ROLE OF ADJUDICATING AUTHORITY IN APPROVING/ REJECTING A RESOLUTION PLAN

By Richa Saraf and Ananya Raghavendra (resolution@vinodkothari.com)

The insolvency resolution process of Binani Cements have been through various ups- and downs. On 19.11.2018, the Hon’ble Supreme Court in the case of Rajputana Properties Pvt. Ltd. v. UltraTech Cement Ltd. & Ors. dismissed Dalmia Bharat’s plea to seek stay on Ultratech’s bid for Binani Cement, upholding the UltraTech Cement’s bid for Binani Cement sale. Previously, on 14.11.2018, the NCLAT had also held UltraTech’s offer for Binani Cement as valid, stating that Dalmia Bharat’s offer was discriminatory against some creditors[1]. Read more

LIQUIDATION PROCESS (SECOND AMENDMENT) REGULATIONS

Richa Saraf and Devisha Dhanuka (resolution@vinodkothari.com)

Pursuant to Notification No. IBBI/2017-18/GN/REG028, dated 27.03.2018, the very first amendment was brought into Regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 w.e.f. 01.04.2018 to permit sale of the corporate debtor as a going concern. The insertion, as aforementioned, was brought in force keeping in view the object with which the Insolvency and Bankruptcy Code, 2016 (“Code”) was formulated, i.e. to provide for an opportunity of revival of the entity under distress.

Read more

PRIORITY OF TAX DUES IN LIQUIDATION?

By Kasturi Chowdhury (resolution@vinodkothari.com)

 

The manner of distribution of the assets of a company during liquidation is fraught with ambiguity and settlement of such claims arising out of it has inconvenienced the parties concerned since the advent of the Insolvency and Bankruptcy Code, 2016 (“Code”).  In a recent ruling, the judgement of the Hon’ble High Court of Hyderabad showed the path to be followed when there arose such conflict regarding priority of settling the dues of the Income Tax authority during liquidation of a Company.

This article essentially deals with the provisions of the Code in juxtaposition to the Income Tax Act, 1961 deliberating upon the judgement of the Hon’ble High Court in the matter of Leo Edibles & Fats Ltd. Vs. The Tax Recovery Officer (Central) IT Dept.(WRIT PETITION No.8560 OF 2018)

FACTS OF THE CASE:

Leo Edibles & Fats Limited, the petitioner in the present case, filed a writ petition with the Hyderabad High Court, against the action of the Sub-Registrar, Erragadda, Hyderabad, in refusing to register its purchase of immovable property, in the liquidation proceedings of VNR Infrastructures Limited (“VNR”),  since the Income Tax Department claimed charge over such immovable property, pursuant to an earlier notice of attachment for non-payment of tax by the corporate debtor, VNR.

Pursuant to the liquidation order of VNR, passed by the National Company Law Tribunal, Hyderabad, the liquidator formed a liquidation estate. Subsequently, the assets of VNR was sold through e-auction, wherein the petitioner was declared as the highest bidder for one of the properties. The petitioner had deposited 25 percent of the total amount due as consideration and was also issued a letter of sale by the liquidator, calling upon it to deposit the balance sale consideration within fifteen days. However, at this point, the petitioner came to know that the property purchased by it was subjected to attachment by the IT Department and therefore, the said petition was moved by the petitioner.

The court had passed an interim order to the effect that the petitioner company should deposit the balance sale consideration in respect of the auction, however, the liquidator was instructed not to disburse any of the amounts pending further orders.

The High Court directed the sub-registrar to register sale of the property in favour of the petitioner and instructed the IT Department to submit its claim before the liquidator, who may consider it, in accordance with the priorities set by Section 53 of the Code.

RELEVANT PROVISIONS OF LAW:

Income Tax Act, 1961:

Section 178 of the Income Tax Act which lays down the mannerism in which the Income Tax Department may recover the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is payable by the company under liquidation. Sub- section (6) of Section 178 further provides the following:

“The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force”

Insolvency and Bankruptcy Code, 2016:

1.    Amendment in the IT Act:

Section 247 of the Code read along with the Third Schedule amends the Income Tax Act, 1961 with the following direction:

“In sub-section (6) of section 178, after the words “for the time being in force”, the words and figures “except the provisions of the Insolvency and Bankruptcy Code, 2016” shall be inserted.”

2.    Non-obstante clause:

Section 238 states that “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” Therefore, the Code clearly overrides the IT Act.

3.    Principles of Distribution:

Section 53(1) of the Code lays down the following order of priority in which the proceeds from the sale of the liquidation assets shall be distributed:

  1. IRP costs and liquidation costs
  2. Workmen’s due for the period of twenty-four months preceding the liquidation commencement date and debts owed to a Secured Creditor
  3. Wages and any unpaid dues owed to employees other than workmen
  4. Financial debts owed to unsecured creditors
  5. any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date
  6. any remaining debts and dues
  7. preference shareholders, if any
  8. equity shareholders or partners, as the case may be.

The Income-tax Department is clearly not a secured creditor and the debt owed to the Dept. is in the nature of dues that clearly adds to the consolidated fund of the state and thus, should be settled as per the waterfall structure mentioned in Section 53(1)(v).

4.    Effect of Moratorium:

As per Section 14 of the Code, the order of the NCLT for initiation of liquidation of the Corporate Debtor would result in a moratorium on the initiation or continuation of legal proceedings by or against the corporate debtor thereby making the contention of the IT department, that the Code did not apply to them in relation to the said property, and the argument that the attachment order pre-dated the initiation of liquidation can certainly not be regarded as valid.

5.    Attachment on Liquidation Estate:

Section 36 of the Code states that for the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor. Further, Section 36(3)(b) of the Code provides that the liquidation estate assets may or may not be in possession of the corporate debtor, including but not limited to encumbered assets. Therefore, even if the order of attachment constitutes an encumbrance on the property, it still does not have the effect of taking it out of the purview of Section 36(3)(b) of the Code or put a bar on completion of the sale.

PRECEDENTS FOLLOWED:

In Ananta Mills Ltd. (In Liquidation) V/S. City Deputy Collector, Ahmedabad,[(1972) 42 Company cases 476 ] the Gujarat High Court observed that the purpose of attachment appeared to be to prevent private alienations of the property but the attaching-creditor does not acquire, by merely levying attachment, any interest in the property.

In Prem Lal Dhar vs. Official Assignee [(1897) ILR 25 Cal. 179 (P.C.)], the Hon’ble Court considered the effect of attachment prior to the commencement of winding-up proceedings and whether such attachment could continue on the property even in the hands of the purchaser, who bought the property through the official liquidator free of all encumbrances. The court in the said matter held that such attachment of the properties of a company, which was subsequently ordered to be wound up, without any further action being taken would be of no consequence or effect against the official liquidator and the property could be disposed of by the official liquidator, since such attachment merely prohibits private alienation by the person whose property is attached but creates no interest in such property.

In the case of Dena Bank vs. Bhikabhai Prabhudas Parekh & Co. & Ors. [(2000) 5 SCC 694] , it was held that the Crown’s preferential right to recovery of debts, over other creditors is confined to ordinary or unsecured creditors and further in the case of Stock Exchange, Bombay vs. V.S. Kandalgaonkar, [CIVIL APPEAL NO.4354 of 2003], the Supreme Court put at rest the ongoing controversy by observing that there is priority of rights of secured creditors over the rights of income tax department.

CONCLUSION:

The framework for insolvency and bankruptcy Code was proposed with the objective of consolidating and amending the laws relating to reorganisation, and insolvency resolution of corporate persons in a time bound manner for maximization of the value of assets of such persons and to promote entrepreneurship, availability of credit while balancing the interests of all the stakeholders, including alteration in the priority of payment of Government dues. However, certain ambivalences existing in the interpretation of the framework resulted in undue delays in resolution. The thorough interpretation and detailed analysis by the Hon’ble High Court not only settles the long-standing dilemma regarding the ascertainment of the nature of crown debts and the supremacy of the Code over the Income Tax Act, it further clarifies that the interest of secured creditors prevail over crown debts.

Moratorium during Liquidation: Scope And Effect

By Richa Saraf (resolution@vinodkothari.com)

What is a moratorium?

The term has been defined in Merriam Webster Dictionary to mean “legally authorized period of delay in the performance of a legal obligation or the payment of a debt; a waiting period set by an authority; or a suspension of activity.

In Cambridge Dictionary, moratorium refers to a period of time during which a particular activity is stopped.

In Insolvency and Bankruptcy Code, 2016, Section 33(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) stipulates “Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:

Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.”

It is a general notion that moratorium exists only at the time of corporate insolvency resolution process, the article discusses whether moratorium exists during liquidation as well. Further, based on precedents, the author has also tried to explain the exclusions and inclusions in the term “other legal proceedings” as mentioned in Section 33(5) of IBC.

Moratorium on Institution or Continuation of Suits?

The understanding, based on the interpretation of Section 33, is that there is no moratorium on continuation of suits. In case the liquidator wants to institute a fresh suit or legal proceeding, he will require specific permission from the adjudicating authority, in accordance with Section 33(5) of IBC, however, the liquidator can continue to pursue or defend an already existing proceeding, without seeking any permission from the adjudicating authority, pursuant to the powers conferred upon him under Section 35(1)(k) IBC. Here, it will be relevant to draw reference from the parent Companies Act which puts a stay not only on institution of “suit or other legal proceeding”, but also on its continuation.

In fact, in the parent Companies Act, 1956, Section 446(2) conferred an exclusive jurisdiction on the winding up court in all matters pertaining to the company before the court. Section 60(5) of IBC is akin to the provisions contained in Section 446(2)(d). The relevant extract is reproduced below:

“Notwithstanding anything contained in any other law for the time being in force, NCLT have jurisdiction to entertain, or dispose of: (a) any application or proceeding by or against the corporate debtor;… (c) any question of priorities… arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor”.

There are several court rulings which have analyzed the relevance of this provision– that the winding up court has holistic powers in respect of the company under winding up, so that all matters that may affect the company under liquidation may be dealt with by the court. It can thus, be contended that age old laws have been developed with an intention to prohibit institution as well as continuation of suits or legal proceedings during liquidation.

In the book Law Relating to Insolvency & Bankruptcy Code, 2016[1], this issue was discussed and it has been clarified that:

Unlike clause (a) of sub-section (1) of section 14, sub-section (5) of section 33 does not include the word ‘continued’, which apparently implies that suits or proceedings that were instituted prior to the insolvency commencement date may be continued during the liquidation proceedings. However, the notes to clauses[2] clearly state that the “liquidation order shall result in a moratorium on the initiation or continuation of any suit or legal proceeding by or against the corporate debtor”. In view of the author, absence of the word ‘continued’ is merely a drafting glitch- since allowing the continuation of pending suits or proceedings will hamper smooth conduct of liquidation proceedings. Hence, the provision shall be read as, “. . . no suit or other legal proceeding shall be instituted or continued by or against the corporate debtor:”

In Companies Act, 1956 and 2013, approval of court was required for suits by or against the corporate debtor, but under the IBC, there is no provision for seeking leave by the other party and only the liquidator can institute legal proceedings on behalf of the corporate debtor by seeking prior approval of the adjudicating authority. The very object of Section 60(5) of IBC is to prevent multiplicity of suits in multiple fora, and therefore, it will be quite illogical to have several forums determining matters which may impinge on the assets or liabilities of the company under liquidation. There are several rulings which have discussed the intent of the moratorium. One significant ruling is Central Bank of India v. Elmot Engineering Co., 1994 AIR 2358; 1994 SCC (4) 159, wherein the Hon’ble Supreme Court cited the following para from Palmer’s Company Precedents, Part 11, 17th Edn., page 302:

“When a winding-up order is made, the Court, acting by its officer the Official Receiver lays its hand upon the assets and says, no creditor or claimant must touch these assets or take proceedings by way of action, execution or attachment pending the distribution by the Court in due course of administration. This protection is indispensable equally in winding-up and in bankruptcy to prevent a scramble for the assets, but it is not always enough. An even- handed justice requires that the Court should have power to intervene at an early stage for the protection of the assets, and this power is given by this section.”

The Apex Court, thus, explained the intent of the section:

“This section aims at safeguarding the assets of a company in winding-up against wasteful or expensive litigation as far as matters which could be expeditiously and cheaply decided by the company court are concerned. In granting leave under this section, the court always takes into consideration whether the company is likely to be exposed to unnecessary litigation and cost.”

Proceedings not covered under the ambit of moratorium:

1.    Tax proceedings:

Tax proceedings will have to be classified into two categories: pre-assessment and post-assessment proceedings. While assessment proceedings are considered to be outside the purview of moratorium, proceedings for recovery of tax would fall within the ambit of moratorium. This distinction may seem to be unfair, however, in the proceedings under the income tax act and some other analogous acts, for example under sales tax, excise etc., the proceedings for determination of the rights and liabilities of the companies and the other persons may have to be determined initially by authorities which have been specially created under the specific statute, and when it comes to recovery of dues, the winding up court should come into picture. The reason is that the legislature intended that the assets of the company in liquidation should be dealt with at one place by the NCLT who would be in the best position to distribute the funds of the companies equitably.

See Life Insurance Corporation of India v. Asia Udyog (P) Ltd., 1984 55 CompCas 187 Delhi, 1984 145 ITR 520 Delhi[3] and in Official Liquidator, Golcha Properties Private Ltd. (In Liquidation) v. Income-Tax Officer and Ors. [1974] 44 CompCas 144 (Raj); [1974] 94 ITR 11 (Raj); 1972 WLN 563.[4]

While the tax authorities may to continue the assessment proceedings to determine the quantum of their claim, however, they cannot proceed with execution, distress or recovery. Statutory authorities are included under the definition of “operational creditors” [Section 5(20) of IBC], and accordingly, they will have to file their claim with the liquidator for recovery of their dues in the requisite form. The liquidator will verify their claim, and make payment only in accordance with the priority laid down under Section 53 of IBC.

For pre-assessment proceedings, the liquidator has to continue to represent the company. In this regard, it is relevant to cite the case of Tika Ram and Sons (Private) Ltd. v. Commissioner of Income-Tax [1964] 51 ITR 403 (All)[5], where Allahabad High Court made the following observations:

“Income-tax proceedings are certainly not such proceedings which the High Court under Section 446 could possibly entertain and make the assessment itself nor could it transfer any such assessment pending before the Income-tax Officer to its own record.

……..For these reasons I would hold that assessment proceedings do not fall within the scope of “other legal proceedings” and do not automatically come to a stop the moment the company goes into liquidation………..

………the company in liquidation is still an assessee, and income-tax proceedings up to the stage of assessment do not fall within the scope of the words “other legal proceedings” as used in Section 446 of the Companies Act, 1956.”

 

For recovery of dues, the exclusive jurisdiction vests with the NCLT, and statutory authorities cannot encroach upon the same. See Damji Valji Shah v. Life Insurance Corporation of India, [1965] 35 Comp. Cas. 755; [1965] 3 S.C.R. 665, 673 (S.C.)[6], S. V. Kondaskar, Official Liquidator, and Liquidator of the Colaba Land and Mills Co. Ltd. v. V. M. Deshpande, Income-tax Officer, [1972] 83 I.T.R. 685, 699; 42 Comp.Cas. 168, 181 (S.C.)[7].

In this regard, reference may be drawn to Circular No. 1053/02/2017-CX issued by Central Board of Excise and Customs dated 10th March 2017[8], which clearly lays down that the dues under IBC shall have priority over Central Excise dues. Also, it is mentioned that when cases are pending before BIFR/ OL/ appropriate authority under IBC, then recovery measures shall not be resorted to and further, in such cases public counsel should be advised to file affidavits for first charge under Section 11E of Central Excise Act, 1944 informing the quantum of confirmed demand to BIFR/ OL/DRT/IBC Authorities.

2.    Jurisdiction of Writ Courts:

On perusal of the provisions contained in the earlier act, it may be noted that an exemption was granted to cases pending before High Courts or Supreme Court, but no such exemption has been provided for under the IBC. The issue was discussed in Canara Bank v. Deccan Chronicle Holdings Limited, [CA (AT) Insol No. 147 of 2017][9]. The appellant (i.e. the creditor) submitted that the adjudicating authority cannot exclude any court from the purview of moratorium for the purpose of recovery of amount or execution of any judgement or decree, including the proceeding, if any, pending before the High Courts and the Supreme Court of India against a corporate debtor.

The NCLAT acknowledged that clause (a) of Section 14(1) specifically does not exclude any Court, including the High Courts or even the Apex Court. However, the Hon’ble Bench there are certain constitutional provisions which must be considered. There is no provision to file any money suit or suit for recovery before the Supreme Court except under Article 131 of the Constitution; some High Courts have original jurisdiction to entertain the suits, which may include money suit or suit for recovery of money. However, the writ jurisdiction conferred on the Supreme Court and the High Court under Article 32 and Article 226 of Constitution of India, being a constitutional power, cannot be curtailed by any provision of an Act or court. Therefore, ‘moratorium’ will not affect any suit or case pending under Article 32 or 226. However, so far as suit, if filed before any High Court under original jurisdiction which is a money suit or suit for recovery, against the corporate debtor such suit will be covered by the bar imposed under Section 33(5).

3.    Criminal Proceedings:

In criminal proceedings, particularly in the proceedings under Section 138 of the Negotiable Instruments Act, 1881, the directors or officers in default, as the case may be, are generally held personally liable, as against the civil liability of the company. The company and its directors cannot shirk their criminal liability merely on the ground that the company was already wound up and the liquidator had taken charge of the affairs of the company.

Upholding the principle laid down by the Kerala High Court in Jose Antony Kakkad v. Official Liquidator 2000 Comp Cas 811[10], in Counter Point Advt. P. Ltd., Rep. by its Director, Mr. Naresh Purushotham v. Harita Finance Limited, Rep. by its Special Legal Assistant, Miss. Gulzar Sayeeda [2006] 133 CompCas 435 (Mad); 2006 Cri LJ 2289; 2006 (2) CTC 501[11], the Madras High Court observed that:

“Though the words ‘legal proceedings’ in Section 446 of the Companies Act is wide enough to be taken in criminal proceedings also, such criminal proceedings must be in relation to the assets of the company. Criminal proceedings which are not in respect of the assets of the company but which end in the conviction or acquittal of the accused, cannot be stayed under Section 446 of the Companies Act. Proceedings under Section 138 of the Negotiable Instruments Act, 1881, can end only in the conviction or acquittal of the accused in the case and no recovery of any amount covered by the dishonoured cheques can be made in the criminal proceedings. As the proceedings under Section 138 of the Negotiable Instruments Act are not in respect of the assets of the company, the proceedings pending in the criminal Courts cannot be stayed under Section 446 of the Companies Act.”

Again, in M/s. Indorama Synthetics (I) Ltd v. State of Maharashtra and Anr.[12], having regard to the earlier decisions, and in consonance with the spirit, purpose and object of the provisions of Section 446(1) of the Companies Act and Section 138 of the Negotiable Instruments Act, similar view was taken by the Bombay High Court. Applying the ratio, it can be safely concluded that the expression “suit or other proceedings” does not include criminal complaints filed under Section 138 of the Negotiable Instruments Act.

4.   Proceedings notified by the Central Government:

Section 35(6) stipulates that the provisions of sub-section (5) shall not apply to legal proceedings in relation to such transactions as may be notified by the Central Government in consultation with any financial sector regulator, however, no such legal proceedings has been notified till date.


[1] 2016 Edition, by Sikha Bansal and Vinod Kothari.

[2]http://www.prsindia.org/uploads/media/Bankruptcy/Insolvency%20and%20Bankruptcy%20code,%202015.pdf

[3] https://indiankanoon.org/doc/327104/

[4] https://indiankanoon.org/doc/7921/

[5] https://indiankanoon.org/doc/102942/

[6] https://indiankanoon.org/doc/623299/

[7] https://indiankanoon.org/doc/38825714/

[8]http://www.cbec.gov.in/resources//htdocs-cbec/excise/cx-circulars/cx-circulars-2017/circ1053-2017cx.pdf;jsessionid=424933FE2D4B60AD42EFE3B5A66A85F2

[9] http://nclat.nic.in/final_orders/Principal_Bench/2017/insolvency/14092017AT1472017.pdf

[10] https://indiankanoon.org/doc/1731723/

[11] https://indiankanoon.org/doc/1203400/

[12] https://indiankanoon.org/doc/64892212/

Reversibility of Liquidation Order?

By Richa Saraf (resolution@vinodkothari.com)

Insolvency and Bankruptcy Code was framed with the object to provide opportunity for revival to an insolvent company, however, since the rising number of liquidation cases, as against resolution, is a cause of worry.

“After more than a year of the Insolvency and Bankruptcy Code proceedings, there have been more liquidation cases than resolution of the non-performing assets accounts. According to a data from the Insolvency and Bankruptcy Board of India, in the National Company Law Tribunal, around 78 companies got liquidation orders since February 2017[1].”- quoted in an article in Business Standard.

“An analysis of companies that have completed the Corporate Insolvency Resolution Process (CIRP) till December reveals that liquidation orders were passed for as many as 30 companies. This is three times the number of 10 cases for which resolution was approved at the culmination of the CIRP, as per latest data available with the Insolvency and Bankruptcy Board of India.[2] quoted in an article in Indian Express. Read more

Financial Creditors & Committee of Creditors: What, Why and How?

By Megha Mittal (resolution@vinodkothari.com)

IBBI issues clarification w.r.t. voting powers of CoC

Brief Background:

Pursuant to the Insolvency and Bankruptcy (Amendment) Code, 2018, the crucial reduction of voting threshold from 75% to 66% for critical matters like approval of Resolution Plan, Extension of CIRP, and all matters of section 28 of the Insolvency and Bankruptcy Code, 2016 (Code), came into effect.

However, there still prevailed ambiguity as to how to determine this threshold of 66%. What shall be the fate of those financial creditors who abstained from voting?

In this background, the Insolvency and Bankruptcy Board of India (IBBI/ Board) has issued a clarification w.r.t. voting in the Committee of Creditors.

Constitution of Committee of Creditors- What, why and how?

Committee of Creditors” (Committee) is a committee consisting of the financial creditors of the Corporate Debtor. This Committee eventually forms the decision making body of the various routine tasks involved in Corporate Insolvency Resolution Process (CIRP), responsible for giving approval to the IRP/ RP to carry out actions that might affect the CIRP.

A major chunk of the dues of the Corporate Debtor is that of Financial Creditors and thus, to recognize their substantial interest, the Committee is formed. The power to ratify the managerial decisions taken by the RP vests upon the Committee; It is this Committee that approves/ rejects the Resolution Plan, extension of CIRP, decides upon liquidation of the Corporate Debtor, ratifies expenses borne by the RP etc. In short, all decisions having an impact on the Corporate Debtor shall first be approved by the Committee.

As per section 18 of the Code, it is the duty of the Interim Resolution Profession to constitute the Committee upon collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor. It shall consist all those financial creditors whose claims have been received within the time period stipulated in the public announcement.

Voting power of the Members

In the event of passing any resolution by the Committee, a minimum threshold of assent is required to be obtained. However, in light of these facts, the following questions arise w.r.t. fate of creditors who submit delayed claims or the determining the voting power of the members of the Committee

  • What happens when a financial creditor submits claims after the stipulated date as per public announcement?

Where a financial creditor submits its claim after expiry of the last date for submission, it shall form a part of the Committee for purposes after such submission. No decision taken prior to its inclusion in the Committee can be questioned later on.

  • How is it to be determined whether the requisite threshold is met?

While determining the percentage of votes received in favour, only those creditors then forming part of the Committee shall be considered as the total value of creditors and the votes of those creditors who abstain from voting shall be deemed to be dissenting votes.

These provisions can be better understood with the help of an illustration:

Illustration:

A corporate debtor, X Ltd. has 6 financial creditors having dues to the tune of Rs. 600 crores. By the time the last day for submission of claim expires, the claims of only 3 financial creditors being A, B and C having dues of Rs. 50 Crores, Rs. 75 crores and Rs. 125 crores, respectively have been submitted.

Thus, the IRP constitutes a committee of these 3 creditors.

After the last day for submission of claims expires, another financial creditor, D, having dues of Rs. 100 crores submits its claims. After the claim is verified, such financial creditor shall also form part of the Committee.

D, opposes a certain decision taken by the Committee prior to its inclusion. Such contention placed by D is non-maintainable as the previous resolutions passed by the Committee shall be held good because they were duly passed with requisite majority.

After D is admitted as a member of the Committee, there are a total of 4 members having total dues of Rs. 350 crores. Now, for a resolution requiring minimum 66% of the votes to be passed, members of the Committee having dues of atleast Rs. 231 crores must vote in favour of such resolution.

Assuming a situation where out of the 4 creditors, A chose to abstain from voting, A shall be deemed to be a dissenting creditor. Thus, even on such abstention, votes in favour of minimum 66% of Rs. 350 crores i.e. Rs. 231 crores shall be required and not that of Rs. 300 Crores.

Another point to be noticed is that dues of creditors not forming part of the Committee shall not be taken into account while determining the requisite percentage. In the illustration above, the remaining creditors of Rs. 250 crores shall not be taken into consideration while passing of resolutions.

Conclusion:

Considering the above, the following can be concluded:

  1. Financial creditors not forming part of the Committee shall not have any voting power w.r.t. decisions taken by the Committee unless they become a part of the Committee.
  2. Creditors abstaining from voting shall be deemed to be dissenting shareholders.