Consent of M ajority Shareholders under IBC not mandatory

In the matter of K. Sashidhar v. Kamineni Steel & Power India Pvt. Ltd., the Hyderabad Bench of National Company Law Tribunal (“Tribunal”) on November 27, 2017, approved the resolution plan approved by only 66.67% of the Committee of Creditors (“CoC”).

FACTS

Kamineni Steel & Power India Pvt. Ltd. (“Corporate Debtor”) filed a company petition under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“Code”), seeking to initiate corporate insolvency resolution process of itself.

The resolution professional conducted 9 meetings of the CoC, and after such meetings, the resolution plan was approved by only 66.67% of the CoC.

ISSUE

Whether it is mandatory to obtain 75% votes of the CoC, for approval of a resolution plan under the Code.

CONTENTION

It was the contention of the resolution professional that he had followed all extant provisions of the Code and thus the resolution was in accordance with law and that it may be approved by the Tribunal. The resolution professional gave the following reasons for his contention:

  • The resolution professional relied on the observation of NCLT Mumbai Bench in the matter of Raj Oil Mills Ltd and Edelwise Asset Reconstruction Company Limited, wherein it observed that the use of the word ‘may’ in Section 22 of the Code (appointment of resolution professional by CoC) had prescribed a jurisdiction to deal with the issue of percentage of voting share depending on the facts and circumstances of each case.
  • Further, the resolution plan aimed to pay the operational creditors in a staggered manner after payment to financial creditors in the usual course of business.
  • He also contended that liquidation is a time consuming process and realization of assets will take 2-3 years, by which time the valuation will deplete and as per the opinion of majority lenders, it may not fetch more than the payment proposed to be made under the one time settlement envisaged under the resolution plan.
  • Further, the dissenting financial creditors shall be paid pursuant to Regulation 38(c) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

HELD

The Tribunal held that the requirement of obtaining 75% votes of the CoC is not mandatory, and the Tribunal gave the following reasons:

  • In the Code, at various places the words “may” and “shall” are used. Section 30(4) states that the CoC may approve the resolution plan by a vote of not less than 75% of voting shares of the financial creditors. Further, under Section 31 it is provided that “if the adjudicating authority is satisfied …” Therefore, even though the CoC may approve a resolution plan with not less than 75% of the voting share, a discretion is given to the Adjudicating Authority to approve the Resolution Plan.
  • The Tribunal was of the view to approve the resolution plan since a majority of the lenders had approved the plan. Further, Section 30(4) merely states that the resolution plan may be approved by a vote of not less than 75%. Since the Code is a new legislation, the percentage has to be read with various circulars issued by Reserve Bank of India (“RBI”).

OBSERVATION

The Tribunal observed that:

  • The adjudicating authority cannot act mechanically and can’t assess the threshold of 75% of the voting shares based on arithmetic calculations and it has to take into consideration various circulars/guidelines issued by RBI from time to time and social obligations cast on government to create employment. The Tribunal observed that it is its duty to examine the issue in a macro perspective so as to balance the interest of all stakeholders such as employees, creditors, economy, rural development. Maximization of value of assets and balancing interest triumphs over liquidation and recovery.
  • The main preamble of the Code is resolution of corporate debtor rather than liquidation. The functioning of the three dissenting banks prima facie does not adhere to preamble of the Code and initiatives of government/RBI in restructuring bad loans.
  • A paramount duty is cast upon the adjudicating authority that while approving the resolution plan, the authority has to exercise his judicious mind in the facts and circumstances of a specific case.