[Priyasha Goyal is a graduate of the Jindal Global Law School, Sonipat]
The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’) were amended vide a notification dated 7 August 2020. The Insolvency and Bankruptcy Code, 2016 (‘the Code’) has been formulated with the objective of reducing the time taken for resolution of stressed assets, maximizing the value of assets to the corporate debtor and ensuring greater availability of credit by making the resolution process more creditor-friendly. In line with this objective of a creditor-friendly Code, the Insolvency and Bankruptcy Board of India (‘IBBI’) released a discussion paper on 14 February 2020 seeking public comments on three proposed amendments to the CIRP Regulations related to replacement of authorized representatives, voting on multiple resolution plans simultaneously and casting of vote by creditors. Pursuant to the comments received on the discussion paper, the CIRP Regulations were amended accordingly. In this post, the author seeks to delineate these key issues faced by the creditors in the resolution process and the role of the notification in reducing these hurdles and making the Code more creditor friendly.
Simultaneous Voting On Multiple Resolution Plans
As per the extant provisions, the resolution professional examines the validity of the resolution plans in accordance with section 30(2) of the Code. If the plans satisfy the enlisted criteria, they are presented before the Committee of Creditors (‘COC’) for their approval. The COC identifies the best resolution plan based upon the predetermined evaluation matrix. Upon examining the feasibility and viability of the plan, the COC votes on the said plan. If the plan receives 66% or more of the voting share of the COC, it is considered approved by the COC and is thereafter presented before the adjudicating authority for its approval. In the event that the selected plan does not receive the required 66% approval by the COC, the entire process of considering the viability and feasibility of other compliant resolution plans has to be repeated from the beginning. While theoretically this process promises to yield the best result, practically it has the possibility of excluding compliant plans that do not meet the strict contours of the evaluation matrix.
While the Code evidently prioritizes creditor interests, it can also act as a hindrance when a stalemate is reached and no plan receives the requisite votes for approval. In contrast to the aggressive cram-down approach adopted by the United States in section 1129 of its chapter 11 Bankruptcy Code, the approval process in India accommodates the interests of all creditors. Failure to get the requisite votes for a plan does not allow the involuntary imposition of such a plan on the dissenting creditors. Such a mechanism thwarts creditors interests, thereby undermining the objective of the Code. Instead, by allowing creditors to vote simultaneously on multiple resolution plans, it not only ensures a time-bound resolution of stressed assets by consolidating overlapping steps, but also encourages greater creditor participation in the process. Approval of a resolution plan is the most important role of the COC and by removing the hurdles faced by creditors in this process, the amendment boosts creditor involvement.
In this backdrop, the present amendment seeks to amend regulation 39(3) of the CIRP Regulations to incorporate simultaneous voting on all compliant resolution plans. It states that where only one resolution plan is put to vote, the plan is deemed approved if it receives the requisite 66% votes. If more than one plan is put to vote simultaneously, then the plan which receives the highest votes that meet the 66% threshold is considered approved. In the event that no plan receives the requisite majority, the plan which received the highest vote is voted upon again. Further, if two plans receive the same votes, then the COC applies the pre-decided tie breaker formula to approve either plan.
The pre-amendment approval process reduces the number of options available to the COC by limiting the selection of the plan to one that best fits the evaluation matrix. However, by allowing the COC to consider multiple plans simultaneously, the notification creates opportunities for detailed and reasoned comparisons, consequently maximizing the value derived from the approved plan. Further, the previous mechanism also resulted in loss of valuable time by requiring a new set of COC meetings to be held each time a plan did not receive the requisite votes. The time-consuming nature of the process in a resolution process premised on speedy recovery of stressed assets is further evident from the ongoing insolvency proceedings of Jaypee Infratech Limited. The process which began in August 2017 is yet to reach fruition, three years since IDBI Bank led consortium’s application was admitted by the NCLT. One of the primary reasons for this delay was the failure of the COC to approve a resolution plan with the requisite majority. After rejecting bids from resolution applicants over two rounds of voting, the COC finally decided to vote on the plans of the two resolution applicants, National Buildings Construction Corporation (NBCC) and Suraksha Realty, simultaneously. This allowed the COC to consider the feasibility and viability of both plans concurrently and vote for their desired plan, thereby reducing the time taken to approve a resolution plan. This simultaneous voting by the COC culminated in a 97.36% approval by the COC of the NBCC resolution plan, and subsequent approval of the same by the NCLT on 3 March 2020. The successful working of the simultaneous voting structure adopted by the COC in the Jaypee case is testament to the practical benefits of such a change in the approval process.
Appointment of Authorized Representatives
Under section 21(6A) (b) of the Code read with regulation 16A of the CIRP Regulations, a class of creditors may appoint an authorized representative (“AR”) to represent their interests and concerns to the COC more coherently. The process of appointing the AR involves the interim resolution professional (“IRP”) identifying three insolvency professionals who are eligible as per the criteria enlisted under regulation 4A(2) and the creditors thereafter indicating their choice amongst the selected three professionals. Whoever represents the choice of the highest number of creditors from the class is consequently appointed as their AR by the adjudicating authority. Currently, the criteria for eligibility of an AR include insolvency professionals eligible under regulation 3 of the CIRP Regulations, not a relative or related party of the IRP and willing to perform the role of an AR. To ensure that the AR so appointed better represents the interests of the creditors in that class, regulation 4A was amended to add another eligibility criterion for the AR. The amendment states that the AR should reside in the state or union territory which has the highest number of creditors from that class residing in it. In case there aren’t adequate insolvency professionals in that state or union territory, the insolvency professionals residing in neighboring state or union territory shall be considered for the appointment.
This geographical consideration by IBBI serves to ease communication between the AR and creditors, allowing for better coordination and better representation of the interests of the creditors in that class. While this is a welcome move by IBBI, it represents a shift from the amendment proposed in the discussion paper. The discussion paper suggested provisions for replacement of the AR by creditors, in the event that the creditors were dissatisfied with the functioning of the AR. Currently there is no provision regarding the circumstances permitting a replacement of the AR and the process thereunder. By explicitly stating the same, the procedural hurdles faced by the COC would be eliminated, while also accounting for the primacy of creditor interests in the resolution process. The reason for omitting this clause on replacement of ARs is unknown, but an amendment notifying the same would be another step forward in plugging all gaps and making the Code more creditor friendly.
Voting by a Class of Creditors After Circulation of Minutes of the Meeting
Presently the voting process followed by the AR of a class of creditors is cumbersome, often yielding unsatisfactory results. Section 25A of the Code provides that the AR must circulate the agenda and minutes of the meeting of COC to the financial creditors he represents and seek their voting instructions after both these stages. The AR is required to then cast a vote based on the vote of more than 50% of the voting share of the class, at both stages. The casting of vote after the circulation of agenda will often not yield a favorable outcome since the creditors do not make a well-informed decision at this stage, making it difficult to achieve a majority. There are also concerns of pre-polling or internal voting before the agenda is even circulated, as in the Jaypee case, due to confusion stemming from the two-pronged voting process and the added significance attached to the voting at the first stage. Moreover, the process of voting at two stages is simply inefficient since the creditors are not prevented from changing their vote at the second stage, consequently making the voting at the first stage merely indicative of the preference of the majority of the creditors. The final decision continues to be taken based on the voting after circulation of minutes of the meeting.
To reduce the procedural hurdles and make the process more efficient, the notification substituted sub-regulation 9 of regulation 16A of the CIRP Regulations to enable the creditors to cast a vote only after circulation of the minutes of the meeting. It states that the AR may seek preliminary views of the creditors in the class to better reflect the views of the class in the COC meeting. However, the voting instructions will be received only after the minutes of the meeting have been circulated and the creditors can make a well-informed reasoned judgment on the matter. This is another move that benefits creditors, encouraging them to make a decision only after all views are duly considered, thereby making the voting process more efficient.
Conclusion
As evident from the analysis above, the notification attempts to ease the difficulties faced by creditors in the resolution process. It duly accounts for the practical hurdles faced by creditors while discharging their role under the extant insolvency framework, seeking to making the Code more workable. By making the voting and approval process more time-efficient, it also complements the Code’s objective of ensuring a time-bound resolution of stressed assets. This notification is a welcome move which goes beyond the simple theoretical understanding of the framework’s objective, and takes a cue from the ongoing developments, thus attempting to make the Code as practicable as possible.
– Priyasha Goyal