By: Katyayni Singh and Arjit Mishra
INTRODUCTION
The Committee of Creditors (CoC), under the Insolvency and Bankruptcy Code, 2016 (IBC/ Code), are entrusted with the responsibility of reorganisation and resolution of a debt-ridden corporate body.[1] The IBC follows the democratic process to adopt a resolution plan for its debtor. The resolution plan, as per Section 30(4) of the IBC, ought to be approved by the CoC “by a vote of not less than sixty-six percent” of its voting share.[2] Section 30 in whole stipulate the procedure for submission of the resolution plan. Under clause (2), it lays down protections for the operational creditors, who can’t vote, and dissenting financial creditors (DFC), who voted against the submitted resolution plan. Section 30(2)(b) contains two options for the discharge of debts of operational creditors- either the amount to be paid “in the event of liquidation” or “the amount to be distributed under the resolution plan” in the order of priority mentioned under section 53(1). The CoC ought to adopt that option which renders higher value. Similarly, the creditors in dissent are entitled to such amount which “shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.”[3]
The CoC has discretionary authority to go ahead with the submitted resolution plan which is approved by the special majority vote.[4] However, it is not always easy to satisfy the dissenting minority, which rises either within the CoC or outside. Nor is it viable to cram down the minority by imposing the decision of the majority without providing a fair share to the former. The Supreme Court judgment of DBS Bank Limited v. Ruchi Soya Industries Limited,[5] (Ruchi Soya) has brought to limelight the concerns of dissenting creditors. As the matter has struck the right chord in identifying a crucial issue, this paper attempts to analyse the issue from different jurisdictional lenses. This paper discusses an important theory known as “Cross-Class Cram Down principle” (CCDP) that has reaped significant benefits in the US, the UK and the Singapore to settle the debtor-creditor dispute.
The paper comprises four crucial parts. Part II is for the refreshment of the memory in relation to the historical evolution of India’s insolvency laws and what led to the creation of the IBC. The background helps to better understand the objectives of this Code. Part III identifies the interests of creditors with minimal rights and analyses the issues arising out of the conflict between the CoC and the dissenting creditors. It discusses the dispute related to the manner of distribution of proceeds in case a resolution plan has been adopted.
Part IV provides a broader view of the issue in reference to different economic milieus. It deliberates upon the cross-class cram-down mechanism and its application in the US, the UK, and Singapore. Where the USA is responsible for moulding the principle of cram down, this part of the paper elucidates how it has evolved in other developed countries for a successful reorganization of a corporate debtor (CD). Part V recommends the suggestions that would enhance the feasibility of acceptance of a resolution plan, with mitigation of the conflict rate between assenting and dissenting parties. Part VI sums up by highlighting the importance of assimilation of cram down mechanism to make insolvency regime watertight.
EVOLUTION OF THE INSOLVENCY FRAMEWORK IN INDIA
The inception of insolvency and bankruptcy legislation in India was facilitated by the Government of India Act, 1800.[6] After experimenting in the pre-19th century, the Indian Insolvency Act was enacted in 1848 in aid of insolvent debtors. However, the 1848 legislation could not meet the expectations of the 20th century when trade and commerce were in developing mode.[7] Accordingly, the Presidency-towns Insolvency Act 1909 was enacted for Madras, Bombay, Calcutta, and the Provincial Insolvency Act, 1920 for mofussils. In that era, insolvency was primarily viewed as a matter of reputation. Further, trade and commerce were ought to be handled with care. Therefore, the jurisdiction vested with the High Courts. Although Insolvency Courts existed, their jurisdictional power was restricted and regulated by the High Courts. The payment-related issues were viewed with a myopic lens. The Court-trustees who handled the insolvent’s business were barely trained. The colonial laws were not creditor-centric as the debt-clearance mechanism was inadequate.
After India left the British cradle, the nation faced obstructions from all directions in maintaining its economic pillar. It had to prevent a handicapped structure from becoming paralysed. First step was taken with the enactment of Companies Act 1956 that not just regulated the incorporation and governance of companies but also foresaw the situation of winding up. To cater to the ailing companies, Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was enacted. The corporate restructuring reforms since 1990 spurred the revolution for establishing a robust insolvency framework in India in a quest to facilitate time bound rehabilitation or winding up and protect the creditors’ interest.[8] The Reserve Bank of India set up several expert committees to determine the effectiveness of the existing laws and suggest amendments. The Eradi Committee, set up in 1999, identified that SICA is a tool for borrowers to frustrate the cause of creditors by delaying any relief.[9] The corporate milieu was not responding to the legislative prompts offered by SICA. As courts failed, RBI opted for out-of-court corporate restructuring.[10] There was an urgent requirement to salvage the interests of secured creditors, i.e., financial institutions. It was the T.R. Andhyarujina Committee that made India’s tryst with economic reforms possible.[11] The committee proposed sustainable innovative plans. It suggested that banks and financial institutions should have a mechanism to recover their dues without going to courts or tribunals and that stressed assets should be transferred to asset reconstruction companies. It led to enactment of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Finally, secured creditors discovered a way to enforce their security although the legislation was not a solution for all the problems.
In the face of rapid development, India had to unlearn its old ways and look out for feasible and viable options. In its pursuit, India finally enacted the IBC in 2016. IBC is a comprehensive legislation that ultimately renders the control in the hands of creditors, by constitution of CoC, to find a solution in the event their borrower meets insolvency, under the guidance of an insolvency professional. Its primary objectives are insolvency resolution, promotion of investment, maximisation of the asset value, and enhancement of the credit flow. It streamlines the resolution process by demarcating the roles of different entities.
CHALLENGES TO THE IBC, 2016
The IBC is the epitome of India’s insolvency resolution culture. When a Corporate Debtor faces insolvency, the creditor[12] or the debtor[13] itself can file an application for commencement of the Corporate Insolvency Resolution Process (CIRP) before the National Company Law Tribunal (NCLT). The NCLT appoints an Interim Resolution Professional (IRP) who admits all the claims after their verification and accordingly constitutes the CoC comprising financial creditors. The CoC appoints the Resolution Professional (RP) who oversees the management of the Corporate Debtor and guides the CoC in their quest of finding a Resolution Plan. While RP works to maintain the CD as a “going concern”, the CoC operates as the decision-making authority. When a resolution plan is offered by a Resolution Applicant (RA), the CoC has the sole authority to assess its feasibility and viability. Section 30(6) of the Code read with Regulation 39(4) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), the CoC accepts the plan if it is passed by the majority with 66% in voting.[14] Despite being a collective body, it is the assenting financial creditors who reap the benefit of CIRP whereas others remain unsatisfied in want of higher debt recovery.
The Committee of Creditors: A Collective or a Fragmented Body
The CoC has been envisaged to protect the collective interest of creditors.[15] The National Company Law Appellate Tribunal (NCLAT), Chennai Bench has observed that it is “the collective decision of the CoC” which is enforceable by law even if it comprises an individual.[16] However, collectivism is constrained by the individual actions of the creditors. To say it otherwise, the dissenting financial creditors and operational creditors do not always support the collective decision of the secured majority because the approved resolution plan do not satisfy their dues. In the case of Ruchi Soya, its financial creditor, DBS Bank, has extended a handsome credit of Rs 243 crore. As per the approved resolution plan offered by Patanjali Ayurvedic Limited, an estimate of Rs. 119 crore was to be paid to the appellant. Since the appellant’s security was of greater value than that of other financial creditors, the bank argued that equating it with other creditors having “inferior security interest” would result in “unjust enrichment and windfall benefits to the dissimilarly placed creditors to the detriment of the appellant.” The plan was approved by a whopping majority of 96.95%. Here, one can find a direct conflict between the choice of one creditor with the decision of the majority vote.
The CoC reigns supreme under the current insolvency framework because it has the commercial wisdom to take any decision for the benefit of the debtor as well as creditors.[17] However, when CoC falls short of reconciling the differences, the matter ought to be undertaken by the courts. Despite noting the concerns of the appellant-bank in the CoC meeting, the CoC proceeded with the resolution without meeting the requirements of the appellant. Since the Adjudicating Authority (AA) cannot question the commercial wisdom of the CoC, the plan was first given provisional and subsequently final approval by the AA. Accordingly, the matter reached the Apex Court. By January 2024, it has been more than five years since the commencement of CIRP and more than three years since approval of the resolution plan. The matter carries forward the feud in the CoC and dissatisfaction of the interest of the secured creditor.
The CoC does not de facto embody the collective commercial wisdom of all creditors. Practically, it is not even possible since every creditor has extended credit to the debtor in different ways. Firstly, operational creditors cannot be the members of CoC and so have no say in its decision-making. Secondly, the dissentient creditors either tend to prolong the dispute beyond the ordinary CIRP period or are compelled to agree unsatisfactorily.
Although CoC has sufficient powers to take its own decision in a fair manner, yet its composition is creating hindrances in successful resolution. A closer look into the perspectives of the dissentient pool of creditors would help understand the reason behind passive opposition to CoC.
Dissentient Financial Creditors: Causes and Concern
Regulation 2(1)(f) of the CIRP Regulations, 2016 defined a “dissenting financial creditor” as one who either voted against the resolution plan or abstained from voting for the plan which is approved by the CoC. However, by notification dated 5 October 2018, the definition was omitted by virtue of the NCLAT order in the case of Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd,[18] wherein Regulation 38(1) of the CIRP Regulations was held to be inconsistent with the Code. Regulation 38 was providing for payment of liquidation value to dissenting financial creditors and operational creditors in priority to other financial creditors who would be paid different amount. It was promoting a differential treatment of creditors who approve the plan in detriment of those who don’t. To avoid such discrimination, the definition was omitted and regulation 38 was validly amended to remove the error of equating the amount payable to dissentient creditors during CIRP to liquidation value.
As per the 2019 amendment dated 6 August 2019, the dissentient and the operational creditor are to be paid in accordance with Section 30(2) of the Code which lays down the procedural standard of payment of proceeds in the event of approval of resolution plan. As interpreted in Essar Steel India Limited v. Satish Kumar Gupta, [19] the operational creditor ought to be paid higher of the two amounts as given under clause 2(b), either the liquidation value or in order of priority as mentioned under Section 53. The dissenting creditor is to be paid the minimal amount payable during liquidation. The complexity arises in realising whether liquidation value should be equivalent to the security value of the dissentient or should it be proportionate to the value that secured creditors ought to receive under the plan. In the judgment dated 3 January 2024, the Apex Court was attempting to find the answer on a similar question of law and in its pursuit, it has referred the matter to higher bench. The question is:
“Whether Section 30(2)(b)(ii) of the IBC, 2016, as amended in 2019, entitles the dissenting financial creditor to be paid the minimum value of its security interest?”
The issue can be broken down into three parts: Firstly, there is need to understand the “manner of distribution of proceeds” that create the dispute between the assenting majority and dissenting minority. Secondly, the amount of value of security that may satisfy the secured creditor requirements. Thirdly, the reasons behind liquidation of the debtor need to be analysed.
Manner of distribution of proceeds
Before voting on a resolution plan, the CoC considers the manner of distribution of proceeds while considering the order of priority and extent of security interest.[20] It requires careful consideration because the value offered in the plan is mostly lesser than the total amount of claims admitted. For instance, Patanjali Ayurvedic Ltd offered an approximate of 49% value of the total claims admitted for resolution of Ruchi Soya. The dispute arose because the CoC was not willing to prioritise the security interest of the appellant. In Essar Steel, the operational creditors who had submitted claims of more than Rs 1 Crore were not being paid any amount in the approved resolution plan.
Various factors influence the majority decision of the CoC. Due to the low amount of offers received, it is very essential for the CoC to distribute the amount to render the CD as a “going concern”. The Apex Court in K. Sashidhar v. Indian Overseas Bank,[21](K Sashidhar) elucidated with an example. Suppose a resolution plan fails to make provision for electricity dues. Now it is upon the CoC to suggest modifications to the plan so that the business is not thwarted due to want of basic needs. In making such a modification, the amount to be distributed among creditors would be affected.
The dissentient creditors or the operational creditors may not dispute the plan solely because they are not able to receive the desired value. But they may reasonably challenge the plan when the manner becomes unfair and inequitable. Usually, the CoC adopts pro rata distribution of proceeds but that is not a one-stop solution. There are no objective criteria for assessment of the manner of distribution.
Entitlement to value of Security Interest
Another important concern that has arisen is with respect to the claim of security interest. In Jaypee Kensington Boulevard Apartments Welfare Association and others v. NBCC (India) Ltd,[22] (Jaypee Kensington) it was ruled that a dissenting secured creditor may enforce its security interest “to the extent of the value receivable by him and in the order of priority available to him.”[23] This enforcement of security is only to obtain the monetary value and nothing equivalent. The dissenting creditor is free to opt for any method for discharge of its debt.
In India Resurgence ARC Private Limited v. Amit Metaliks Limited,[24] (India Resurgence) a restricted view was taken by the division bench. They opined that Section 30(2)(b)(ii) does not entitle the dissentient secured creditor to enforce its security interest or receive its total value. Even if such situation arises, the security so enforced would only be available to the value receivable by him. It was further opined that a dissenting financial creditor cannot expect to receive amount in excess, i.e., it cannot go beyond the “receivable liquidation value” meant for the same class of creditors. This opinion given in India Resurgence has been questioned in Ruchi Soya judgment. The view in latter case is that the payment to the dissenting financial creditor should at least be equal to the value of security interest.
Both the judgments refer to Jaypee Kensington and culls out divergent interpretations from the same. In India Resurgence, the purpose of the division bench was to prevent violation of objectives of IBC. While in Ruchi Soya, the Court intended to prevent inequitable treatment that might be meted out to dissenting creditors. The divergency pertaining to security interest would vary on a case-by-case basis. Even if the Apex Court entitles the dissentient secured creditor to enforce its security to its total value, it might irk the assenting majority who might receive a relatively lesser value. As the interpretation from a higher bench is welcome, there is need of assessing the security value with the fair market value instead of liquidation value.
Favouritism to liquidation
Liquidation of a company implies an end to its business. It is the last resort in the event resolution of the debtor is not possible. Creditors live under the presumption that sale of assets would reap higher value in discharge of their debt in comparison to resolution of the debtor. The division bench in India Resurgence worried about the very notion amongst the creditors that promotes liquidation. They feared that if dissenting financial creditors were paid a higher amount as a trend, there would be more liquidations while the object of insolvency resolution and maximization of assets would take a backseat. As of September 2023, the rate of liquidation of companies undergoing CIRP is 44% and that of resolution is 10% to 14%.[25]
Section 30(2)(b) requires clarity because it confuses the dissentient financial creditors that the liquidation value is higher than what is proposed in the resolution plan. This confusion incentivizes creditors to push for liquidation of the CD. This conundrum has been rightly pointed out in a report from Insolvency and Bankruptcy Board of India (IBBI) titled “Report of the Colloquium on Functioning and Strengthening of the IBC Ecosystem.”[26] An amendment to clarify how to ensure equitable distribution would help in deleting unwarranted presumptions regarding liquidation.
CROSS-CLASS CRAM DOWN MECHANISM: A METHOD OF RECONCILIATION BETWEEN DFCS AND COC IN DIFFERENT JURISDICTIONS
One of the effective ways to resolve the conflict between the CoC and the dissentient or powerless creditors is by providing the latter parties with a fair share of distribution in the resolution plan adopted by the CoC. It can be executed with the help of the Cross-Class Cram Down principle. It means that dissenting creditors should be bound by the accepted resolution or restructuring plan provided the plan is better for all than the available alternatives. Having originated in the USA, it has been adopted by other developed economies like the UK and Singapore. It is advantageous to understand how CCDP has evolved and moulded in different insolvency frameworks throughout the world.
The United States of America
The principle of “cross-class cram down” traces its roots to sections 1129(a) and 1129(b) embedded in Chapter 11 of the U.S. Bankruptcy Code. Cram down principle will only be applicable “if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.”[27] The major points which can be culled out from the principle is that the plan should not unfairly “discriminate” and is “fair and equitable” to the dissenting class of creditor. This power to determine whether the plan is discriminatory or unfair and inequitable lies with the court.
The term “not discriminate unfairly” is not clearly defined by the legislature and the courts too fail to give it a definite meaning. In the case of In Re Buttonwood Partner Ltd.,[28] where a secured creditor got a higher rate of interest, the court gave a four-fold test where discrimination would not be constituted as unfair. The test includes that “(i) there should be reasonable basis for discriminating, (ii) the debtor cannot consummate the plan without discriminating, (iii) the discrimination is proposed in good faith, and (iv) the degree of discrimination is in direct proportion to its rationale.”[29] The court deferred from its earlier judgment of In re Dilts,[30] where the court held that granting different rates of interest among secured creditors would amount to unfair discriminatory practice. But the common link that connects most cases is the condition that “ensures that dissenting class will receive relative value equal to the value given to all other similarly situated classes.”[31]
The phrase “fair and equitable” is not properly explained by the legislature, much like the phrase “discriminate unfairly”. The case of Consolidate Rock Products Co. v. DuBois,[32] through interpretation of the term “fair and equitable”, led to development of a principle that is today known as the “absolute priority rule”. According to this rule, the senior most secured creditors are at the top priority whose claims must be satisfied before any other. Next in line comes the junior secured creditors whose claims must be satisfied before one can move to unsecured creditors. The phrase “indubitable equivalent” is another brainchild of courts as they interpret a “fair and equitable” plan under section 1129(b)(2). In the case of In re Murel Holding Corp.,[33]the court took cognizance of the fact that a secured creditor who is concerned for the protection of his principal amount would hardly care about the interest. The secured creditor wishes to get his money or at least the property and there should be no reason to deprive the creditor of property “unless by a substitute of the most indubitable equivalence.”[34] In simple words, the term “indubitable equivalent” of the secured claim would mean to surrender the collateral to the secured creditor, and the collateral “must produce a cash flow or be capable of being sold within a reasonable time so that the creditor can realize cash.”[35]
As can be seen in the above-mentioned paragraphs, much of the power lies with the courts when applying the cram-down principle to the dissenting class of creditors. Whether it is interpreting the term “unfair discrimination” or “fair and equitable” plan, the ultimate authority rests with the court. It is interesting to note that the court is tasked with evaluating a resolution plan for unfair discrimination or lack of fairness and equity in satisfying the claims of different classes of creditors. This requires commercial acumen, which in India is possessed by the CoC, and the judicial authority is called upon only to assess the process through which the plan was submitted and approved.
The United Kingdom
In the United Kingdom, the CCDP was introduced through the UK Corporate Insolvency and Governance Act, 2020 (CIGA) with the insertion of Part 26A to the Company Act, 2006. Much like the USA, the UK’s cram-down regime has conditions that should be satisfied if the dissenting class of creditors has to be crammed down. These conditions are enlisted under Section 901G of part 26A of the Companies Act 2006. Section 901G would only be applicable if any “compromise or arrangement” is not agreed to by at least 75% by value of a class of creditor, present and voting. There are 2 conditions that must be fulfilled to cram down a dissenting class of creditors. The first and foremost condition is that (i) the court is satisfied that, if the compromise or arrangement were to be accepted, the dissentient creditors would not be “worse off” under the “relevant alternative” and (ii) the compromise or arrangement has been approved by a minimum of 75% by value of at least one class of creditors, who have a genuine economic interest in the debtor during relevant alternative.[36]
Two key phrases used in condition (i) are “relevant alternative” and “not be worse off”. It is open to the court’s interpretation which makes it ambiguous and uncertain. Under the head of “relevant alternative” the court is free to decide what would most likely happen to the company if the plan were not to be sanctioned.[37] Justice Trower while penning down his opinion in the DeepOcean case,[38] mentioned that the main concern for the courts should be to compare a restructuring plan and the relevant alternative, and while doing so the courts should pay attention to the likely financial return in each case.[39] To apply this condition, the first step is to identify a relevant alternative, the second step is to identify results for the creditors under the identified relevant alternative and the third step is to compare the results under the relevant alternative to those where the plan were to be sanctioned. Much like “relevant alternative” the second phrase that could lead to uncertainty is “not to be worse off”. It is left to the court’s wisdom to decide when the dissenting creditors are not worse off under the relevant alternative. Justice Trower acknowledged this ambiguity and questioned the perspective from which the phrase “any worse off” should be judged.[40] He concluded that the court should rather take a holistic view in considering the condition of dissenting creditors while judging it against the “any worse off” condition.[41] Much like the USA insolvency regime, the UK insolvency regime is dependent upon the court system for assessing the conditions for cramming down a dissenting class of creditors
Singapore
Singapore is yet another jurisdiction that has a cross-class cram-down mechanism in its Insolvency Restructuring and Dissolution Act (IRDA). It is similar to Chapter 11 of the U.S. Bankruptcy Code. Section 70(2) of IRDA authorises the court to sanction a plan and bind all the classes of creditors by it. In Singapore as well, the courts should be convinced that the plan does not “discriminate unfairly” between the classes and is “fair and equitable” to each dissentient class.[42] The plan should be approved by a majority of creditors who represent 3/4th in value of the claim and accordingly, are bound to the compromise.[43]
EFFECTIVE CRAM DOWN IN INDIA: SUGGESTIONS
In India, cramming down is exercised by virtue of Section 30 of the Code. However, as it has been discussed above, Section 30 is not sufficient. Sub-clause (4) chalks out the implementation-related requirements such as percentage of voting, feasibility and viability of the plan, and manner of distribution including order of priority as per Section 53(1). Although sub-clause (2) enlists the standard for distribution of proceeds to the operational creditors and dissenting financial creditors, there is confusion in understanding the true intent and meaning of the said clause. It provides for payment of minimum liquidation value and remains silent regarding the amount so receivable, thereby tilting the balance towards liquidation. Cramming down with fair and equitable treatment needs to be included more conspicuously in the regulations and the code.
Introduction of an exclusive clause for determining the distribution of proceeds
The Ministry of Corporate Affairs floated a discussion paper in January 2023 where it invited comments on the manner of distribution of proceeds under the head “9. Reimagining the consideration of the resolution plan and the manner of distribution of the proceeds from the same during the CIRP.”[44] Clause 9.5 suggested that the manner of distribution should be segregated from the implementation-related requirements of the plan as mentioned in Section 30(2). It proposed a statutory provision of a separate scheme of distribution.
According to the scheme, all creditors would receive the liquidation value of the CD and any surplus would be distributed rateably. As much as the proposal seems promising, it fails to take into account that in India, a relatively lower value of amount is usually received. The value submitted by the resolution applicant may not always appeal to the majority of the creditors but may be feasible in the longer run. Although the proposal of the said discussion paper is prima facie in line with the recommendation of the “United Nations Commission on International Trade Law Legislative Guide on Insolvency Law”,[45] the probability of acceptance of the plan in India remains bleak.
Instead of promising the liquidation value that is usually feasible by sale of distressed assets, the procedure should provide for pro-rate distribution of the value so received. In case of secured creditors, the proportionate value of their security should be taken into account while determining the division of funds. Others should be paid in order of priority as determined in the waterfall mechanism to be laid out in CIRP. Such exclusive provision for distribution of proceeds would streamline the process for the CoC and enable an objective assessment of the distributive manner.
Payment of Fair Market Value instead of Liquidation Value
The assurance given to the dissenting creditors and operational creditors to receive liquidation value tend to push creditors towards liquidation. This is the reason behind higher rate of liquidation in India. In a discussion paper floated on 1 November 2023 by the IBBI, it has been proposed under the head “F. Clarity in minimum entitlement to dissenting financial creditors” that the minimum value protections provided to the dissenting creditors under section 30(2)(b) of IBC and Regulation 38(1) of the CIRP Regulations are problematic since they equate the “realisable amount” to “liquidation value” despite there being an event of resolution.[46] The primary issue with such award of liquidation amount is that the dissentient parties receive the notional value as it existed on Insolvency Commencement Date (ICD). Usually, with progress of the CIRP, the actual value of the distressed assets begins to depreciate. So, the dissentient parties receive an undue advantage over the assentient class. Accordingly, it has been proposed in the discussion paper that the dissentient parties should be eligible for “lower” of the two values- the realisable amount or liquidation amount.
It is recommended that liquidation amount be replaced with “fair market value”. There are dual benefits of making such amendment. First, it allows real time assessment of the value of the debt. Especially, in case of security interest, the secured creditor need not worry about not receiving adequate price. Rather, it may receive a price willingly at arm’s length in a free and open market without trade restrictions. Second, it would ultimately prevent creditors from getting incentivised towards liquidation of the CD. Replacing “liquidation value” with “fair market value” may also do away with the need of introducing “lower” of the two amounts instead of “higher”. This would help ensure a fair and equitable distribution of proceeds where the dissentient parties would be not be worse off or unjustly discriminated.
Operational Creditors to vote for their share of distribution of proceeds
The operational creditors are in general not members of the CoC and so they do not have necessary voting rights. They are entitled to attend meetings when their claim exceeds 10% of the total debt value. The legislature had a sound reason behind their non-inclusion because OCs are primarily not concerned with the prospects of the corporate debtor.[47] However, they should be consulted to ensure their share in proceeds for the substantial amount the debtor owes to them. They can be allowed to vote for the distribution of proceeds as a class. It is not necessary to entrust them with decision-making authority but at least their voices should be heard.
This will ensure that the concerns of operational creditors are also taken into account and the resolution plan, which is to be approved, provides for the claims of operational creditors. If the operational creditors are entitled to bare minimum say in the CoC and are provided with voting rights, there will three-fold benefits. First, it may facilitate a wholesome deliberation and discussion about the resolution plan where each stakeholder including the operational creditor will have the opportunity to voice their opinion on the plan. Second, inclusivity would possibly reduce the chances of frivolous petitions filed by the operational creditors against the decision of the CoC claiming that their interest was overlooked by the CoC while arriving at the decision. This would serve the greater purpose of the IBC, i.e., to provide a resolution of corporate debtor in a time bound process by effectively reducing the unwarranted petitions filed by operational creditors. Third, the CoC shall become an embodiment of equality.
With each class of creditor possessing right to vote, the CoC may, without any misgivings, bind the creditors with the accepted resolution plan. The dissenting voices may also convert into assenting expressions as all their concerns would be heard of, leading to necessary modifications in the plan with minimum interference of the tribunals.
CONCLUSION
The key to the success of the insolvency resolution process is a healthy and conflict-ridden Committee of Creditors. India has come a long way by making strides towards an ideal mechanism for insolvency resolution. A committee providing equal say to all the creditors would ensure that all voices are heard. It warrants equitable treatment of both assentient and dissentient parties. However, the discussion should not be entertained to such an extent where they become disruptions. Discussions should pave the way for decisions, thereby preserving commercial wisdom of the committee.
When disruption happens during the discussion about the restructuring or resolution plan within the meetings, other developed jurisdictions allow interference by the court. However, India cannot empower the tribunal to dictate changes to the resolution plan. They can simply send it back to the CoC for modification. Therefore, India requires a modified cram down mechanism that solves the disruptions arising during CoC meetings and clear the passage to peaceful resolution. The cram down method should be inclusive of an equitable bargaining right between the class of creditors. If the proposed amendments are included in Section 30 and complementary regulations are made, the complex situation as one arose in Ruchi Soya’s resolution may be ameliorated.
[1] V.S. Datey, Guide to Insolvency and Bankruptcy Code (7th edn., Taxmann 2019) 1.95.
[2] The Insolvency and Bankruptcy Code 2016, s. 30(4).
[3] The Insolvency and Bankruptcy Code 2016, s. 30(2)(b)(ii).
[4] Vikas Mehta, ‘Entitlement of Dissenting Financial Creditors under IBC’ (SCC OnLine,13 May 2023) <Entitlement of Dissenting Financial Creditors under IBC | SCC Times (scconline.com)> accessed 15 February 2024.
[5] DBS Bank Ltd. v. Ruchi Soya Industries Ltd., 2024 SCC OnLine SC 3.
[6] Krati Rajoria, ‘Insolvency and Bankruptcy Code of India: The Past, the Present and the Future’ (HeinOnline, 2018)<https://heinonline.org/HOL/Page?handle=hein.journals/ibuslj2018&div=7&g_sent=1&casa_token=&collection=journals> accessed 16 February 2024.
[7] Law Commission of India, ‘Report On Insolvency Laws’ (Report No.26, February 1964) <February 1964, Twenty-sixth Report of the Law Commission on Insolvency Laws.pdf (ibbi.gov.in)>accessed 16 February 2024.
[8] Vijay Kumar Singh, ‘Modern Corporate Insolvency Regime in India: A Review’ (HeinOnline, 2021) <https://heinonline.org/HOL/Page?collection=journals&handle=hein.journals/nlsblr2021&id=29&men_tab=srchresults> accessed 20 February 2024.
[9] Sumant Batra, Corporate Insolvency: Law and Practice (Abhinandan Malik, 1st edn., EBC 2017) 11.
[10] ibid.
[11]Akaant Kumar Mittal, Insolvency and Bankruptcy Code: Law and Practice (Abhinandan Malik, 1st edn., EBC 2021).
[12] The Insolvency and Bankruptcy Code 2016, s. 7 and s. 9.
[13] The Insolvency and Bankruptcy Code 2016, s. 10.
[14] The Insolvency and Bankruptcy Code 2016, s. 30(6).
[15] Sudhaker Shukla and Kokila Jayaram, ‘Promoting common good amidst anti-common behaviour of stakeholders: Role of Committee of Creditors’ (IBBI, Oct 2021) <bcb6b096e766e07c164ad5f61ebe2b01.pdf (ibbi.gov.in)> accessed 20 February 2024.
[16] Edelweiss Asset Reconstruction Company Ltd. v. Sai Regency Power Corpn. Ltd., 2019 SCC OnLine NCLAT 921.
[17] Swarnendu Chatterjee and Shivank Kumar, ‘Fair and Equitable Distribution Clauses in Resolution Plans – Is Section 30(2)(B) of Insolvency and Bankruptcy Code, 2016 Being Illusory for Operational Creditors?’ (SCC OnLine, 4 July 2022) <Fair and Equitable Distribution Clauses in Resolution Plans – Is Section 30(2)(B) of Insolvency and Bankruptcy Code, 2016 Being Illusory for Operational Creditors? | SCC Times (scconline.com)> accessed 22 February 2024.
[18] Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd. and Others, 2018 SCC OnLine NCLAT 1034.
[19] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, 2019 SCC OnLine SC 1478.
[20] The Insolvency and Bankruptcy Code 2016, s. 30(4).
[21] K. Sashidhar v. Indian Overseas Bank, 2019 SCC OnLine SC 257.
[22] Jaypee Kensington Boulevard Apartments Welfare Association and others v. NBCC (India) Ltd., 2021 SCC OnLine SC 253.
[23] ibid.
[24] India Resurgence ARC Private Ltd. v. Amit Metaliks Ltd., 2021 SCC OnLine SC 409.
[25] ETBFSI Research, ‘IBC performance improves as share of liquidation cases drops sharply’ The Economics Times (23 November 2023) <IBC performance improves as share of liquidation cases drops sharply, ET BFSI (indiatimes.com)> accessed 22 February 2024.
[26] Richard F. Broude, ‘Cramdown and Chapter 11 of the Bankruptcy Code: The Settlement Imperative’ (1984) 39 (2) The Business Lawyer <https://www.jstor.org/stable/40686562> accessed 22 February 2024.
[27] ibid.
[28] In Re Buttonwood Partner Ltd., 111 B.R. 57 (Bankr. S.D.N.Y. 1990).
[29] ibid.
[30] In re Dilts, 100 B.R. 759 (Bankr. W.D. Pa. 1989).
[31] In re Tribune Co., 464 B.R. 126 (Bankr. D. Del. 2011).
[32] Consolidate Rock Products Co. v. DuBois, 312 U.S. 510 (1941).
[33] In re Murel Holding Corp.,75 F.2d 941 (2d Cir. 1935).
[34] ‘The Indubitable Equivalent and Giving Debt for Dirt: Can a Debtor Force a Secured Creditor to Take Less than All of Its Collateral in Satisfaction of its Debt’ (2003) American Bankruptcy Institute <The Indubitable Equivalent and Giving Debt for Dirt Can a Debtor Force a Secured Creditor to Take Less than All of Its Collateral in Satisfaction of its Debt | ABI> accessed 25 February 2024.
[35] In re B.W. Alpha Inc., 100 B.R. 831 (Bankr. N.D. Tex. 1988).
[36] The Companies Act 2006, Pt. 26A, s. 901G (5).
[37] In Re DeepOcean 1 UK Ltd., (2020) EWHC 3549 (Ch).
[38] ibid.
[39] ibid.
[40] Radhika Goel, ‘Cramming Down of non-consenting class of creditors: The UK regime’ (2022) 4 Indian Journal of Law and Legal Research <4Issue2IndianJLLegalRsch1.pdf> accessed 25 February 2024.
[41] Simon Jerrum and Rick Brown, ‘Cross-class cram down after DeepOcean: what creditors need to know about the new UK regime’ (Lexology, 20 February 2021) <Cross-class cram down after DeepOcean: what creditors need to know about the new UK regime – Lexology> accessed 25 February 2022.
[42] Insolvency, Restructuring and Dissolution Act 2018, s.70(3).
[43] Mohan Gopalan, ‘ Creditor Schemes of Arrangement and Dissenting Creditor Protection’ (Singapore Academy of Law Journal, 21 August 2018) <JournalsOnlinePDF (academypublishing.org.sg)> accessed 25 February 2024.
[44] Ministry of Corporate Affairs, ‘Invitation of comments from the public on changes being considered to the Insolvency and Bankruptcy Code, 2016’ (File No. 30/38/2021-Insolvency, January 2023) < https://www.mca.gov.in/content/dam/mca/pdf/IBC-2016-20230118.pdf > accessed 25 February 2024.
[45] United Nations Commission on International Trade Law, ‘Legislative Guide on Insolvency Law’ (United Nations publication, 2004) < Legislative Guide on Insolvency Guide (un.org)> accessed 26 February 2024.
[46] Insolvency and Bankruptcy Board of India, ‘Discussion paper on amendments to Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Process) Regulations, 2016’ (November 2023) <Discussion Paper on amendments to CIRP Regulations.pdf (ibbi.gov.in)> accessed 27 February 2024.
[47] Insolvency and Bankruptcy Board of India, ‘The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design’ (November 2015) <BLRCReportVol1_04112015.pdf (ibbi.gov.in)> accessed 27 February 2024.
(Katyayni Singh and Arjit Mishra are law undergraduates at Damodaram Sanjivayya National Law University, Visakhapatnam. The authors may be contacted via email at katyaynisingh@dsnlu.ac.in and arjitmishra@dsnlu.ac.in.)
Cite as: Katyayni Singh and Arjit Mishra, From Right to Dissent to Success of the Resolution Process: Reinforcing Cramdown With Fairness and Equitability, 11th April 2025 <https://rmlnlulawreview.com/2025/04/11/from-right-to-dissent-to-success-of-the-resolution-process-reinforcing-cramdown-with-fairness-and-equitability/> date of access.