Majority Requirement for Creditors’ Approval of Resolution Plan

Background and Legal Question

Nearly all of the posts on this Blog that deal with the Insolvency and Bankruptcy Code, 2016 (the “Code”) begin with the quip that the Code is still undergoing a gestation period that has led to snags in its implementation. This one is no different. Two separate benches of the National Company Law Tribunal (“NCLT”) have adopted diametrically opposing views on the majority requirement by which the committee of creditors (“CoC”) may approve a resolution plan submitted by a resolution applicant under the Code. The relevant provision is section 30(4) of the Code, which reads as follows:

The committee of creditors may approve a resolution plan by a vote of not less than seventy five per cent. of voting share of the financial creditors.

Related to this is the power of the NCLT to approve the resolution plan, which is dealt with in section 31(1) of the Code:

If the [NCLT] is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements …, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

The question that arose is whether the NCLT has the power to approve a resolution plan that is approved by a majority that comprises less than 75% of the voting share of the financial creditors as stipulated under section 30(4). The answer to this question depends upon a number of factors. One approach could be to determine whether that statutory provision, which prescribes the majority requirement, is mandatory or directory in nature. Another could be to consider whether the NCLT has the discretion or even the jurisdiction to entertain and approve a resolution plan that has been approved by less than a 75% majority of the financial creditors. In rulings that have triggered some disparity in the approach of the NCLT, the Hyderabad bench concluded that it has the power to approve a resolution plan that has received the support of less than 75% financial creditors in value, but the Mumbai bench was categorical in that it did not even possess jurisdiction to entertain a resolution plan unless it had received the assent of 75% financial creditors in value.

Hyderabad Bench: The Exercise of Discretion

In K. Sashidhar v. Kamineni Steel & Power India Pvt. Ltd. (27 November 2017), the Hyderabad bench of the NCLT was seized of a resolution plan that had received the consent of 66.67% in value of the financial creditors. Out of the remaining financial creditors, while 26.97% had dissented, 6.36% remained open. Despite falling short of the 75% majority requirement stipulated under the Code, the resolution professional placed the plan before the NCLT for approval. The Hyderabad bench of the NCLT emphasised the use of the expression “may” in section 30(4), which accordingly indicated the directory nature of the provision. Moreover, the bench reasoned that, in interpreting the statutory provision, necessary regard must be had to the legislative intention surrounding the Code, and also the efforts of the Reserve Bank of India (“RBI”) and its directives in ensuring that companies are rescued rather than liquidated.

In interpreting the statutory provision, the Hyderabad bench held:

In the IBC at various places the word “may” and “shall” are used. However, Section 30(4) states that the CoC may approve the resolution plan by a vote of not less than 75% of voting shares of the financial creditors. Further, under Section 31 it is provided that “if the adjudicating authority is satisfied …”. Therefore, we are of the considered view that even though the CoC may approve a resolution plan with not less than 75% of the voting share, a discretion is given to the Adjudicating Authority to approve the Resolution Plan.

In exercising such discretion, the bench examined the facts and circumstances of the case, including the fact that resolution of the debt in the interests of various stakeholders was preferable to liquidation of the company. Keeping these considerations in mind, the NCLT approved the resolution plan even though it had received the support of less than 75% of the financial creditors in value.

Mumbai Bench: A Question of Jurisdiction

In a later decision of  ICICI Bank Limited v. Innoventive Industries Limited (8 December 2017), the Mumbai bench of the NCLT was faced with a similar question on whether to approve a resolution plan that had received the approval of 66.57% of the financial creditors in value, which was less than the prescribed majority in section 30(4) of the Code. However, the Mumbai bench framed the legal issues somewhat differently: “whether this Adjudicating Authority has jurisdiction to exercise over a decision taken by CoC as contemplated in the Code”. In other words, the issue was not whether the NCLT had the discretion to approve such a scheme, but a more fundamental one relating to whether it even has the jurisdiction or capacity to entertain, let alone approve, the resolution plan.

The Mumbai bench’s views are quite categorical:

11. When it has been replete in the provisions of the Code mandating resolution approved by CoC means a resolution with vote not less than 75% of the voting share of CoC, and when for passing a resolution, a cap is set out as an inbuilt measure in a statute without leaving any ambiguity to the judiciary, will it be open to this Bench to question or to alter the cap given by the legislation? I strongly believe that at least this Adjudicating Authority has not such jurisdiction to venture into. It is also to be kept in mind of us as to whether interpretation of a statute is open to this Authority when legislation in clear terms said what the mandate is. By reading the above provisions, it is ex facie understandable to any layman that a resolution by CoC with less than 75% voting share of CoC is no est in law.

The bench went on to observe that it was not open to the NCLT to treat an approval of the CoC with less than 75% majority as a valid approval of the resolution plan. In fact, the Mumbai bench too delved into the rationale for the Code, but emerged with a different perspective in that the Code was intended to operate as a single window approach for resolution of corporate debts, and that the creditors (especially financial ones) were conferred appropriate powers and authority to act with the support of the requisite majority. From that viewpoint, the bench held that the NCLT’s jurisdiction can be invoked only by the approval of a resolution plan by a 75% majority of financial creditors in value, failing which the NCLT is prohibited from delving into a consideration of the plan. Hence, in the absence of an approval from the financial creditors as required above, the Mumbai bench refused to look into the resolution plan.

Analysis

The opposing views adopted by the two benches of the NCLT on an identical question is somewhat disconcerting and ought to be streamlined. From an interpretational perspective, the Mumbai bench’s approach of treating the 75% majority requirement as sacrosanct appears more convincing. There are number of reasons for doing so (some of which have been addressed by the Mumbai bench).

First, that the majority requirement in section 30(4) is mandatory rather than directory is borne out from the literal as well as purposive interpretation of the statute. For instance, even if one were to ascribe some level of flexibility to the use of the word “may”, the expression arguably clarifies that the CoC is not obligated to approve a resolution plan, but rather than it may do so at its discretion. But, when it does exercise its discretion positively, it must be supported by the requisite majority of 75% of the financial creditors in value. It is not convincing to hear that the word “may” can be interpreted the dilute the majority requirement.

Second, the majority requirement ought to be mandatory given that the resolution plan has a significant impact on various stakeholders as it has a binding effect. The binding nature of such a plan is premised upon the fact that it enjoys the support of a predetermined majority. If that majority requirement were to be diluted, it destroys the main prong on which the plan’s binding character is premised.

Third, in the absence of the approval by the requisite majority of creditors, it would be perilous to confer discretion upon the NCLT to loosen the majority requirements. Not only is such dilution of the majority requirement absent in the legislation and debates, but it would inject a tremendous amount of uncertainty to the process.

Fourth, although the language used is somewhat different (with the conspicuous absence of the expression “may”), it is worth considering the corollary of a scheme of arrangement, which has to be approved by a requisite majority under section 230(6) of the Companies Act, 2013. Even here, the NCLT (and previously the High Court) would be seized of a petition to sanction a scheme of arrangement only when it is approved by the requisite majority of classes of shareholders or creditors, as the case may be, and not otherwise. Even here, to confer discretion upon the NCLT to soften the majority requirements for shareholders or creditors will be traversing hazardous territory.

In all, the majority requirement clearly stipulated in the Code ought to be an uncompromising one, the satisfaction (by the creditors) of which will confer jurisdiction upon the NCLT to consider and approve a resolution plan. Consequently, it must not be a matter left to the discretion of the NCLT to ensure compliance or to waive it in given circumstances. The dichotomy emerging from the different benches of the NCLT must be addressed sooner rather than later given the deluge of insolvency cases that have inundated the system.