Are Dissenting Financial Creditors Adequately Protected Under Section 30(2)(e) Of The Insolvency And Bankruptcy Code (IBC)?

The first check is to verify if the plan was accepted by a minimum of 66% of the CoC members. The second check examines whether the plan meets the conditions specified in Section 30(2) of the IBC. It is important to note that the IBC does not grant the NCLT the authority to modify or compromise the merits of the plan. Therefore, the approval of the plan rests in the hands of the creditors. Moreover, through various judicial decisions, the judiciary has emphasized that the NCLT, as the Adjudicating Authority, is not empowered to question the CoC's decision regarding a resolution plan once it has been adopted.

The Rights of Dissenting Financial Creditors and the Concept of Deemed Approval: An Analysis

Under Regulation 2(1)(f) of CIRPRegulations, 2018, "dissenting financial creditors" are defined as those who voted against the resolution plan accepted by the Committee of Creditors (CoC) or refused to vote for it. Prior to October 2017, there was no requirement for dissenting financial creditors to provide reasons for objecting to or disapproving a resolution plan. The Insolvency and Bankruptcy Code (IBC) does not grant the adjudicating authority the jurisdiction to scrutinize the justifiability of the objections raised by dissenting financial creditors against the recommended resolution plan.

The concept of deemed approval is explained in the Explanation to Section 30(2)(e) of the IBC. It clarifies that if shareholder approval is deemed necessary under the Companies Act, 2013, or any other applicable laws for the implementation of actions under the resolution plan, such approval is considered given and does not violate those laws. The protest by minority shareholders against the resolution plan contradicts the explanation provided in Section 30(2)(e) of the IBC. It reinforces that the CoC has the ultimate authority under the IBC to handle and accept the plan for the resolution of bankruptcy. Shareholders and investors of a financially distressed company are not permitted to participate in the process.

The Supreme Authority rests with the Committee of Creditors

In the landmark case of JaypeeKensington Boulevard v. NBCC (India) Ltd., the Supreme Court emphasized the supremacy of the Committee of Creditors (CoC) in relation to resolution plans. The Court ruled that Adjudicating Authorities cannot interfere with the CoC's commercial decision-making process. The Adjudicating Authority lacks the power to modify or alter a resolution plan approved by the CoC. If any flaws are found in the plan, the Adjudicating Authority can only refer it back to the CoC for reconsideration. This principle was reaffirmed in the case of K.Sashidhar v. Indian Overseas Bank & Ors., where it was observed that the Adjudicating Authority (NCLT) has no jurisdiction to question the justifiability of the financial creditors' decision to accept or reject a resolution plan. The commercial decisions made by financial creditors are entirely unrestricted, and the Adjudicating Authority has no grounds to challenge them.

• Cross-Class Cram down Provision in UK and its impact on dissenting creditors

The UK government passed the Corporate Insolvency and GovernanceAct 2020 (CIGA 2020) on 25th June 2020. This Act comprises two categories of measures: permanent changes aimed at modernizing the UK insolvency framework, and temporary provisions intended to provide support to businesses during the ongoing pandemic. One significant provision known as the "cross-class cram down" is in the context of helping financially distressed companies struggling with debt obligations. The authority to approve a restructuring plan presented as a compromise or arrangement is granted to the court by Section 901F, which is part of Part 26A of the Companies Act 2006 Act. This provision was inserted through Schedule 9 of CIGA. Under this Act:

1. Restructuring Plan: CIGA 2020 allows financially distressed companies to propose a restructuring plan for their debts and obligations. This plan requires approval from creditors and court sanction.
2. Court Sanction: Before implementation, the court reviews the proposed plan to ensure it is fair and equitable for all parties, including creditors. The interests and rights of different creditor classes are considered.
3. Creditor Voting: Creditors have the opportunity to vote on the restructuring plan. Creditors are grouped into classes based on their rights and interests. Each class votes on approving the plan.
4. Cross-Class Cram Down: Notably, CIGA 2020 includes the "cross-class cram down" provision. This allows the court to impose the restructuring plan on dissenting creditors who voted against it. If the court determines the plan is fair and equitable despite creditor objections, it can be imposed on them.
5. Fair Assessment: The court evaluates the restructuring plan to ensure fairness and equity for all parties involved. Factors considered include the financial interests and treatment of each creditor class, the plan's advantages compared to alternative options, and balancing the interests of creditors.

The cross-class cram down provision grants the court the power to sanction and impose a restructuring plan on dissenting creditors, even if they voted against it. This allows the court to override the objections of dissenting creditors if it determines that the plan is fair and equitable. In contrast, the IBC code does not explicitly provide the adjudicating authority the jurisdiction to scrutinize the justness of the reasons given by objecting financial creditors for rejecting a resolution plan.

When can an approved Resolution Plan under IBC be challenged?

During the Corporate Insolvency Resolution process, a Resolution Plan approved by the Adjudicating Authority can be challenged only on limited grounds specified in Section 30(2) or for material irregularity in the exercise of powers by the Resolution Professional. However, even with the consent of the Committee of Creditors (CoC), any material irregularity in the Resolution Professional's exercise of authority cannot be considered a matter of Commercial Wisdom.

In the case of Kotak Investment AdvisorsLimited v. Mr. Krishna Chamadia & others, the Supreme Court observed that the acceptance of a Resolution Plan depends on the CoC's business decision. However, the CoC does not have the authority to endorse unlawful actions during the Corporate Insolvency Resolution Process. On the other hand, in the case of K. Sashidhar, it was held that the CoC's commercial wisdom is given significant importance for the specified steps to be completed within the timeframes set by the Insolvency and Bankruptcy Code (I&B Code), without interference from the court.

It is assumed that financial creditors are well-informed about the viability of the corporate debtor and the validity of the recommended resolution plan. A team of experts examines and assesses the proposed resolution plan before taking action. The collective decision of the CoC, reached after thorough discussions in their meetings and voting according to their respective shareholdings, constitutes a corporate decision.

It should be noted that the reasons provided by the financial creditors and their collective decision before the adjudicating authority do not provide grounds for questioning the "commercial knowledge" that has been deliberately provided by the legislature.

What are the remedies available to dissenting financial creditors?

For creditors who hold valid security interests in their debt, dissenting financial creditors may be entitled to receive payment by allowing them to enforce their security interests up to the amount owed and in the order of priority available to them. This satisfies the conditions of Section 30(2)(b) of the Insolvency and Bankruptcy Code (IBC).

The Supreme Court, in the case of IndiaResurgence ARC Private Limited v. M/s. Amit Metaliks Limited & Anr., highlighted the importance of Section 30(2) of the IBC. According to this provision, objecting financial creditors must be paid an amount defined in terms of the proceeds of assets payable under Section 53, and this payment must be made before other creditors, as specified in the second part of clause (b) of Section 30(2) of the Code.

Alternatively, the right of an objecting financial creditor to receive the amount payable can be fulfilled by allowing them to enforce their security interest up to the value they are owed and in the order of priority available to them. This remedy applies only if the creditor holds a valid security interest. By asserting such a security interest, objecting financial creditors would indeed receive payment under Section 30(2)(b) of the Code, thereby meeting the criteria set forth in that section. However, the Supreme Court clarified that if an objecting creditor has access to a security interest, they do not have the authority to exercise the entire security interest or recover the full value of the security.

Through the analysis of these case laws, it is evident that the Committee of Creditors (CoC) holds the ultimate authority in making commercial decisions regarding the resolution plan, surpassing the jurisdiction of the adjudicating authority. This limits the scope of NCLAT. Section 61(3) of the Insolvency and Bankruptcy (I&B) Code specifies that the NCLAT can only examine challenges based on reasons "other than" questioning the financial creditors' autonomy or commercial judgment.

Additionally, as per the October 2017 notification, the I&B Code and its associated procedures do not require objecting financial creditors to provide recorded reasons for rejecting a resolution plan. The concept of deemed approval, explained in Section 30(2)(e), further restricts the influence of objecting shareholders, granting them limited authority in the process.

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