Insolvency Resolution Process When There Exist Only Operational Creditors

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Section 6 of the Insolvency and Bankruptcy Code, 2016 (the “Code”) provides for “Persons who may initiate corporate insolvency resolution process” wherein the financial creditor, operational creditor or the corporate debtor itself, may “initiate the insolvency resolution process”.

An application for insolvency of a corporate debtor or corporate person may be filed under Sections 7, 8 and 9 of the Code by those persons mentioned under Section 6.

Section 21(8) provides that “where a corporate debtor does not have any financial creditors, the committee of creditors shall be constituted and shall comprise of such persons to exercise such functions in such manner as may be specified”

In cases where the corporate debtor does not have any financial creditors or where the financial creditors are “related party” (defined under Section 5(24A)) to the corporate debtor, once the insolvency resolution process has been initiated, a committee consisting solely of such operational creditors can be set up in accordance with Regulation 16 under IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (Amended upto 04.07.2018).

16Committee with only operational creditors

(1) Where the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor, the committee shall be set up in accordance with this Regulation.

(2) The committee formed under this Regulation shall consist of members as under –

(a) eighteen largest operational creditors by value:

Provided that if the number of operational creditors is less than eighteen, the committee shall include all such operational creditors;

(b) one representative elected by all workmen other than those workmen included under sub-clause (a); and

(c)one representative elected by all employees other than those employees included under sub-clause (a).

(1) A member of the committee formed under this Regulation shall have voting rights in proportion of the debt due to such creditor or debt represented by such representative, as the case may be, to the total debt.

Explanation — For the purposes of this sub-regulation, ‘total debt’ is the sum of-

(a) the amount of debt due to the creditors listed in sub-regulation 2(a);

(b) the amount of the aggregate debt due to workmen under sub-regulation 2(b); and

(c) the amount of the aggregate debt due to employees under sub-regulation 2(c).

(d) A committee formed under this Regulation and its members shall have the same rights, powers, duties and obligations as a committee comprising financial creditors and its members, as the case may be.”

Initiation of Insolvency Resolution Process by Operational Creditors

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The Insolvency and Bankruptcy Code, 2016 (the “Code”) allows initiation of an insolvency process, under Section 6 in the prescribed manner, by financial creditors, operational creditors or the corporate debtor itself.

Section 5(20) has defined an ‘operational creditor’ as “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.”

Section 6 of the Code provides for “Persons who may initiate corporate insolvency resolution process” wherein the financial creditor, operational creditor or the corporate debtor itself, may initiate the insolvency resolution process”.

An application for insolvency of a corporate debtor or corporate person may be filed under Sections 7, 8 and 9 of the Code.

Section 8 of the Code provides for the initiation of an insolvency process by an operational creditor. An operational creditor may, on default of non-payment of dues by the corporate debtor deliver a “demand notice” (means a notice served by an operational creditor to the corporate debtor demanding payment) of such non-payment, under Section 8(1).

The corporate debtor shall, within 10 days of receipt of the demand notice, bring to the notice of the Operational Creditor of the “existence of a dispute” under Section 8(2)(a), i.e., the pendency of a suit or arbitration proceeding that was filed prior to the receipt of the “demand notice”, or the payment of “unpaid operational debt” as provided under Section 8(2)(b).

Consequently, in the absence of such payment and non-existence of a dispute between the two, the Corporate Insolvency Resolution Process can be initiated under provisions set out in Section 9 of the Code.

 

Rights of The Directors/Partners of Corporate Debtors to be Present at CoC Meetings

ConferenceRoomOnce the Corporate Insolvency Resolution Process (the “CIRP”) has been initiated under Sections 7, 8 and 9 of the Insolvency and Bankruptcy Code,2016 (the “Code”), the Resolution Professional (the “RP”) shall constitute a Committee of Creditors (the “CoC”) under Section 21 of the Code.

Section 21(2) of the Code states that the CoC “shall comprise all financial creditors of the corporate debtor”.

Section 24 of the Code provides for “Meeting of committee of creditors”, which specifies those who may be present at the meetings of the CoC.

Sections 24(3) & (4) state that the directors, partners and one representative of the operational creditors may be present at the meeting but do not have the right to vote in such meetings.

24. Meeting of committee of creditors

(3) The resolution professional shall give notice of each meeting of the committee of creditors to

(a) members of 1 [committee of creditors, including the authorized representatives referred to in sub-sections (6) and (6A) of section 21 and sub-section (5)];

(b) members of the suspended Board of Directors or the partners of the corporate persons, as the case may be;

(c) operational creditors or their representatives if the amount of their aggregate dues is not less than ten per cent. of the debt.

(4) The directors, partners and one representative of operational creditors, as referred to in sub-section (3), may attend the meetings of committee of creditors, but shall not have any right to vote in such meetings:

Provided that the absence of any such director, partner or representative of operational creditors, as the case may be, shall not invalidate proceedings of such meeting.”

The purpose, of the Code in appointing a Resolution Professional and initiating the CIRP is to take away complete control of the corporate debtor from its board at the time of insolvency. Therefore, the Code has provided for the directors/partners of the corporate board/person to be able to be present at the meetings of the CoC but stated that they would possess no voting rights at such meetings.

Amendment to The Threshold For The Requisite Voting Percentage At CoC Meetings [Insolvency & Bankruptcy Code, 2016, India]

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An Insolvency Law Committee (“the Committee”) was set up on 16th November 2017 to recommend issues to the Government that are arising from implementation of the Insolvency and Bankruptcy Code, 2016 (“the Code”). The Committee in its report (the “Report”) dated 26th March 2018 has made several recommendations for amendments to the Code, including reducing the threshold for the requisite voting percentage, at meetings of the Committee of Creditors (“CoC”), from the previous 75% to 66% for major decisions and the previous 75% to 51% for routine decisions to be made during the Corporate Insolvency Resolution Process (“CIRP”).

In furtherance of the Committee’s report on proposed amendments, the President has signed the ordinance [Ord. No 6 of 2018] to amend the Code.

The high threshold of 75% voting share to make decisions during the CoC meetings was beginning to impede CIRP. After due deliberation on the issue, the Committee on page 45 of the Report agreed that, “to further the stated object of the Code i.e. to promote resolution, the voting share for approval of resolution plan and other critical decisions may be reduced from 75 percent to 66 percent or more of the voting share of the financial creditors. In addition to approval of the resolution plan under Section 30(4), other critical decisions are extension of the CIRP beyond 180

days under section 12(2), replacement or appointment of RP under sections 22(2) and 27(2) and passing a resolution for liquidation under section 33(2) of the Code. Further, for approval of the other routine decisions for continuing the corporate debtor as going concern by the IRP/RP, the voting share threshold may be reduced to 51 percent or more of the voting share of the financial creditors.”

To summarize, the reduction in the requisite voting percentage from 75% to 66% to pass decisions at CoC meetings are:

1.Extension of Time period: The time period for the completion of insolvency resolution process under Section 12(2) can now be extended from 180 days to no more than 90 days which shall not be granted more than once.

2. Appointment or Replacement of resolution professional: The members of the CoC, under Section 22(2), may resolve to appoint the interim resolution professional as the resolution professional or appoint a new one, or may replace the existing resolution professional under Section 27(2).

3. Approval for Certain Actions: Section 28(1) lays down “certain actions” which shall not be “approved by the committee of creditors unless approved by a vote of 66% of the voting shares” as provided under Section 28(3).

4. Submission of Resolution Plan: The CoC, under Section 30(4), shall approve a resolution plan.

5. Initiation of liquidation: The resolution professional shall, under Section 33, intimate the Adjudicating Authority of the decision of the CoC to liquidate the corporate debtor.

The reduction in the requisite voting percentage from 75% to 51% to pass decisions at CoC meetings are:

  1. Section 21(8) states that “Save as otherwise provided in this Code, all decisions of the committee of creditors shall be taken by a vote of not less than fifty-one per cent. of voting share of the financial creditors:”

Below mentioned is the newly inserted Section 12A, which enables the withdrawal of an application for insolvency post admission:

  1. Withdrawal of Application: Section 12A has been newly inserted to allow the Adjudicating Authority to withdraw the application for insolvency under sections 7, 9 or 10, “on an application made by the applicant with the 90% voting share of the committee of creditors”.