[By Rahul Ranjan]
The author is a student of National Law University, Odisha.
Introduction
The Insolvency and Bankruptcy Code (IBC), introduced in 2016, addressed the issue of financial distress for corporate entities, partnerships, and individuals by offering a time-bound framework for resolving insolvency. The 2015 BLRC report highlights that one of the core principles behind the design of the code is to ensure a Collective Process. Thus, the code aims to discourage individual actions that benefit only specific creditors at the expense of broader benefits for all creditors.
However, despite the inherent design of the code requiring creditor participation in a collective approach to liability restructuring through negotiation, before the second amendment which inserted Section 12A to the IBC, the code did not have any provisions that provided for the withdrawal of the Corporate Insolvency Resolution Process (CIRP) application after its admission before the Adjudicating Authority (AA) by a collective decision of the Committee of Creditors (CoC).
In this post, the author attempts to analyse Section 12 A of the code in the context of a recent NCLAT decision. An argument has been raised for collective decision-making under this section based on a comprehensive understanding of the intent behind the Act and its subsequent amendment.
Recent NCLAT’s decision
In Vijay Saini v Shri Devender Singh & Ors., the NCLAT, recently dealt with a case wherein an application under Section 12A was submitted by the respondent before the CoC. The proposal was supported by 40.15% votes of Financial Creditors in a class and Punjab National Bank which held 12.42% votes. Upon analysis of the results, the Resolution Professional concluded that the total votes in favour of the proposal are 52.57%, falling short of the 90% mark as stipulated under Section 12A. An application was filed eventually before the AA which in turn held that home buyers are to be treated as a class for all purposes including approval of a plan under Section 12A and consequently, the procedure under Section 25A(3A) ought to have been followed.
The question before the NCLAT was the manner in which voting with respect to an application under Section 12A needs to be computed.
At first, the Tribunal referred to the case of Swiss Ribbons Pvt. Ltd. vs Union Of India, wherein the Supreme Court explained the rationale of the 90% threshold and reiterated the Insolvency Law Committee 2018 (ILC) Report which held that reaching consensus among all financial creditors is crucial for permitting individual withdrawals because an ideal outcome is a comprehensive settlement encompassing all parties involved. Thus, a substantial majority of 90% is required to approve such withdrawals, reflecting the collective interest of the creditors. Thereafter, it referred to the provisions under the IBC and held that the proviso to sub-section 3A brought in a different voting process for Section 12A.
Under Section 25A (3A) it has been provided that the Authorised Representative (AR) under Section 21(6A) shall vote on behalf of all represented financial creditors based on the decision reached by a majority vote (over 50%) of those creditors who participated in the voting process but for applications submitted under Section 12A, the AR must vote as per the provisions of Subsection (3) which in turn provides that AR must act in the best interests of each represented creditor, in accordance with their instructions and vote based on their proportionate voting share, fulfilling the requirement of 90% as stipulated therein.
Scope for Collective Decision Under Section 12A
Though the tribunal rightly acknowledged the effect of the proviso under Section 25A(3A), it missed an opportunity to touch upon the scope of expanding the collective approach under Section 12A.
The rationale behind Act No. 26 of 2018, as outlined in its Statement of Objects and Reasons (SOR), was the need for further refinement of the IBC. This refined approach in the form of Section 12A underscores the shift from a creditor-debtor-specific proceeding to one encompassing all creditors of the debtor, as envisaged by the IBC. By discouraging individual actions for enforcement and settlement that prioritize individual benefits over the collective good, the IBC aims to ensure a more equitable outcome for all creditors. The Lok Sabha debates that occurred before the insertion of Section 25A relied on the 2018 report and explained the rationale behind the amendments brought in through the IBC (Amendment) Bill, 2019 which aimed to ensure the expeditious admission and completion of CIRP cases. Additionally, they seek to address the issue of voting deadlock, which has arisen in certain situations.
Furthermore, upon perusal of the provisions for AR, it can be seen that these have been inserted based on the recommendations of the 2018 report itself which in turn acknowledged that though the Code strives for greater participation by all CoC members in decision-making during meetings, large CoCs present significant logistical hurdles which can thus, be addressed through the use of ARs.
When the AR votes under the Section 12A, they must adhere to sub-section 3. But it should be noted that this sub-section unlike sub-section 3A does not explicitly provide for making decisions reached by a majority vote, however, it does not rule it out either. AR thus, should be able to make the collective decision after considering individual opinions of all creditors as directed under sub-section 3. This interpretation is in line with the principle of the Collective Process of the IBC. When the number of creditors in the CoC exceeds a certain threshold in number, a reduced percentage of votes can be prescribed, being subject to legislative domain. Thus, upon securing such a reduced percentage of votes, the AR after considering the individual opinions of all the creditors should be allowed to make a collective vote. This style of voting will enhance the effectiveness and efficiency of the withdrawal process as it will enable the swift elimination of resolution plans that do not resonate with a specified percentage of creditors. This allows for more timely amendments and the introduction of new plans that better reflect the inclusive interests of all creditors, thereby expediting the completion of the CIRP process.
Conclusion
The IBC since its inception has strived for a collective approach to deal with insolvency issues aiming for the general benefit of all stakeholders. The Parliament through amendments to the IBC has asserted its commitment to further the efficiency and effectiveness of the processes involved in the code, be it through the insertion of provisions for AR or bringing in Section 12A. To serve this objective, one of the inherent principles of the IBC being principle of Collective Process has continued to be relied upon. Thus, on similar lines, the Legislature after consultation with relevant authorities should prescribe the threshold for the number of creditors as well as the percentage of voting to create an avenue for collective voting for the purposes under Section 12A of the IBC to fasten the CIRP process without compromising with the efficiency and effectiveness of the process.