Omission of Regulation 26(2): A double-edged sword
This piece takes a look at Regulation 26(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 hereinafter referred to as ‘the Regulations’.
Pre-amendment, sub-regulation 2 of Regulation 26 read as follows:-
“(2) Once a vote on a resolution is cast by a member of the committee, such member shall not be allowed to change it subsequently.”
This sub-regulation ensured that the vote cast by a member of the committee of creditors (CoC) was final and it specifically prohibited any such member to change its vote at a subsequent stage. The intention behind such a regulation was to ensure that the decision of the CoC attains finality and there is no uncertainty as to the vote cast by any member of the CoC. The entire CIRP process revolves around the CoC and the intention of sub-regulation appeared to be that once a positive vote is cast upon by a CoC member, it should not be allowed to change to a negative vote leading to failure of CIRP process especially when voting was done on a Resolution Plan.
Thereafter vide notification No. IBBI/2018-19/GN/REG031 dated July 3, 2018 (w.e.f July 4, 2018) the said sub regulation of regulation 26 was omitted. The said omission has somehow escaped the attention of the public and I argue that such an omission might create more hindrances in the resolution process rather than coming to the aid of Corporate Insolvency Resolution Process participants from the point of approval/ rejection of a Resolution Plan.
The effect of such omission is that after the notification, any member of the CoC can change its vote subsequently. This could have wide ramifications especially when the CoC has voted in favour of approval of a Resolution Plan. Suppose a resolution plan is passed by CoC with 66% voting in favour of the plan. In the intervening period between approval of the plan by CoC and its approval by the Learned Adjudicating Authority, an unsuccessful resolution applicant may still negotiate with member(s) of the CoC offering them a better deal in the event they change their vote or any CoC member may on his own decide to change his/her vote after voting has concluded on the resolution plans. This conundrum is challenging both for the CoC as well as the Adjudicating Authority.
The Real Estate Sector may be hit by this uncertainty as the Resolution Plans presented in case of Real Estate Companies are often complex and have many stakeholders involved including the homebuyers. Past instances show that when CIR Process is initiated against a Real Estate company it has a large member of financial creditors because of the classification of homebuyers as Financial Creditors. In some cases, the number of CoC members exceeds 1000. In such cases, any resolution passed by the CoC is usually with wafer-thin majority. Sometimes even a small class of homebuyers having 2-3% voting share can change their mind and opt for changing their vote against the resolution plan which has been approved by a CoC (which contains more than 1000 homebuyers). The omission of sub-regulation 2 of 26 may deter proposed resolution applicants from participating in the resolution process owing to this uncertainty.
In the case titled as ‘Sharad Sanghi vs. Vandana Garg and Ors.’ – 2019 SCC Online NCLAT 148 in para 14, the Learned NCLAT observed as follows:-
“14. Whether a member who has already opined, after final decision, can change its opinion or not? It is the matter which can be decided by the ‘Committee of Creditors’, which may extend the period and allow to have fresh voting. Regulation 26(2) being directory cannot override the power of the ‘Committee of Creditors’, which is the final decision making authority in accepting or rejecting a ‘Resolution Plan’. The Insolvency and Bankruptcy Board of India also noticed that Regulation 26(2) is not workable and will amount to interference with the power of the ‘Committee of Creditors’ as vested under the Insolvency and Bankruptcy Code, 2016 and therefore, the Insolvency and Bankruptcy Board of India deleted Regulation 26(2) w.e.f. 4th July, 2018. If it would not have been deleted, one could have argued that Regulation 26(2) is arbitrary as it does not allow the ‘Committee of Creditors’ to form its final opinion.”
The Learned NCLAT notes the powers of CoC and observes that the omissionwould have taken away the vested powers of CoC. However, it may be noted that such an omission might become problematic in the instances mentioned above. On the one hand, the wisdom of CoC is upheld in the highest regard, on the other hand, a balance needs to be maintained with the needs of the proposed/ successful resolution applicant.
In the case of ‘RBL Bank Ltd. vs. M/s MBL Infrastructures Ltd’., the Learned Adjudicating Authority at Kolkata in its order dated 18.04.2018 observed that:
“Can a financial creditor not to change its mind and to have a review of earlier decision upon deliberation with the resolution applicant and vote in favour of a resolution plan who did not vote in favour when it was put to vote? It appears to us that they can. Even in parliamentary proceedings, in our democracy, a motion to reconsider a policy decision which was once failed for not obtaining majority vote, is not uncommon……Whether or not a member of CoC can change its mind on a decision once it has been adopted, is within their own power and choice. No specific bar in the Code or Regulation brought to our notice to have a different view than the view we have taken as above. Two dissenting financial creditors out of 20 financial creditors alone challenging the reconsideration of resolution plan. From a practical standpoint of a prudent man thinking also, if one person wish to change its mind who is not debarred from changing its mind, why not change stands considering the subsequent change in the circumstances or events. In the said background, we do not find any justifiable reason to hold that reconsideration of resolution plan is bad in law as contended by IDBI and Bank of Baroda.”
A change in vote might be useful in instances wherein a resolution plan is rejected by the CoC and liquidation process against a Corporate Debtor may commence. In such cases, member(s) of CoC can change their vote and support the resolution plan even if they had voted against it earlier. Change of vote in such a scenario would ensure that the Corporate Debtor does not go under liquidation and it continues as a going concern, even though the member(s) of CoC may not completely agree with the plan presented by the successful resolution applicant. In case an event the Adjudicating Authority has only limited power to review the decision and wisdom of the CoC,
Therefore, the omission of sub-regulation 2 of 26 is a double-edged sword which can sometimes revive the CIR Process and in other cases it may completely derail the plan which was approved by the CoC but due to change in vote, the same is rejected before being approved by the Learned Adjudicating Authority.
By Abhay Pratap Singh, Partner