The Insolvency and Bankruptcy Board of India ("the Board") has recently amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, ("Regulations") by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Fourth Amendment) Regulations, 2018 ("Amendment") notified on 5th October, 2018. We examine how the Amendment impacts operational creditors and whether the ongoing concern of operational creditors with relation to the quantum of their dues has been addressed by the Board.
The Amendment states that Sub-regulation 38(1) of the Regulations stands replaced by the following clause: "The amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors."
The Erstwhile Regulation 38(1)
Originally, Regulation 38(1) required a resolution plan to mandatorily provide the source of funds for the liquidation value due to operational creditors. It then provided that;
- such liquidation value ought to be paid in priority to payments to any financial creditor; and
- such payment has to be made within 30 days from the approval of the resolution plan by the adjudicating authority.
In our view, the liquidation value was the bare minimum which had to be paid to operational creditors under the resolution plan in priority and within 30 days from the approval of such resolution plan. Further payments could undoubtedly be made to operational creditors though the same were not compulsorily required to be made in priority.
The amended Regulations now simply state that a resolution plan should mandatorily provide that the amount due to operational creditors under a resolution plan shall be given priority in payment over financial creditors.
There is no minimum amount prescribed for payment to operational creditors under the amended Regulations. However, Sub-section 30 (2)(b) of the Insolvency and Bankruptcy Code, 2016 ("Code") in any event requires the resolution professional to confirm that the resolution plan provides for the payment of debts of operational creditors which should not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under Section 53 of the Code. Therefore, the minimum prescribed amount due to operational creditors remains unchanged and the interests of operational creditors, to the extent of the liquidation value of the amounts due to them, remain protected under the Code.
The main change brought about by the Amendment, is that now all payments due to operational creditors as contemplated under a resolution plan, and not just the minimum prescribed amount, have to be made in priority to financial creditors.
Since operational creditors are still excluded from the CoC, the quantum of their dues, which are payable under a resolution plan and which are now prioritised, is still subject to the approval of only the Committee of Creditors ("CoC").
We note here that there is no fiduciary duty on the CoC to act in the best interest of all stakeholders including the operational creditors. There is no provision which statutorily permits the NCLT to reject a resolution plan on the grounds of inequity or any discrimination against a particular class of stakeholders. The only option available to operational creditors then is to file challenges before the tribunals and courts which causes delays and uncertainties.
Given that all payments due to operational creditors are now prioritised to any payment due to financial creditors, the question that arises is, would a CoC now be more inclined to reduce the amount of such payments? Additionally, would a CoC now be justified in reducing the pay-outs to the claims of operational creditors since financial creditors have to wait longer for their pay-outs and thus need to be adequately compensated for such risk?
The CoC (comprising of only financial creditors) can still, at its absolute discretion, without any statutorily prescribed fiduciary duty, decide on the amounts payable to operational creditors under a resolution plan.
While the efforts of the Board in dealing with the problems of operational creditors are laudable, a look is perhaps needed at the actual mischief and defect that exists, that the Code and Regulations do not provide for, and whether the present Amendment is in any way a step towards remedying it?
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