Empowering Creditors: A Reformation of Insolvency regime through Preferential Voting

[By Vaibhav Kesarwani & Kamakhya Nadge]

The authors are students of Gujarat National Law University, Gandhinagar.



In the realm of the Insolvency and Bankruptcy Code, 2016, one of the most common contentions of the stakeholders regarding the resolution process has always been either lesser value realization after the process is over or the high amount of time taken for the completion of the process which is much longer than what is prescribed under the law.

With the release of the IBBI Discussion Paper on June 07, 2023, the board has proposed introducing a “Preferential Voting Method” to ensure that the preference of the Plan is captured and the creditors can vote freely. The introduction of preferential voting represents a pivotal shift, offering creditors a powerful tool to shape the outcome of insolvency proceedings. Unlike the existing binary voting system, preferential voting allows creditors to rank their preferences on received bids, opening the door to a more nuanced and comprehensive evaluation process.

According to this method, the Committee of Creditors (COC) provides preference to all the resolution plans that are received, and then the plans are scrutinized according to the first preference of the COC; if no plan has achieved the required 66% votes of the COC, as required under section 30(4) of the Code, the Plan with least first preference is eliminated. Its first preference is allocated to the second preference. Thereby the process continues till one Plan has secured the required majority. However, if no plan secures the 66% threshold after the Preferential voting process is complete, it can be said that no plan was accepted by the COC. The Preferential Voting Method entails an iterative approach where preferences are reallocated until a plan secures the necessary majority. This iteration further involves keeping track of multiple preferences and reallocation that prolong the decision-making process and increase the complexity of arrival at a final resolution. Despite this complexity, Preferential Voting successfully reduces the burden of NCLT and, at the same time, provides flexibility to the creditors.

This article delves into the paramount importance of implementing preferential voting in insolvency proceedings, exploring its potential to enhance creditor empowerment, drive transparency, and optimize value recovery. By examining both domestic and foreign jurisprudence, the authors have attempted to glean valuable insights into the benefits, challenges, and best practices associated with this progressive approach and, at the same time, navigate the dynamic landscape of insolvency, where preferential voting emerges as a catalyst for equitable and efficient decision-making in an ever-evolving economic environment.

Advantages of Implementation of Preferential Voting in Insolvency Proceedings

Enhanced Creditor Expression

Traditionally, the Creditors used to vote in favour of all the IBC complaint resolution plans to prevent the corporate debtor from ending in liquidation, leaving the creditors with little to no relief. This was more common for cases concerning the Real estate, as the real estate allottees had to experience huge losses if they became dissenting creditors. Consequently, the corporate debtor went into liquidation due to not crossing the 66% threshold.

The proposed framework would successfully solve this problem and allow the creditors to vote according to their preference and ensure that the Plan which is most beneficial to them is accepted.

The method of preferential voting unleashes a nuanced decision-making process that expands the scope of evaluation from the binary system to a robust and comprehensive analytical approach that empowers the creditors to express their preference in the proposed resolution plans. With this process, the creditors can assess each resolution plan’s relative merits and drawbacks, allowing for more informed choices that align with their individual priorities. By unleashing this heightened level of scrutiny and discernment, preferential voting maximizes the potential for value optimization. It fosters a fair and transparent decision-making environment that upholds the interests of all parties involved.

Flexibility and Informed Decision Making

The proposed priority-based method for evaluating the Resolution plan enables the creditors to make an informed choice before accepting the resolution plan. It prevents the plans from going under liquidation if the concerned creditor does not individually prefer a particular resolution plan. For instance, if creditor A wanted to prefer Resolution Plan 1 and dissent from Resolution Plan 2, he/she would be forced to vote for both plans without any preference to prevent himself from being a dissenting creditor and the company from going under liquidation. The priority voting method gives a multi-dimensional approach to evaluating creditors and empowering them to optimize value recovery without worrying about the company going under liquidation if they dissent from the resolution plan.

The introduction of preferential voting enables creditors to tailor their decision-making process based on their unique priorities and objectives. Creditors can rank bids according to various criteria, such as maximizing financial recovery, preserving jobs, or promoting sustainable business practices. This customization ensures that value recovery aligns with the specific needs and goals of creditors within the IBC framework.

The economic environment in India encompasses a wide range of industries and businesses, each with its complexities and challenges. Preferential voting recognizes this diversity and allows creditors to adapt the decision-making process accordingly. By expanding flexibility, creditors can assess bids based on industry-specific factors, operational considerations, or market dynamics, thereby optimizing value recovery in line with the intricacies of the Insolvency and Bankruptcy Code, 2016.

Promoting Fairness and Transparency

The introduction of preferential voting can provide an equitable approach to creditors by eliminating any potential bias or favoritism of a resolution plan by the other creditors. The ranking of the resolution plan provides a transparent view of how the creditors perceive and evaluate different plans, and this visibility not only fosters accountability among creditors but also facilitates an open and informed dialogue between stakeholders, contributing to greater trust and credibility in the insolvency process. It levels the playing field by taking the individual preference of each creditor.

With the preferential voting framework, the Creditors, investors, and other stakeholders can have greater faith in the decision-making outcomes, knowing that their interests are being considered fairly and transparently. This increased confidence not only supports the smooth functioning of insolvency proceedings but also attracts greater participation and investment in the Indian legal system as a whole. The introduction of Preferential voting will be a forward step towards a robust and inclusive Insolvency framework in India.

Comparative Analysis of Foreign Jurisprudence

Although the preferential voting of the resolution plans has been proposed in India for the first time, it is an already established framework in many jurisdictions. The UK Insolvency framework, under its robust mechanism called “Creditor Decision Procedure,” provides for preferential voting of the Resolution Plan, which promotes active participation of the creditors.

Just like the proposed framework in India, the UK’s Corporate Insolvency and Governance Act 2020 also provides the opportunity to evaluate and rank different resolution plans. This ranking allows them to express their preference for each Plan, reflecting their assessment of the feasibility, value, and potential benefits associated with each proposal. Once creditors have ranked the proposals, the votes are tabulated and analyzed to determine the outcome. The Plan that receives the highest level of approval from the creditors, based on their preferences, is typically deemed as the preferred resolution plan. Although the preferential voting of the Resolution Plan is pre-established in the UK, the proposed mechanism by IBBI provides for the exclusion of the Plan with the least votes and allocation of the first preference of that Plan to the second preference. This enables the proposed framework by IBBI adds to be workable in accordance with the Indian Insolvency framework, which provides that a minimum of 66% of the COC should vote for the Plan.

Contradictory to the foreign laws that have implemented the preferential voting of resolution plans, the US Insolvency regime sticks to the traditional mode of voting where the creditors are presented with competing resolution plans and the Plan that receives the highest approval by creditors, based on their claims’ value, is typically confirmed by the creditors followed by the court. The reason for the same is an extensive complication with the preferential voting mechanism, which forces the creditor to accept one of the proposed resolution plans.


In conclusion, although the introduction of Preferential voting in insolvency proceedings can be a pivotal advancement in the decision-making process of the COC, the framework at the same time is “complicated.” It amounts to the creditors forcefully approving one of the resolution plans. The IBBI can still keep the provision of “dissenting from the plan” open for creditors who do not want to accept any of the proposed resolution plans.

Although certain amendments have to be made before the implementation of the framework, the adoption of preferential voting stands as a progressive step towards equitable and effective decision-making of the Creditors as the global landscape of insolvency evolves. This approach enhances transparency, promotes fairness, and empowers stakeholders by allowing creditors to rank resolution plans based on their preferences. At the same time, it heralds a new era of transparency, accountability, and value optimization in insolvency proceedings, fostering trust among stakeholders and driving the success of the overall insolvency framework.


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