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

Last Updated: 5 July 2019
Article by Mohit Kishore and Udita Singh

'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

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions