The Insolvency and Bankruptcy Code (IBC) has been dubbed a game-changer in corporate circles, and the intent of the legislation—to see whether corporate debtors can be put back on their feet within a stipulated time frame to stave off liquidation—is laudable. Thus, time is of essence under the scheme of the Code; however, there have been some practical interpretational issues which have come up. These must be properly addressed to ensure that interests of all the stakeholders in the process, i.e., the creditors, corporate debtors and other stakeholders, are taken care of. Under the Code, when a financial creditor or the corporate debtor files for admission of an insolvency petition, it must propose a name of an interim resolution professional (IRP). Once the petition has been admitted and the Corporate Insolvency Resolution Process has been initiated, the IRP must constitute a committee of creditors, and the said committee of creditors must consist of only financial creditors.
Under the unlikely situation where there are no financial creditors of the debtor, the committee would consist of the operational creditors, that too only the top 18 in value. Once the committee has been formed, the committee may, by a majority vote of 75% or more, either resolve to appoint the IRP as Resolution Professional (RP) or appoint another RP. The voting share of a financial creditor in the COC meeting is based on the value of the debt, thus, the financial creditor to whom the corporate debtor owes the highest debt would have a greater voting share.
Recently, the NCLT, Mumbai, was faced with a situation wherein approximately 62% of the votes in the COC meeting were in favour of removing the IRP and appointing another RP, and the rest of the votes were in favour of continuance of the IRP as RP. Hence, a situation of deadlock arose in the appointment of RP which may not have been anticipated during the drafting of the Code. NCLT gave a finding that the financial creditor who has the highest voting share must be given the preference over the other creditors who have a lesser vote share and thus preference must be given to the decision taken by the financial creditor with the highest vote share.
The NCLT further noted that Section 22(2) of the Code which provides that regularisation of IRP as RP or appointing RP may be decided by a majority vote of 75% and the NCLT read “may” as giving it the legislative latitude to deal with an issue of percentage of vote share based on facts of each case. The case throws up another issue to ponder over: Under a COC meeting, all decisions of the committee of creditors shall be taken by a vote of not less than 75% of voting share of the financial creditors (Section 21(8) of the Code); some key corporate decisions like raising any interim finance, creating any security interest, etc, undertaking related party transactions, disposing of or permitting the disposal of shares of any shareholder of the corporate debtor or its nominees to third parties, making any change in the management of the corporate debtor or its subsidiary, making changes in the appointment or terms of contract of such personnel, etc (Section 28 of the Code), require to be approved by 75% of vote share of creditors and finally, the resolution plan itself needs to be approved by 75% of the vote share of the creditors (Section 30(4) of the Code).
A para materia statute would be Companies Act, 2013 wherein certain decisions would have to be taken by way of special resolution or approved by 3/4th of the members in value and if such consent are not obtained, such decisions cannot be passed. Thus, the Code provides that such major decisions must be taken after obtaining consent of 75% of the vote share and if there is a deadlock, such actions cannot be undertaken. This is an inbuilt statutory mechanism for minority creditors. As such, the operational creditors, in any event, do have a say in a resolution process.
Now, with the NCLT opining that financial creditor who has the highest voting share must be given the preference over the other creditors who have a lesser vote share—if such a stance is blessed for all deadlock cases—opens up many issues such as protection of the minority creditors. Is it effective resolution process if the financial creditor who has the highest vote share gets the casting vote, something which is not contemplated under the Code and should not be the legislative intent?
The NCLT should have undertaken a joint reading of Section 21(8) and Section 22(2) [cited supra] to come up with an effective solution. The legislative intent was to give the highest voting share to the financial creditor whose debt was the biggest, but to enhance it to the status of effective casting vote may not, in my personal humble opinion, be the appropriate way going forward.
Author is partner Lakshmikumaran & Sridharan.