[Nitu Poddar is a Senior Associate at Vinod Kothari and Company, and can be reached at [email protected]]
This post deals with the question whether, in determination of the assent at a Committee of Creditors (“CoC”) in corporate insolvency resolution proceedings, the votes of such creditors who (a) do not vote at all, at an electronic voting; or (b) abstain from voting at the meeting itself (collectively the “abstaining creditors”) will be considered while computing the voting strength of 75% required.
The relevant provision of law for this purpose is section 21(8) of the Insolvency and Bankruptcy Code, 2016 (the “Code”) which provides as follows:
(8) All decisions of the committee of creditors shall be taken by a vote of not less than seventy-five per cent of voting share of the financial creditors:
“Voting share” has been defined in section 5 (28) as follows:
(28) “voting share” means the share of the voting rights of a single financial creditor in the committee of creditors which is based on the proportion of the financial debt owed to such financial creditor in relation to the financial debt owed by the corporate debtor.
Assuming that the total number of voting shares, based on financial debt availed by the corporate debtor, is Rs 100 and ,at a meeting, creditors holding financial debt of Rs 20 decide to abstain from voting, and out of the remaining Rs 80, creditors holding financial debt worth Rs 70 assent, whereas those holding financial debt worth Rs 10 oppose, is the decision passed with at least 75% voting share? The answer will be affirmative, if we consider total voting share of Rs 80 who decided to cast votes, and the answer will be negative if we consider the total number of votes, including those who were undecided, or decided to remain undecided, that is, Rs 100.
The situation of abstaining financial creditors forms a substantial reality in CoC meetings. Very often, an officer of a bank or financial creditor comes to the meeting, and decides to abstain from voting, and commonly specifically writes on the ballot paper: “Abstain from voting since HO instructions not received”, or the like. It is quite commonplace that no matter which officer comes to the meeting, the voting at the meeting is often at the directives of “senior management” or “HO” and, if the officer attending the meeting has not got HO consent, they will mostly abstain.
The process of decision-making at CoCs very often involves existential question – the very survival of the corporate debtor depends on whether the CoC has decided to pass a resolution plan, or has failed to do so. Hence, the question becomes critical – can a member, who decides not to vote at all, and therefore, have no view on a matter whatsoever, be counted at par with a person who has explicitly expressed a negative view?
There are five perspectives from which we will try to attempt this critical question:
- General rationale of collective decision-making;
- Law of meetings, as settled over decades of authorities and rulings;
- Notes of the Bankruptcy Law Reform Committee (“BLRC”);
- Amendments to Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the “CIRP Regulations”); and
- Decisions, or indecision, as available from rulings of the National Company Law Tribunal (“NCLT”).
General rationale of collective decision-making
After all, the CoC is a collective decision-making forum. The law insists on a super-majority for decision-making. A decision has two aspects – a positive aspect, and a negative aspect. No collective decision-making process may compel a person to decide. A person may not want to decide, or may remain indecisive. A person may simply remain absent from the decision-making process.
The process of counting majority or supermajority is a process of assimilating views expressed on a matter. If there is no view expressed, or a member does not come forward to vote at all, the same cannot be equated with a negative view. Therefore, the required super-majority has to be computed based on votes cast. This seems to be the intuitive rationale of collective decision-making.
General law of voting
Over several years, the general law of voting has developed such that members express their views by either by voting in favour of a resolution or against the resolution. There can also be members who do not express their views at all; either by (a) not attending the meeting, or (b) by attending but not voting or abstaining to vote at the meeting.
The members who do not express their views are considered to be indecisive and, therefore, by implication, have decided to follow the decision of the majority.
Hence, to count votes and to arrive at a conclusion on whether or not an agenda is resolved at the meeting, the votes in favour and the votes against are weighed and the majority is counted by finding the proportion of the votes cast in favour to the votes cast against. In no circumstance, the invalid votes or votes not cast at all are counted to calculate the majority.
In Shackleton on the Law and Practice of Meetings, chapter 15 deals with members’ meetings and resolutions. The commentary observes that “abstainers will not count; in other words, if an ordinary resolution is put to the vote and six vote in favour, five vote against, and 12 abstain, the resolution is carried.”
On reading of section 189 of the Companies Act, 1956 and section 114 of the Companies Act, 2013, it is clear that the same law has also been part of corporate law for over decades now.
The ones present and abstaining from voting are surely counted towards quorum for the meeting but not added in the denominator to count the percentage of “yes” votes as against the “no” votes. Mere presence in the meeting does not amount to participation and taking decision unless the same is done by exercising the voting rights.
The High Court of Gujarat in In re: Arvind Mills Ltd. has held that a bare attempt to vote by depositing blank ballot containing any writing is not effective and cannot be included in the total count. Only those ballots that express voters preference can be counted. The requirement contemplates only two preferences: one affirmative and the other negative. To adopt any other rule would be to say that three ballots were contemplated– one affirmative, one negative, and another neither affirmative nor negative but forming a new class into which all ballots void for any reason must go.
In the matter of Kirloskar Electric Co. Ltd., High Court of Karnataka, the Karnataka High Court held that a member present and voting may remain neutral, indifferent, unbiased, or impartial- not engaged on either side. One is not supposed to write anything except putting ‘yes’ or ‘no’ either in favour of or against the proposition. A vote cast without indicating the mind of the voter either for or against the resolution is no voting at all. So, in construing whether a resolution is passed by three- fourths majority present and voting, what is to be considered in calculating the majority is not the number of persons present and voting, but the number of valid votes polled in such meeting. The number of valid votes includes only votes indicating the mind of the voter for or against the resolution.
The aforesaid decision of the Karnataka High Court pertained to section 391 of the Companies Act, 1956. It may be noted that the proceedings under section 391 also involve compromises or arrangements, akin to resolution proceedings under the Code. This ruling was reiterated and referred in further matters as well.
Accordingly, the member who abstains from voting has neither decided to cast her vote in favour of the motion nor against the resolution; and therefore one cannot invoke the principle that silence amounts to acquiescence in favour of the motion. Such abstaining member is not counted for voting at all – neither in the numerator nor in the denominator.
Voting in context of the Code
Voting under the Code is no different, and the above rule also applies in calculating the voting of the CoC. There are instances of indecisiveness in CoC meetings, more so when bankers are generally the majority members in the CoC. In the absence of requisite approval or mandate from their seniors or heads, bankers abstain from voting quite often. In such a scenario, to decide whether the resolution is through or not by requisite votes in favour, the members who abstain from voting are excluded from the count and, consequently, the votes are counted out of the total number of votes received, i.e., to say the votes cast in favour or against.
A careful reading of section 5(28) of the Code will reveal that the definition uses two terms – voting share, and voting right. It defines a voting share to mean a voting right, based on financial debt, etc. As evident, a financial creditor gets the right to vote based on the financial debt. That voting right is converted into a vote by actual exercise of the voting rights. The voting rights of the votes cast are pooled together, and then one determines the voting shares that have approved the proposal, versus those who rejected. A “right” has to be exercised to become a voting share. One cannot, without exercising the right, exercise it by implication. Where a member abstains from voting, such member is in a state of indecisiveness and therefore choose not to exercise her right to vote. Her voting right is neither here nor there. As a result, since she cannot decide for herself, she chooses to go ahead with the required majority.
It is pertinent to note that pursuant to the amendments to the CIRP Regulations notified on 31 December 2017, the definition of dissenting shareholders was amended to include a financial creditor who abstained from voting for a resolution plan, approved by the committee.
The amended text is reproduced for easy reference:
“dissenting financial creditor” means a financial creditor who voted against the resolution plan or abstained from voting for the resolution plan, approved by the committee;”
Following this amendment, there remains no doubt in the matter. Notably, the term “dissenting financial creditors” is used only once in the entire CIRP Regulations (in regulation 38(1)(c)) wherein it is stated to provide the liquidation value due to the dissenting financial creditors.
Had it been intended by the lawmakers to consider the members abstained from voting equal to the ones who voted against the resolution, the same would have been done by them. Nothing stopped the legislature from making such amendment in the Code itself, so as to make such definition universal Code-wide. The lawmakers have conspicuously amended the definition only in the CIRP Regulations to add such intent only in case of allocating liquidation value.
Until the aforesaid amendment was rolled out, the abstaining members were not included in the ones dissenting and therefore this explicit addition was done in the definition of dissenting financial creditors.
Notably, the Final BLRC Report (Vol I) also discusses the issue. The relevant extracts are reproduced below:
Clause (4) of Para 5.3.1.
If a creditor chooses not to participate in the negotiations, despite having been so informed, the vote of creditors committee will be calculated without the vote of this creditor.
The final arrangement has to have a majority vote of creditors with 75% in value. Creditors absent at the meeting will have to accept the decision of those present.
The above discussion in the BLRC Report makes the intent of the law abundantly clear to exclude the abstention vote from the total votes cast.
In the matter of Kamineni Steel and Power India Pvt Ltd, Hyderabad Bench of NCLT commented on the indecisiveness of the members of CoC as a result of which they abstain from voting. While the issue of voting has been discussed in this matter, however, the same was left concluded. In para (c) in page 71 of the order, the NCLT pointed out that section 30(4) of the Code “did not say whether such percentage is out of the total voting share of the financial creditors or those present during meetings of respective CoC (committee of creditors) of financial creditors.”
With the above discussion in hand, it becomes abundantly clear that unless otherwise explicitly stated, absentee vote can never be counted as either an assent vote or a dissent vote. Being in a state of indecisiveness, such members agree to the decision of the requisite majority.
– Nitu Poddar
Few Observations on the above:
Reference to Kirloskar Case law is not proper in the present case because that was decided under Section 391 of the Companies Act because 391(2) of that Act specifically requires the members to be counted who are present and voting either in person or by proxy.
Another interpretation that can be possible is:
The definition under the Insolvency Act did not specifically mention the words voting and present either in person or by proxy and thus there can be inference that the Act is contemplating the total voting share and not of those who have participated in the voting process. If the intention was otherwise, the act would have made specific provisions ala Companies Act to that extent.
If we see the language of the Act there are many places in the Act as give below:
Section 22(2) of the Code specifies The committee of creditors, may, in the first meeting, by a majority vote of not less than seventy-five per cent. of the voting share of the financial creditors,……..”
Similarly Section 27(2) of the Code specifies “) The committee of creditors may, at a meeting, by a vote of seventy five per cent. of voting shares,…….”
Section 28(3) of the Code specifies “(3) No action under sub-section (1) shall be approved by the committee of creditors unless approved by a vote of seventy five per cent. of the voting shares.
Section 30(4) of the Code specifies “(4) 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.”
The words used in all the above is not less than seventy five per cent of voting share of the financial creditors and not on the basis of not less then 75% of the voting shares of members present and voting
Further, in any case the aggrieved party can also rely on the judgment of Madras High Court in Combatore Cotton Mills Ltd and Lakshmi Mills Co Ltd (1980) 50Com Cases 623 at 630(Mad) laid down the following principles for sanctioning a scheme:
1. The court should be satisfied that the resolutions are passed by the statutory majority in value and in number in accordance with Section 391(2) of the Companies Act, 1956 at a meeting or meetings duly convened and held and this factory is jurisdictional. Therefore if a class whose interests are affected by a scheme does not asset to the scheme or approve it at a meeting convened in accordance with the provisions of the law, the court will have no jurisdiction to confirm the scheme, even if it considers that the class concerned is being fairly dealt with or that it would approve the scheme.
2. The court should satisfy itself that those who took part in the meeting are fairly representative of the class and that the statutory meeting did not coerce the minority in order to promote the adverse interest of those of the class whom they purport to represent.
3. Lastly, in exercising its discretion under Section 391 and 394 the Court is not merely acting as a rubber stamp. It is the function of the Court to see that the scheme as a whole, having regard to the general conditions and background and object of the scheme is a collective wisdom of the class of members.
4. There should not be any lack of good faith on the part of the majority. Followed in Indo Continental Hotels and Resorts Ltd In Re (1990) 69 Comp Cases 93 (Raj) and Cetex Petrochemicals Ltd Re (1992) 73 Comp Cases 298 at 313 (Mad)