The Insolvency and Bankruptcy Code, 2016 (“Code“) is to be amended by the Insolvency and Bankruptcy Code (Amendment) Bill, 2019 (“Amendment“) that was passed by both houses of Parliament recently. The Amendment carries out various modifications to the Code in order to maximize the value from the Corporate Insolvency Resolution Process (“CIRP“).
Briefly, the highlights of the Amendment are as follows:
- Clarity that a resolution plan (“Resolution Plan“) can provide for comprehensive corporate restructuring schemes such as mergers, demergers, amalgamations
- the Amendment to Section 12 of the Code provides for an absolute deadline for completion of CIRP within 330 days, including litigation and other judicial processes. If any CIRP is in process on the date of commencement of the act bringing the Amendment into force (“Amendment Act“) and is pending over 330 days, it must be completed within 90 days from the date of commencement of the Amendment Act.
- The Amendment to Section 30 lays out a mandatory requirement for Resolution Plans to provide for payment to operational creditors of a minimum of either (i) the amount payable to such creditors on liquidation under Section 53 of the Code or (ii) such amount as would have been payable to such creditors if the total amount distributable under the Resolution Plan is treated as liquidation proceeds and paid in accordance with the priority laid down in Section 53.
- Further, the Amendment to Section 30 also mandates a requirement for Resolution Plans to provide for payment to dissenting financial creditors of at least the amount payable to such creditors on liquidation under Section 53 of the Code.
- The Amendment to Section 25A of the Code provides that, for cases where an authorised representative represents a class of financial creditors on the committee of creditors, such representative will vote on behalf of the entire class on the basis of the decision taken by a majority of the creditors, present and voting, that they represent.
In this article, we focus on one of the most pivoting amendment which is the aforesaid amendment to Section 25A of the Code. In our earlier article titled “Homebuyers Now Financial Creditors: Too Many Cooks Spoil The Resolution Process?” (“Article“) one of the drawbacks highlighted by us was the requirement of the vote of each homebuyer being calculated individually in proportion to the individual debt owed to him and not as a class of financial creditors. It has been seen in the case of IDBI Bank Limited versus Jaypee Infratech Limited read with the disclosure provided by Jaypee Infratech Limited to the Bombay Stock Exchange dated 23rd October, 2018, that none of the agendas put forth before the Committee of Creditors (“CoC“) was approved, mainly due to many homebuyers failing to exercise their votes and thus, the remaining financial creditors (including homebuyers who did cast their vote) were not able to form the requisite majority (calculated on total debt share). In such a scenario, if no Resolution Plan is approved, the corporate debtor has to be liquidated. On liquidation, homebuyers being unsecured creditors would stand to lose priority to secured financial creditors such as financial institutions.
In a move set to definitely benefit classes of creditors such as homebuyers, the Amendment now rectifies this issue by empowering the authorised representative to cast the vote of the entire class of creditors represented by him in accordance with the decision approved by more than 50% of such class of creditors on a present and voting basis.
As an example, let us presume there are 1000 homebuyers in any given real estate company undergoing CIRP, where the collective debt of the 1000 homebuyers forms 70% of the total debt of all financial creditors. Out of these, 300 homebuyers attend a meeting of the CoC and 270 of such homebuyers, vote in favour of a particular agenda.
Now, pre- Amendment, the vote of the 270 homebuyers who voted in favour of the agenda would only count to the extent of their respective individual debt share. Thus, although in our example, almost all homebuyers who were present had voted in favour of a particular agenda, the fact that a large number of homebuyers abstained from voting would lead to failure to garner the minimum required percentage for approving that particular agenda. This might not present itself as an issue when minor decisions of the CoC are affected, however in a vote for the approval of a Resolution Plan, such a mechanism for calculating the vote would undoubtedly hinder the effectual resolution of any company undergoing CIRP.
However, post-Amendment, in our example, because the majority of the homebuyers, i.e., 270 homebuyers out of the 300 present and voting have voted in favour of the agenda, the vote of the entire class of financial creditors i.e. of 1000 homebuyers forming 70% of total debt share would be cast by the authorised representative in favour of the agenda. Thus, now the authorised representative is required to extrapolate the vote of the 270 homebuyers, to all the 1000 homebuyers being a class of creditors, and backed by the entire voting share of this class, the vote of the collective class of creditors being homebuyers would undoubtedly carry more weight and actually lend meaning to homebuyers becoming part of the CoC.
In our view, this Amendment would undoubtedly cause resolution applicants to ensure that the interests of this unique class of creditors is protected and will also encourage all homebuyers to exercise their rights responsibly and actively participate in the CoC meetings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.