Transfer and Transmission of Securities under the IBC
Table of Contents
Under the Companies Act, 2013, transfer of shares is a voluntary act where a shareholder knowingly sells or gifts their shares to another party, while transmission of shares in an involuntary transfer of ownership by operation of law, such as death, insolvency, or success. In insolvency, the distinction between transfers and transmission becomes critical in addressing issues like value destruction and wealth transfer, as it impacts how assets are distributed among creditors and stakeholders and the outcome of the resolution process. For instance, if shares are transmitted to a party that is not willing to cooperate with the resolution plan it could hinder the process.
Legal Context: Companies Act vs. IBC
- Standards Under Companies Act: Section 56 of the Companies Act deals with the transfer and transmission of Securities under the IBC. It mandates that the companies must use Form SH-4, the Securities Transfer Form, for registering transfers of Securities under the IBC, such as shares or debentures. The duly executed and stamped transfer instrument must be delivered to the company within 60 days from the date of its execution. Failure to comply with this section can lead to penalty, with companies facing fines ranging from Rs. 25,000 to Rs. 5,00,000, and defaulting officers facing fines from Rs. 10,000 to Rs. 1,00,000.
- IBC Terminology & Rights: According to section 3(34) of the Insolvency and Bankruptcy Code, 2016 (“the IBC”) “transfer” includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien. “Transmission”, on the other hand”, describes the passing of rights, liabilities, or property by operation of law, such as through inheritance or court order.
Transmission of Securities under the IBC
Transmission of Securities under the IBC refers to the legal transfer of securities, like shares, from one person to another due to an involuntary event like death or insolvency, rather than voluntary sale or transfer. In case of death, the securites are transmitted to the legal heirs or nominee, if specified, For insolvency, the securities are transferred to the official receiver or assignee appointed by the court. The legal representatives or nominee to provide relevant documents like a death certificate, succession certificate, or probate or letter of administration to initiate the transmission process. In such circumstances, the company is obligated to register the transmission once the legal heir provides the necessary documents and if required by the Articles of Association.
Transfer of Securities under the IBC
Voluntary transfer of shares, governed by section 56 of the Companies Act, may necessitate company approval, along with compliance with stamping and timely submission requirements, and includes:
- Voluntary Transfers: Following Section 56, the procedure for share transfers, require proper documentation, such as Form SH-4, proper stamping, and timely submission. Depending on the Articles of Association, company approval might be necessary for certain share transfers.
- Assignment of Claims in CIRP/Liquidation: The Insolvency and Bankruptcy Board of India (IBBI) allows for the assignment of financial claims by creditors during the insolvency process and liquidation. As per Regulations 28 and 30A of the Liquidation Regulations, regulated the assignment of claims, such as a creditor can assign its claims to another party, who then becomes the new claimant, entitled to exercise the rights and benefits associated with that claim. This mechanism is particularly relevant for claims secured by debentures or other securities.
- Impact on Share Transfers: When debentures or Securities under the IBC are involved in an insolvency, the assignment of the underlying claim can result in the transfer of those instruments. This is distinct from a standard share transfer governed by section 56, as it is not a voluntary transfer of shares between existing shareholders. The assignment of the claim transfers the ownership of the underlying debt, which can then be exercised as per the terms of the debenture or security, potentially leading to a change in ownership of the underlying asset.
Read more : Understanding Fresh Start Process Under IBC in India
Key NCLT/NCLAT Jurisprudence
Hindustan Unilever’s policy, as outlined in its AoA, prioritizes the rights of surviving joint holders when it comes to jointly held shares. This means that if a shareholder with joint ownership of shares passes away, the surviving joint holder(s) automatically inherit the deceased’s share of the holdings. As per this policy, a will, even if registered, is not considered a valid document for transferring ownership of jointly held shares in this scenario. In case of insolvency, the transmission of a company’s assets and title to legal heirs or official assignees is generally determined by the Companies Act, with the company’s article of association potentially further guidance or stipulations. Courts play a role in determining these transmission, ensuring they align with legal and statutory requirements.
RP & CoC Practical Checklist
Resolution Professionals (RPs) and the Committee of Creditors (CoC) play an important role in transfer or transmission during the insolvency process, involving:
- Due Diligence on Securities: Both stakeholders must verify board minutes, and are responsible for conducting due diligence to assess the eligibility of resolution applicants under section 29A of the IBC, while the CoC reviews the RPs report and approves or disapproves the plan. They must also ensure that the investor registers for pending transmission or transfer claims before inviting expressions of interest.
- Documentation Required: RPs and the CoC need to ensure that all the documents are submitted according to the Companies Act and the IBC, such as the death/succession certificate, indemnity bond; for voluntary transfers: SH-4, stamp, certificate—all within stipulated windows.
- Handling Claims Assignment: When a creditor transfers a claim, specifically one involving pledged securities, the RP must update the claims list to reflect the new creditor. This ensures the claims list accurately represents the current ownership of the claims, and the transparency, fairness, and integrity of the insolvency integrity.
Risks & Common Pitfalls Securities under the IBC
There are several risks and common pitfalls in such cases, such as:
- Delays in Registration: Companies are required to register transfers or transmission of property of assets within one month of the transfer date. Failure to register these transfers can lead to complications in establishing legal ownership and can significantly worsen any potential title disputes.
- Ignoring Liability Subsumption: Failure to account for continuing liabilities associated with transmitted shares during insolvency can indeed cause significant issues, potentially blocking distributions to creditors or misleading potential buyers. This can manifest in several ways, including delayed distributions, disputes over liability, and ultimately, a failure to achieve an optimal outcome for stakeholders.
Tips for Stakeholders
- For Insolvency Professionals: IPs should include potential transmissions/= or transfers in Information Memorandum and coordinate with the Registrar and Transfer Agents (RTAs), and Depositories to validate securities. This ensures a comprehensive understanding of the debtor’s assets and facilitates a smooth resolution process.
- For Creditors and Claim Buyers: For such parties, share transmission can bypass joint ownership and may take precedence over voluntary transfers. They need to be aware of both the precedence and the need to comply with company-specific procedures, including understanding the documentation requirements and any specific timelines for registering the transfer. Further, given the complexities of such cases, it is crucial to seek legal advice to ensure compliance and protect their interests.
- For Companies & RTAs: These stakeholders should proactively validate transmission paperwork before they are processed helps ensure that all information is accurate and complies with relevant regulations and internal policies. Further, by updating registers regularly they can aid the insolvency process and reduce friction.
Conclusion
Proper handling of transfers and transmissions is necessary for preserving asset value and ensuring legal compliance, involving adhering to specific procedure and legal requirements to avoid potential risk and complications. Further, addressing these transactions promotes fairness and equality among creditors, as it prevents some from unfairly benefiting at the expense of others. The IBC provisions include examining transfers to prevent collusion between the corporate debtor and certain creditors to the detriment of others. Further, a thorough review of transactions ensures that the resolution plan is based on a fair and accurate assessment of the corporate debtor’s assets and liabilities. Hence, handling such transactions according to the relevant laws and rules strengthens the overall integrity and effectiveness of the IBC.
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