[Vinod Kothari is an insolvency practitioner at Vinod Kothari & Co and can be reached at [email protected]]
The circular dated 10 August 2018 issued by the Insolvency and Bankruptcy Board of India (IBBI) makes for interesting reading. While it is lamenting the fact that the hard timeline-bound regime of the insolvency process will lead to unintended corporate mortality if the bank representatives attending the committee of creditors (CoC) meetings are not empowered to decide, the amusing undertone is that it has directed the resolution professionals to ensure the attendees in CoC meetings are decision-makers themselves.
The IBBI circular comes in the wake of orders by National Company Law Tribunal (NCLT), Principal Bench in SBJ Exports & Mfg. Pvt. Ltd. v. BCC Fuba India Ltd (7 June 2018) and Jindal Saxena Financial Services Pvt. Ltd. v. Mayfair Capital Private Limited (4 July 2018). Earlier, the Hyderabad Bench of the NCLT had, in Kamineni Steel & Power India Private Limited (27 November 2017) criticized the members of CoC meeting for attending it without full mandate from their competent authorities to take a final call at the meeting itself instead of falling back on their seniors’ approval and delaying the time-bound procedure.
It is a matter of common knowledge that India is one of the few insolvency frameworks in the world which comes with hard timelines. If insolvency is not resolved within 180 (or, on extension, 270) days, the company will be mandatorily moved to a liquidation path. Since the resolution process is entirely based on decisions at the CoCs, the CoC may arrive at some conclusive resolution only if the CoC members are empowered to decide and vote at the meetings. The ironic reality is that the attendees at the CoC meetings are rarely decision-makers themselves. They gather to discuss the matter at the meeting, but would mostly take the issues back to their respective offices to obtain the views of their seniors. The indecision of the CoC itself may be the reason for corporate mortality.
No matter what the IBBI has to say or what NCLT or the National Company Law Appellate Tribunal (NCLAT) might have ruled, the irony is that the CoC attendees barely are able to decide. There are several reasons for their indecisiveness. The reasons may include the mundane, such as the seniority of the person attending, the recent transfer of the attendee into the resolution matters, or the internal hierarchy of the bank itself. However, the most important issue that affects decision-making is the fear of persecution for hard decisions the bankers have to make. And surely, the most important decision in insolvency process is the decision about the haircut. Bankers have a natural fear, born out of years of experience, that if the one who decides has to face the so-called 3Cs – CBI (Central Bureau of Investigation), CAG (Comptroller and Auditor General) and CVC (Central Vigilance Commission). There is no pursuit against indecision. No one is punished for not deciding. However, decision-making invites internal and external action. Therefore, banks simply don’t decide on matters such as haircuts. Practically, one would have seen several situations where the attendee at the CoC would have confessed knowledge of the fact that the value the lender will get in liquidation will be far lower than the haircut placed for approval, but they would rather let the haircut be faced as a fait accompli in liquidation rather than decide upon much lower haircut in resolution.
Added to the problem of indecision is the prevailing notion, incorrect in the view of the author, that the abstention of a creditor from voting amounts to disapproval. That is, if a certain creditor at a CoC meeting decides not to vote at all, its vote will be counted as a negative vote, as the required decision-making should be positive votes out of total votes, and not out of those voting. The author strongly argues that this is a wrong view; however, this view is being espoused in certain quarters. This exacerbates the issue of decision-making at CoCs.
Undoubtedly, the intent of the Insolvency and Bankruptcy Code, 2016 as well as the IBBI is absolutely clear. It is resolution before liquidation. In this wake, the voting percentage required for approval by CoC has also been reduced, by way of an Ordinance, from flat 75% to 66% for substantial decisions and 51% for routine matters.
So, will the scenario be better after this IBBI circular? Surely, one may ensure compliance by writing, perhaps as a part of the notice calling the CoC meetings, that only those empowered to decide should be attending, but practically, no resolution professional may reasonably expect there would be much change. Unless, of course, the Reserve Bank of India sends out a directive – that the member attending the CoC should be sent with a pre-approval of the relevant hierarchy so that the attendee may take a decision at the meeting or the banks become proactive enough to prepare their own evaluation matrices, approved by the senior-most personnel, which can serve as basis to take decision for the attendees at CoC.
– Vinod Kothari