Resolution bids not to be degraded down by Liquidation Value: CIRP and Fast Track Regulations amended to maintain confidentiality

Vallari Dubey

resolution@vinodkothari.com

The Insolvency and Bankruptcy Board of India (‘IBBI’) has, in exercise of its powers contained in Section 196 read with Section 240 of the Insolvency and Bankruptcy Code, 2016 (‘the Code’), amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’)[1] and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 (‘Fast Track Regulations’)[2] to make small but material changes with respect to two important things, a) Liquidation Value, and b) definition of ‘dissenting financial creditors’. We discuss the changes in further detail below:

Definition of ‘dissenting financial creditors’

The definition of dissenting financial creditors has been substituted with a new definition with the following additions:

“(f) “dissenting financial creditor” means a financial creditor who voted against the resolution plan or abstained from voting for the resolution plan, approved by the committee;”

On account of the aforesaid amendment, all financial creditors who have abstained from voting shall also be considered as dissenting financial creditors, in addition to those who voted against. However, it is pertinent to note that above definition is only relevant for the purpose of Regulation 38.

It will be useful to reproduce relevant extract of Regulation 38 below:

38. Mandatory contents of the resolution plan.

(1) A resolution plan shall identify specific sources of funds that will be used to pay the –

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(c) liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favour of the resolution plan.

As evident from the above provision, the relevance of the definition is to purely identify such financial creditors, who shall be rightfully paid before other financial creditors who voted in favour of the resolution plan. In light of the amendment, even those creditors who chose not to vote will get a priority in terms of payment of debt due.

This shall however, not affect the voting criteria of the members of the Committee of Creditors. Financial creditors, which abstained from voting, shall not be counted among those who voted against for passing of any decision of the Committee of Creditors (‘CoC’), including approval of a resolution plan.

The voting percentage is provided under Section 30(4) of the Code, which is independent of the definition of ‘dissenting financial creditors’; Accordingly, approval will be granted to a resolution plan by a  vote of at least 75% of voting share of financial creditors. While calculating this percentage, those creditors, which abstained from voting, shall be disregarded.

Insertion of sub-regulation 3A and 4 to Regulation 35

Regulation 35 pertains to Liquidation Value. Following new sub-regulations have been added:

“(3) After the receipt of resolution plans in accordance with the Code and these regulations, the resolution professional shall provide the liquidation value to every member of the committee in electronic form, on receiving an undertaking from the member to the effect that such member shall maintain confidentiality of the liquidation value and shall not use such value to cause an undue gain or undue loss to itself or any other person and comply with the requirements under sub-section (2) of section 29.”;

“(4) Subject to sub-regulation (3), the interim resolution professional or the resolution professional, as the case may be, shall maintain confidentiality of the liquidation value.”

• Accordingly, RP shall provide liquidation value to every CoC member;
• RP shall receive an undertaking from such member, that s/he/it will maintain confidentiality to such liquidation value and shall not take any undue advantage of such value;
• Moreover, not only a CoC member, but also the RP himself shall apply utmost caution and maintain the confidentiality of the liquidation value of the Corporate Person;

The aforesaid amendment is indeed crucial from the aspect that, no one including the RP shall disclose the figures of liquidation value. The intent of such amendment is purely based on the objective of maximization of the value of the assets of the Corporate Person.

Regulation 35 (1) of CIRP Regulations defines liquidation value.

“Liquidation value is the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date.”

For obvious reasons, any value which is corresponding to the ultimate realizable value of assets is tending to be on a lower side. Disclosure of such value to persons such as prospective buyers/resolution applicant could portray the assets on a degraded level, even when a higher value could be fetched.

Till date, chances are more, that liquidation value would be dragging down the resolution plans. On account of such change, better resolution plans and higher value of assets could be expected, resulting into maximum distribution to the stakeholders, which will ultimately fulfill the objective of maximization of value for all.

Further, this will also ensure that the liquidation value remains within the confines of the CoC member only.

Removal of the mandate to include liquidation value in IM

Regulation 36(2) mandates a list of details/information to be part of the Information Memorandum (‘IM’) of the Corporate Debtor. The amendment seek to take away/delete the following from the list:

(j) the liquidation value;

(k) the liquidation value due to operational creditors;

Hereinafter, disclosure of liquidation value in IM shall not be required. Moreover, in line with the previous amendments pertaining to confidentiality, wisdom of IRP/RP shall not allow to include liquidation value in the IM. Therefore, the question of putting such value in IM, does not arise.

Flexible time limit for submission of resolution plan

Regulation 39(1) has been substituted with the following subs-regulation:

“(1) A resolution applicant shall submit resolution plan(s) prepared in accordance with the Code and these regulations to the resolution professional within the time given in the invitation made under clause (h) of sub-section (2) of section 25.”

Earlier to the amendment, following was the provision:

“(1) A resolution applicant shall endeavour to submit a resolution plan prepared in accordance with the Code and these Regulations to the resolution professional, thirty days before expiry of the maximum period permitted under section 12 for the completion of the corporate insolvency resolution process.”

On account of the above change, it is up to the discretion of CoC to decide the number of days, which shall be allowed to submit resolution plans by a resolution applicant. This will provide greater flexibility and is a welcoming amendment.

[1] http://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jan/CIRP_ENGLISH_2018-01-01%2021:32:13.pdf

[2] http://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jan/Fast%20Track%20Amendment%20_ENGLISH_2018-01-01%2021:32:54.pdf