India: Voting Percentage Under Insolvency And Bankruptcy Code: All You Need To Know About Its Calculation

'Absent Sir/Ma'am' used to be a simple phrase that merely denoted that a person is absent from any gathering where he was supposed to be. However, in the context of the Insolvency and Bankruptcy Code, 2016 ("Code") this simple phrase has serious implications on the ability of the members of the committee of creditors ("Members") ("CoC") to reach a decision which could pass muster of the 66% voting requirement laid down by the Code, including the context of serious issues like change of resolution professional or approval of a resolution plan.

Background

It is observed that the Code and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 ("Regulations") have omitted to provide a basis for calculation of votes casted by the Members, meaning, that there is no specific provision basis which the votes which are casted and the number of Members casting the votes can be calculated in the following foreseeable scenarios:

Scenario 1:

A Member is present, either in person or by video conferencing or other audio and visual means at the CoC meeting ("Present") and the Member casts a vote in favour of a resolution;

Scenario 2:

A Member is absent from the CoC meeting, can the Member still vote?; and

Scenario 3:

A member is Present at the CoC meeting however, the Member abstains from voting on a resolution. ("Possible Scenarios").

In view of the above, in case of Scenario 1, which is fairly simple it appears that the Member's vote would be calculated in the total number of votes casted in the denominator and the vote would be counted as yes in the numerator for the purpose of calculating the votes casted in favour of the resolution. However, ambiguity arises in Scenario 2 and Scenario 3 which are the defining theme of this article and are analysed below.

Analysis regarding Scenario 2:

In this regard, reference is made to the judgment dated February 4, 2019 passed by the National Company Law Appellate Tribunal ("Hon'ble NCLAT") in the matter between Tata Steel Limited v. Liberty House Group Pte. Ltd.& Ors.(Company Appeal (AT) (Insolvency) No. 198 of 2018) ("Liberty House Order"), wherein it was observed that, "If some members of the 'Committee of Creditors' having 2.88% voting shares remained absent, it cannot be held that they have considered the feasibility and viability and other requirements as specified by the Board, therefore, their shares should not have been counted for the purpose of counting the voting shares of the Committee of Creditors. In fact, 97.12% voting shares of members being Present in the meeting of the 'Committee of Creditors' and all of them have casted vote in favour of 'JSW Steel', we hold that the 'Resolution Plan' submitted by 'JSW Steel' has been approved with 100% voting shares."

Further, vide order dated June 10, 2019 passed by the Hon'ble NCLAT in the matter between IDBI Bank Limited v. Mr. Anuj Jain, IRP, Jaypee Infratech Ltd. and Anr. (Company Appeal (AT)(Ins) No. 536 of 2019) ("Jaypee Order") it was held that, "We make it clear that if any of the 'Financial Creditor' remains absent from voting, their voting percentage should not be counted for the purpose of counting the voting shares, as held by this Appellate Tribunal in 'Tata Steel Ltd. vs. Liberty House Group Pte. Limited & Ors.'"

We understand from the Liberty House Order and the Jaypee Order that the votes of those Members who were absent from the CoC would not be taken into account for calculating the voting percentage and thereby, not included in the denominator. Further, in terms of Regulation 25 (3) of the Regulations, "The resolution professional shall take a vote of the members of the committee present in the meeting, on any item listed for voting after discussion on the same", it appears that the Members Present in the CoC meeting can only vote. This understanding might be tainted as often the same resolution is discussed over the course of several CoC meetings and it seems rather unfair if a Member who has attended the various CoC meetings wherein the same resolution was deliberated upon is prohibited from voting on the resolution because the Member failed to attend that single CoC meeting pursuant to which the voting on the said resolution took place. However, it may be argued that in order to achieve the timelines prescribed in the Code and in view of the practical limitation, the intent of the Liberty House Order and the Jaypee Order, would indeed be to limit the voting by Members who are Present in the CoC.

We understand that the Liberty House Order and the Jaypee Order revolved around the voting on the approval of resolution plans. The Liberty House Order seems to suggest that the Hon'ble NCLAT had made the above referred observation placing reliance on Section 30 (4) of the Code, which reads as, "The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent of voting share of the financial creditors, after considering its feasibility and viability, and such other requirements as may be specified by the Board." At the cost of making a fallacy, it may be argued that there might be a suggestive indication distinguishing voting on a resolution plan as opposed to other resolutions, as Section 30 (4) of the Code clearly mandates consideration in reference to resolution plans.

Further, the Supreme Court of India vide judgment dated February 5, 2019 in the matter between K. Sashidhar v. Indian Overseas Bank & Ors. (Civil Appeal No. 10673 of 2019) ("SC Judgment "), observed that, "For that, the "percent of voting share of the financial creditors" approving vis à vis dissenting is required to be reckoned. It is not on the basis of members present and voting as such. At any rate, the approving votes must fulfill the threshold percent of voting share of the financial creditors." In view of the SC Judgment, inference may be drawn that the SC Judgment overrules the Liberty House Order and suggests that the percent of voting sharing is "not on the basis of members present and voting". However, the treatment of votes in the numerator and denominator basis the observation "not on the basis of members present and voting" is still not clear. At this juncture, it is pertinent to observe that the Jaypee Order was passed subsequent to the SC Judgment , however the Jaypee Order relies only upon the Liberty House Order and it can therefore be assumed that the Hon'ble NCLAT is of the view that the SC Judgment was limited to its facts.

For the sake of argument, we may say that the above cited observation from the SC Judgment primarily dealt with the minimum threshold requirement of votes (which is clearly provided for in the Code), therefore, the observation "not on the basis of members present and voting" appears to be in relation to meeting the minimum threshold requirement which remains constant in terms of the Code. The SC Judgment appears to be explaining that the threshold requirement is unaffected by the members Present and voting.

Analysis regarding Scenario 3:

In this regard, reference is made to Regulation 25 (4) of the Regulations which provides that, "At the conclusion of a vote at the meeting, the resolution professional shall announce the decision taken on items along with the names of the members of the committee who voted for or against the decision, or abstained from voting" and Regulation 26(4) of the Regulations provides that, "At the conclusion of a vote held under this Regulation, the resolution professional shall announce and make a written record of the summary of the decision taken on a relevant agenda item along with the names of the members of the committee who voted for or against the decision, or abstained from voting".

In view of the above we understand that a Member may vote for or against a resolution or a Member may abstain from voting. However, this opens several questions, firstly, regarding the inclusion or exclusion of the votes of those who abstained from the numerator and the denominator for the purpose of calculation of votes when the Members who abstained were Present at the CoC. Secondly, regarding the inclusion or exclusion of the abstained votes from the numerator and the denominator for the purpose of calculation of votes when the Members who abstained were absent from the CoC.

As regarding the voting by authorized representatives, Section 25A (3) of the Code, stipulates that, "The authorised representative shall not act against the interest of the financial creditor he represents and shall always act in accordance with their prior instructions [...] Provided further that if any financial creditor does not give prior instructions through physical or electronic means, the authorised representative shall abstain from voting on behalf of such creditor." In view of this the Code seems to have envisaged this as the only situation in which there could be abstention from voting, namely, in cases wherein the authorized representative has not received instructions from the financial creditor, elsewhere in the Code and the Regulations, although the term abstained has been used, however, no circumstances for abstention from voting have been provided for. Therefore, thirdly, whether the "abstained from voting" is to be limited to cases in terms of Section 25A (3) of the Code.

In the order dated September 29, 2018 passed by the National Company Law Tribunal, Principal Bench in the matter between Nikhil Mehta & sons (HUF) & Ors. v. M/s. AMR Infrastructure Ltd. (C.P (IB)-02(PB)/2017) ("AMR Order") it was observed that, "The facts reveal that out of total number of 'voting shares' of the financial creditors only 52.78 percent concerning appointment of IRP as RP have actually voted and out of 52.78 percent only 32.56 percent voted in favour of appointing an interim resolution professional as resolution professional" from the AMR Order, we understand that for the calculation of the total votes, in the denominator, the total voting shares was taken and not only those votes which were actually casted, further in the numerator only votes casted in favour of resolution was taken. Although, the AMR Order provides clarity that, for the calculation of total votes, in the denominator, majority vote is to be taken i.e. total share of votes whether actually casted or not. However, the AMR Order was passed prior to the Liberty House Order, the Jaypee Order and the SC Judgment. Further even in view of the AMR Order, ambiguity regarding abstained votes remains, whether these were abstained by Members Present or absent or in the view of Section 25A (3) of the Code. It may be noted that the AMR Order has been challenged before the Hon'ble NCLAT, although on a different position of law.

In our view, there is an urgent requirement for the authorities concerned to provide clarity and certainty regarding the ambiguity posed in the view of the latest judgements dwelling on the subject regarding the calculation of votes casted by the Members.

Impact

A case in point is that of the corporate insolvency resolution process of Jaypee Infratech Limited, wherein even after two rounds of CIRP, the CoC which comprises of a diverse class of creditors has not been able to achieve the requirement of 66% votes as provided in the Code on several key issues like replacing the resolution professional and approval of resolution plan. In fact the non-institutional Members namely, the Home Buyers appear to have suffered a lot on account of the prevailing ambiguity regarding the calculation of votes. Further, the resolution professional is still continuing even after a vast majority akin to an absolute majority of the Members Present and voting have voted for his replacement only because of the votes of those Members who have remained absent has been counted as 'NO'. In this regard, the Insolvency and Bankruptcy Board of India and the Ministry of Corporate Affairs have filed affidavit before the National Company Law Tribunal, Allahabad Bench in the matter of IDBI Bank Limited v. Jaypee Infratech Limited (C.P. No.(IB) 77/ALD/2017), wherein both have advocated the principle of present and voting.

Model Inter Creditor Agreement

P.S. -The Indian Banks' Association ("IBA") has also chosen to adopt the principle of absent/abstain means

'No' while circulating its model Inter Creditor Agreement ("ICA") in terms of the latest Reserve Bank of India directions dated June 7, 2019 regarding resolution of stressed assets. The impact of such a stand would in all likelihood cause similar ambiguity in implementation of resolution plans for borrowers involving restructuring

The content of this article has originally been published on Ipleaders