Successful Closure Case: Managing Shareholder Deadlock through Preference Shareholder Rights

 Background:

The successful closure of a software company entered under the process of voluntary liquidation under the Insolvency and Bankruptcy Code, 2016. The company had two equity shareholders holding equal stakes (50% each) and one preference shareholder holding (100%).

During the process to approve voluntary liquidation, the Company faced a stalemate as both equity shareholders were required to pass a special resolution to approve liquidation process of the company. With equal control, neither side could secure the 75% being the majority required for passing special resolution. One equity shareholder persistently opposed every decision, stalling the process and risking asset value erosion.

As per the Articles of Association and Section 47 of the Companies Act, 2013, the preference shareholder was entitled to vote on resolutions concerning winding up of the company or any action affecting their rights.

 

Strategy and Resolution of deadlock for commencement of closure:

Recognizing the deadlock, the Firm strategically advised the promoter regarding their voting rights of the preference shareholders under Section 47(2) of the Companies Act, 2013, since the resolutions related directly to winding up. By engaging with the preference shareholder and ensuring his rights were properly represented, the Firm secured its affirmative vote breaking the impasse and enabling the passage of the required resolutions. We also relied on provisions under the IBC, 2016 specifically Sections 35 and 36 to exercise control over asset realization and distribution independently, once shareholders consent on key matters was achieved. Through transparent communication and compliance with statutory requirements, the process moved towards closure efficiently.

 

Outcome:

After the resolution was duly passed, the voluntary liquidation process was initiated and carried out in accordance with the prescribed procedures. Over precise execution timeline from the commencement of liquidation, all necessary steps including asset realization, settlement of claims, and compliance requirements were completed, leading to the closure of the company’s affairs. Subsequently, the matter was placed before the Adjudicating Authority (NCLT), which reviewed the entire process, verified that all legal and regulatory compliances had been met, and, upon satisfaction, issued the final order for the company’s dissolution, thereby bringing its legal existence to an end.

 

Key Takeaway:

By tactfully leveraging preference shareholder’ voting right and operating within the framework of the Companies Act, 2013 and IBC, 2016, the Firm effectively overcame a deadlock, safeguarded interest of shareholders, and ensured a smooth and successful voluntary liquidation.