When a company defaults on loan repayment, there are various possibilities - the debt could be restructured, the business could be sold as a going concern or the company could be liquidated. The crucial policy question here is: who should make this decision about the company's future? Traditionally, Indian laws have brought an arm of the state - judiciary or executive - to bear on this decision. The Bankruptcy Law Reforms Committee (BLRC) broke away from this tradition and recommended that: when 75% of the financial creditors agree on a resolution plan, this plan would be binding on all the remaining creditors. If, in 180 days, no resolution plan achieves the support of 75% of the financial creditors, the company goes into liquidation. Effectively, no judge or bureaucrat is to substitute for the commercial wisdom of a super-majority of financial creditors. The Parliament adopted this legislative design and enacted the Insolvency and Bankruptcy Code, 2016 (IBC). Recently, the Hyderabad bench of NCLT in K. Sashidhar v. Kamineni Steel shifted this position of law.
The NCLT held that even if the committee of creditors (CoC) fails to approve a resolution plan with 75% of voting share, the tribunal could approve the resolution plan. In short, the future of an insolvent company will be determined not by the commercial wisdom of the CoC but by the tribunal. This decision is not only antithetical to the original legislative intent behind IBC, it also militates against the plain language of the statute.
Kamineni Steel went into insolvency resolution in February 2017. The resolution plan proposed by the resolution professional (RP) was supported by financial creditors who had 66.67% of the voting power. The remaining financial creditors with 33.33% voting power did not support the plan. They preferred liquidation. According to them the liquidation value of the company was higher than the enterprise value. Faced with the threat of imminent liquidation under IBC, the RP approached the NCLT to approve the resolution plan supported by only 66.67% votes.
The company had also been undergoing the Joint Lender's Forum (JLF) process under the aegis of RBI. Before IBC was enacted, RBI had issued the JLF Guidelines in 2014. These Guidelines provided that on payment default by a corporate debtor in a consortium lending arrangement, the lenders were required to form a JLF to explore options to resolve the stress of the debtor. Any restructuring decision agreed upon by 75% of creditors by value and 60% of creditors by number in the JLF would be binding on all lenders. To facilitate timely decision making by the JLF, on May 5, 2017, RBI issued another notification lowering this threshold to 60% of creditors by value and 50% of creditors by number in the JLF.
The RP of Kamineni Steel relied on the 2017 RBI notification to argue before NCLT that since 60% of creditors by value can make binding decisions in JLF, a resolution plan under IBC supported by the same 60% should also be adequate. NCLT agreed with this argument and approved the resolution plan of Kamineni Steel supported by only 66.67% creditors.
Analysing the judgement
The judgement was broadly based on three legal arguments.
It relied on section 30(4) of IBC which states:
The committee of creditors may (emphasis added) approve a resolution plan by a vote of not less than seventy five per cent of voting share of the financial creditors.
The tribunal held that since the legislature used the word "may" instead of "shall" in section 30(4), the 75% vote rule is not mandatory. The potential consequence of using "shall" in this sub-section has been overlooked in this argument. Had the legislature used "shall" instead of "may" here, it would have meant that in every case the CoC was mandatorily required to approve any resolution plan submitted to them by the RP. That is not the intent of the law. The intent of the law is to let the CoC and not the RP decide the future of the insolvent company and to give the CoC the discretion to approve or reject a resolution plan. This discretion is reflected in the use of the word "may" in section 30(4). In other words, the use of the word "may" is intentional because not every resolution plan submitted by the RP needs to be approved by the CoC. This reasoning has also been supported by Professor Varottil.
Secondly, the word "may" does not dilute the 75% rule either. Section 30(4) of IBC uses the language, "...committee of creditors may approve (emphasis added) a resolution plan by a vote of not less than seventy five per cent of voting share of the financial creditors". This implies that if the CoC chooses to approve the resolution plan, then the plan can only be approved if it has at least 75% vote of the CoC.
Finally, section 30(6) of IBC states:
"The resolution professional shall submit the resolution plan as approved (emphasis added) by the committee of creditors to the Adjudicating Authority .
This implies that if the resolution plan has not been approved by the CoC (by at least 75% voting share as mentioned in section 30(4)), then it should not be submitted to the adjudicating authority by the RP.
If the relevant provision in IBC were ambiguous, the appropriate external aid to statutory interpretation would have been the BLRC report. For example, the Supreme Court in M/s. Innoventive Industries Ltd. v. ICICI Bank, heavily relied on the BLRC report to interpret various provisions of the IBC. The report would have provided clarity to the legislative intent behind section 30(4). The judgement did not make any reference to the report.
The judgement relied on section 31(1) of IBC which states:
If the Adjudicating Authority is satisfied (emphasis added) that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.
NCLT used a broad interpretation of the words "if the Adjudicating Authority is satisfied" in this sub-section to give itself the power to approve any resolution plan which has not been approved by 75% of creditors by value. This argument overlooks the fact that section 31(1) is triggered only after a resolution plan has been approved by the CoC by 75% vote. If the resolution plan has not been so approved, the need for NCLT to check if the resolution plan meets the requirements of section 30(2) does not arise. In the case at hand, since the CoC did not approve the resolution plan of Kamineni Steel by 75% vote, the NCLT could not have used its power to review under section 31(1).
The judgement held that since IBC is a new law and RBI as a banking regulator has issued guidelines governing the voting share of banks, the 75% rule in IBC has to be read in conjunction with RBI's circulars.
There is an inherent problem in this argument. JLF is conceptually based on the London Approach - a non-statutory informal workout mechanism originally developed by the Bank of England since 1970s. In India, the process is guided by notifications issued by RBI under the Banking Regulation Act, 1949. Only lender banks can participate in this process. In contrast, IBC is a formal statutory mechanism for collective insolvency resolution. Unlike JLF, all financial creditors, including non-banks, can vote in the IBC creditors' committee. JLF and IBC provide for different procedures under two different statutes. In the event of any conflict between a subordinate legislation under the Banking Regulation Act, 1949 and the IBC, the IBC being a parliamentary legislation should have overriding effect.
The judgment of K. Sasidhar v Kamineni sets a wrong precedent in the nascent Indian corporate insolvency law jurisprudence. If the dissenting creditors appeal this decision before the relevant appellate tribunal it is likely to be overturned. It is worth noting here that the Mumbai bench of NCLT in a subsequent decision has taken an opposite stand, as highlighted by professor Varottil. The K. Sasidhar v Kamineni judgement should nudge Indian policymakers to consider two issues.
First, in light of IBC, policymakers need to question the rationale for retaining JLF. Even if they choose to retain it, there must be concrete reasons for vital differences between the two procedures. For instance, policymakers need to ask why should there be two different percentage requirements - 60% under JLF and 75% under IBC?
Second, the role of the resolution professional in an insolvency proceeding needs to be reviewed. In the Kamineni case, without securing 75% votes by value of financial creditors, the RP should not have submitted the resolution plan to the adjudicating authority in the first place. Policymakers need to explore institutional reforms to ensure that RPs act in an unbiased manner, like an officer of the court who the adjudicating authority can rely upon.
Rajeswari Sengupta is an Assistant Professor at the Indira Gandhi Institute of Development Research. Pratik Datta is a Chevening Weidenfeld Hoffmann scholar at University of Oxford. The authors thank two anonymous referees for their comments.