The CoC Stalemate: Issue of Voting Thresholds and the Way Forward

[Shubham Kumar is a student from Hidayatullah National Law University, Raipur Ayushi Tiwari from Dr. Ram Manohar Lohia National Law University, Lucknow. Both are in their 3rd year B.A. LL.B.]

The preamble of the Insolvency and Bankruptcy Code, 2016 (IBC) states that the objective of the IBC is to promote resolution over liquidation. Keeping the said objective in mind, the interpretation of provisions of IBC should be carried out in a manner that furthers the above objective. On essential matters regarding the insolvency resolution process, voting by the committee of creditors (CoC) is required. However, there is a certain amount of confusion over the voting powers of CoC, which is creating impediments to the successful resolution of insolvent companies. This post aims to bring such problems to the fore and seeks to suggest possible solutions to them.

Provisions Regarding Voting by CoC

Creditors exercising voting rights in the CoC can be classified into three different categories:

(i) financial creditors who are present and participate in voting;

(ii) financial creditors who are undecided and have abstained themselves from voting;

(iii) financial creditors who are absent from the voting process altogether.

With regards to the first category, their votes are to be counted while determining the total vote share. In the second category, there was a lacuna in law on whether their vote share is to be counted while calculating the total votes required to pass a resolution. In K. Shashidhar v. Kamineni Steel and Power India Pvt. Ltd and Ors., the Hyderabad Bench of the National Company Law Tribunal, in a case prior to the amendment to the IBC, approved a resolution plan that received consent of 66.67% in value of the financial creditors, while 26.97% had dissented and 6.36% had abstained themselves from voting. The NLCT held that the votes of those financial creditors who have abstained shall not be taken in consideration while calculating the total vote share. Therefore, since the plan was approved by 78.63% of the financial creditors by value in the CoC, resolution plan stood approved. The case went on appeal in National Company Law Appellate Tribunal (NCLAT), which passed liquidation orders.

The Supreme Court in K. Sashidhar v Indian Overseas Bank & Ors held that creditors who have abstained from voting will be included in the total vote share, and their vote shall be not be taken as affirmative. This meant that the votes of those financial creditors who abstained from voting will be included in the total vote share to consider whether the required threshold is achieved. However, the Supreme Court did not discuss the treatment of those creditors who remained absent from voting.

With regards to financial creditors who remained absent from voting, the Bankruptcy Law Reform Committee stated that if a creditor chooses not to participate in negotiation despite having been so informed, the vote of creditors committee will be calculated without the vote of such creditor. It also states that the creditor who absents himself at the meeting will have to accept the decision of those present. This makes the intent of law very clear that those who absents from voting their share will be excluded from the total votes cast. The NCLAT also gave effect to this intention in the Tata Steel v. Liberty House case wherein it held that shares of such financial creditors who do not participate in meeting their share should not be counted at all.

Voting in case of Homebuyers

With regards to homebuyers, in Nikhil Mehta v AMR Infrastructure the NCLT issued its decision on the lines of the NCLAT above and held that, where financial creditor constitutes solely of real estate financial creditors (residential and commercial), the decision taken by highest percentage is to be regarded as final. Therefore, it meant that votes of homebuyers who were absent from the meeting shall not be counted, and whatever the majority decides will be final. For example, consider a scenario where 66% votes are required to pass a resolution for appointing a resolution professional and the CoC is constituted solely of real estate (commercial and residential) creditors and 40% of those creditors are absent from voting process. The vote of 60% of creditors shall be considered as 100% and whatever the majority of the 60% decide shall be final.

However, another problem came up in the Japyee Infra case where the CoC consisted of a mix of real estate financial creditors, banks and asset reconstruction companies as financial creditors. In case the real estate financial creditor holds substantial share in voting, absenteeism of majority of homebuyers from voting process can have a negative impact on the resolution process. Here, the required threshold of 66% will be difficult to achieve. There can be two possible solutions to this problem:

(i) Rule of Present and voting: The approach taken in Arvind Mills case can be taken into consideration and the total votes shall be of those who are present and have voted. Hence, if homebuyers are absent their share of votes are excluded from the total voting percentage. Take an example where homebuyers have 60% voting share and other financial creditors have a 40% share. Now, out of these 60% only 20% have been present and have voted either for the motion or against the motion. The votes of the 20% should be taken as the entire share of the real estate financial creditors as a whole.

(ii) Creating homebuyers as a separate class of financial creditors: Whatever the majority of the class of homebuyers shall decide could be taken as the opinion of the group as a whole and then their share is to be counted in the total vote share.

The Global Scenario

The Report of the Insolvency Law Committee had contemplated the issue of voting thresholds for the CoC in which it noted the procedure adopted by various jurisdictions across the globe. It included USA, UK, Canada and Singapore in opining that “a higher threshold with the present and voting requirement, or a lower threshold sans the present and voting requirement, may be adopted.”

In Canada, the prescribed voting share and the percentage of votes determining majority is imposed on each class of unsecured creditors, while in the UK the plan is approved under administration merely by a simple majority in value of the creditors present and voting. These scenarios cannot be incorporated into Indian law due to the question over the status of homebuyers as secured or unsecured creditors and the relative ease in the approval by simple majority respectively.

Chapter 1129 of the US Bankruptcy Code envisages for both consensual and non-consensual confirmation of restructuring with respect to each class of claims or interests in the manner that:

(A) such class has accepted the plan; or

(B) such class is not impaired under the plan.

Another requirement is that “if a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.” Furthermore, a class of claims has accepted a plan if the plan has been accepted by creditors “that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors  that have accepted or rejected such plan.” A class that is unimpaired by a plan is deemed to accept it. Any class whose members are to receive nothing under a plan is deemed to reject the plan.

However, nothing is specified about the circumstances in which all the creditors in a class entitled to vote fail to do so for whatever reason. The failure of enfranchised stakeholders to cast a vote can pose a significant problem, especially if the chapter 11 plan provides for treatment of one or more classes that contain only a single creditor or a handful of creditors, such that one creditor’s failure to cast a vote means that the statutory acceptance majorities cannot be attained.

In re Ruti-Sweetwater, Inc., 836 F.2d 1263 (10th Cir. 1988), the Tenth Circuit reasoned that refusing to deem the failure of an impaired class to vote to be acceptance of the plan “would be to endorse the proposition that a creditor may sit idly by, not participate in any manner in the formulation and adoption of a plan in reorganization and thereafter, subsequent to the adoption of the plan, raise a challenge to the plan for the first time.” The ruling was swiftly overturned In Re Vita Corporation, the decision characterised as “result-oriented” and contrary to the dictates of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. According to the Court:

The Bankruptcy Code specifically provides for an alternative means of obtaining confirmation if a class of impaired creditors does not cast a ballot—section 1129(b)’s cram-down provisions (discussed below). By ignoring “precise requirements” established by the statute and the rules implementing it, the district court cautioned, a court becomes a legislative body and impermissibly implements policy.”

The final and last recourse for the development of Indian insolvency laws thus rests with the Singapore approach which proves to be efficient under the following three heads:

The Present and Voting Solution

Under the Singapore insolvency laws, the first stage is an application to court for leave to convene a meeting of the company’s creditors or class of creditors to consider and approve a compromise or arrangement. Second, at the creditors’ meeting, the creditors or classes of creditors will vote to approve the scheme. The statutory threshold to approve a scheme is a majority in number representing at least three-quarters in value of each class of creditors present and voting at the meeting.[1]

As suggested above, the present and voting solution coupled with a higher threshold of voting not only preserves the sanctity of the resolution procedure but ensures creditor turnout without unnecessary delays. It excludes the members absent from meetings from contributing to the calculation of total voting share to decide if 66% has been achieved or not.

The Cram Down Solution

A cram down refers to the imposition of a restructuring scheme by the court on any class of dissenting creditors, thus preventing errant classes of interest holders from hindering a viable plan. The 2017 reforms to the Singapore laws have supplanted this provision from chapter 11 of the US Bankruptcy Code with the addition of the ‘absolute priority’ rule and a higher creditor approval threshold, to the following pre-existing provisions:

– a majority in number of the aggregate number of creditors sought to be bound by the compromise or arrangement who were present and voting either in person or by proxy at the relevant meeting have agreed to the compromise or arrangement;

– the majority in number referred to in (i) above represents three-quarters in value of the creditors sought to be bound by the compromise or proposal;

The court should also be satisfied that a compromise or arrangement shall not discriminate unfairly between two or more classes of creditors, and is fair and equitable in respect of each dissenting class. This ‘fair and equitable’ criterion means that a dissenting creditor must receive at least as much under a scheme as it would receive were the scheme not approved.[2] Additionally, the absolute priority rule demands that a dissenting secured creditor must receive the value of its security and a dissenting unsecured creditor should be paid in full before shareholders receive anything.[3]

The aforementioned scheme also becomes an attractive option in confirming to resolution more than liquidation under the IBC without compromising the efficiency of the process. However, proper valuation and carefully constructed scheme of disbursement should precede it, something which is being tackled by Singapore at present.

Pre-Packaged Deals

Pre-packaged schemes are being contemplated for India on the lines of the US, UK and most recently Singapore. It entails an arrangement for restructuring that a company prepares in cooperation with its creditors that will take effect once the company enters the corporate insolvency resolution process. The pre-requisite before filing such a plan before a court or tribunal is creditor voting. The objective is to reduce minority (or even present and abstaining to vote in the present case) creditor leverage and the investment of time, money and legal efforts for both parties.

However, this has been criticised on the grounds of being a shortcut rather than a planned solution, along with the fact that the corporate debtor cannot avail the benefits of the moratorium i.e. stay on any kind of recovery proceedings. A more quickened and aggressive creditor stance for recovery is also apprehended if it has prior knowledge that the corporate debtor faces imminent bankruptcy. Lenders have also been hesitant in advancing loans to such companies, which threaten to defeat the ‘going concern value’ of the debtor.

Conclusion

Thus, the existing voting thresholds of the CoC need to be resolved to prevent the rejection of a well-constructed resolution plans on the whims of the absentees while preserving the right to dissent and the importance of the prescribed thresholds. It also needs to cater to the special requirements of homebuyers in mixed-creditor CoCs so that the resolution process is not driven solely by banks and financial institutions.

Shubham Kumar & Ayushi Tiwari

[1] The Insolvency, Restructuring and Dissolution Act 2018.

[2] Companies Act (Singapore), section 211H(3).

[3] Companies Act (Singapore), section 211H(4)(a).

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