendants being in equal control would easily prevent the organisation from suing.

In this case, Since 1988-89, Reliance Industries Limited (‘RIL’) had held more than 5% of the target company, Larsen & Toubro Limited (‘L&T’), and had two of its representatives serving as Non-Executive Directors on L&T’s Board of Directors. In 1994, the Securities and Exchange Board of India (SEBI) notified the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, requiring disclosure of holdings above 5%. RIL continues to acquire L&T shares in the securities market, increasing its stake to 10.98%. The Court ruled that the appellant (RIL) was required under Regulation 7 to notify the target firm that its stake had surpassed 5%.

In this case, The Supreme Court observed that even if the appellants attempted to purchase shares to obtain a controlling interest in the Company, that alone cannot be a basis for refusing to transfer the shares unless and until it can be demonstrated that the purchasers are undesirable individuals who, once in control of the Company, will act against the interests of the Company and its shareholders.

In this case, The Supreme Court ruled that where an offence punishable under Section 113 (2) of the Companies Act, 1956 has been committed, the cause of action arises where the company’s head office is located and not where the purchaser resides. As a result, a complaint may only be lodged in the jurisdiction of the company’s registered office.[16]

In this case, The Supreme Court ruled that the transfer of a company’s shares to a nominee of a shareholder is lawful, and the nominee acquires all of the rights and advantages associated with those shares. It has also provided a few rights to the investors which are discussed below:

RECENT DEVELOPMENTS

In November 2022, the Securities Exchange Board of India a.k.a. SEBI has proposed a framework for protection of interest of public equity shareholders in case of listed companies undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC)[19]. It aims in protecting the public shareholders during the dissolution of a company. It discusses various concerns like how public shareholders are treated during the company’s insolvency proceedings. It also talks about the suggestive measures in how the public shareholders can be protected. The framework intends to create a safer and equitable environment for these shareholders in distressed listed companies.

In 2023, in order to protect the interests of shareholders and creditors SEBI has mandated the stock brokers and depository institutions like the Central Depositories Services India Ltd. (CDSL) and National Securities Depository Ltd. (NSDL) to maintain websites in order to update the details regularly in order to ensure transparency in the securities market.[20]

CONCLUSION

Creditors and shareholders are one of the most vital organs in the security market. They provide funds to form the company’s capital while expecting some return in the form of interest and dividends. They are prone to and exposed to many risks in the security market. Since they are one of the key players in the security markets, they indirectly contribute to the economy of the country. So, it’s the responsibility of the government and the courts to protect them from the risks they face.

In this article, the researcher has discussed the meaning of creditor and shareholder, the rights that are provided to them and provisions that are provided by law. Provisions like sec. 34, 35, 53 and 66 of the Company Act, 2013 are a few sections which help in protecting the interests of shareholders and creditors. The researchers have also mentioned the role of the court for protecting the interests of these people and also mentioned about the NCLT which is a tribunal which deals with various companies and corporate disputes. A few case laws were mentioned by the researcher which would help the reader with better understanding on the topic.

[1]Investors Protection, Atma Ram Sanatan Dharam College,  https://www.arsdcollege.ac.in/wp-content/uploads/2020/04/Investor-Protection.pdf, last seen on 02/06/2023

[2] Kashish Khattar, How to the interests of the creditors, Ipleaders, https://blog.ipleaders.in/how-to-protect-the-interest-of-the-creditors/ , last seen on 03/06/2023.

[3]Shareholders and Creditors remedies of personal actions derivative actions or class action suits including cases of oppression and mismanagement, INFLIBNET Centre, https://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/S000020LA/P000844/M005679/ET/1538395055newe-text.pdf, last seen on 03/06/2023.

[4]Kumar Gourav, Rights and Duties of Shareholders of a Company, Ipleaders, https://blog.ipleaders.in/shareholders-rights-duties/ , last seen on 03/06/2023.

[5] Ibid.

[6] S. 34, The Companies Act, 2013

[7] S. 35, The Companies Act, 2013.

[8] S. 53, The Companies Act, 2013.

[9] Investors’ protection, Lawoctopus Academike, https://www.lawctopus.com/academike/investors-protection/, last seen on 03/06/2023.

[10] The King (R) v. Lord Kylsant, 1 K.B. 442, (1932, King Bench)

[11] Bharat Insurance Co. v. Kanhaiya Lal, AIR Lah792, (1935, High Court of Lahore)

[12] Glass v. Atkin, 65 DLR 501 (1967)

[13]  Reliance Industries Ltd. v. Securities And Exchange Board of India,55 SCL 81 SAT, (2004, Supreme Court of India)

[14] Bajaj Auto Ltd. v. Company Law Board AIR 1999 SC 345, (1999, Supreme Court of India)

[15] H.V. Jayaram v. Industrial Credit and Investment Corporation of India Ltd. (ICICI), AIR 2000 SC 579, (2000, Supreme Court of India)

[16] Kavita Pradhan, Protection of Investor: An Analysis, Social Science Research Network, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2377855, last seen on 03/06/2023.  

[17] Life Insurance Corporation of India V. Escorts Ltd. and others (1986)1 SCC 264, (1986, Supreme Court of India).

[18] Gaurav Purohit, Role of courts in protection of shareholders and creditors, Lexpeeps, https://lexpeeps.in/role-of-courts-in-protection-of-shareholders-and-creditors/#_ftn5, last seen on 03/06/2023.

[19]Framework for protection of interest of public equity shareholders in case of listed companies undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), SEBI, Consultation paper (10/11/2022), available at: https://www.sebi.gov.in/reports-and-statistics/reports/nov-2022/framework-for-protection-of-interest-of-public-equity-shareholders-in-case-of-listed-companies-undergoing-corporate-insolvency-resolution-process-cirp-under-the-insolvency-and-bankruptcy-code-ibc-_64850.html, last seen on 05/06/2023.

[20] SEBI mandates brokers, depositories to maintain websites, The Economic Times, available at: https://economictimes.indiatimes.com/markets/stocks/news/sebi-mandates-brokers-depositories-to-maintain-websites/articleshow/97986756.cms, last seen on 06/06/2023.  

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