Creditor Voting in Practice: Real-life Scenarios

 

Creditor Voting in Practice: Real-life Scenarios

Example 1: Voting for a Resolution Plan with Financial and Operational Creditors

Scenario:

• Company X is a manufacturing firm that has been struggling with severe financial distress. The CIRP is initiated, and a Resolution Professional (RP) is appointed.

• The Committee of Creditors (CoC) is formed, consisting mainly of financial creditors such as Bank A, Bank B, and financial institutions, along with some operational creditors like Supplier Z and Service Provider Y.

Key Steps:

1. Resolution Plan Submitted by Resolution Applicant:

   • A potential investor (Company Y) submits a resolution plan to take over the company. The plan includes:

     • Debt restructuring for the financial creditors: A moratorium on payments for 2 years, followed by gradual repayment over 10 years.

     • Equity infusion: The investor plans to inject capital into Company X to help it regain profitability.

     • Unsecured creditors (including operational creditors) will receive 50% of their outstanding dues.

2. Voting Process:

   • The CoC convenes to vote on the plan.

   • Bank A and Bank B, holding 60% of the total claims, vote in favor of the plan because they believe it is in their best interest to restructure the debt and avoid liquidation.

   • Supplier Z, holding 5% of the total debt, votes against the resolution plan because they believe it doesn’t adequately address their dues.

   • Service Provider Y, holding 3% of the debt, also votes against.

3. Approval of Resolution Plan:

   • Total voting share of Bank A and Bank B comes to 65%, which is enough to surpass the required 75% majority (by the value of debt).

   • Since Bank A and Bank B form the majority of creditors, the plan is approved by the CoC despite opposition from operational creditors.

   • The resolution plan is then submitted to the NCLT for final approval.

4. Outcome:

   • The Company X avoids liquidation, and Supplier Z and Service Provider Y will receive their share of the payment as per the plan (even if it’s not the full amount they originally sought).

   • The financial creditors (especially Bank A and Bank B) are satisfied as the plan helps them recover a large part of their dues over time, and the debtor is able to continue operating.

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Example 2: Operational Creditors with Significant Claims Influencing the Voting

Scenario:

• Company Y, a service provider, owes substantial amounts to its suppliers and employees. It is undergoing CIRP, and the CoC has been formed.

• The CoC consists of large financial creditors (e.g., Bank Z, holding 70% of the claims) and a group of small operational creditors (suppliers and service providers, holding 30%).

Key Steps:

1. Resolution Plan Submitted by Investor:

   • An investor proposes a resolution plan that includes:

     • Debt restructuring for financial creditors: No interest payments for the next 3 years, with the principal amount paid over 5 years.

     • Operational creditors will receive 40% of their dues, with the remainder waived off.

     • Employee dues will be paid in full, as they are prioritized over other creditors.

2. Operational Creditors’ Influence:

   • The operational creditors, especially Supplier A and Service Provider X, hold a significant portion of the total debt, and they want to ensure they get a fair deal.

   • Supplier A holds 10% of the total claims and Service Provider X holds 8%, giving them a combined 18% voting power.

   • These creditors lobby with Bank Z, the largest creditor, to improve the plan for operational creditors, arguing that their dues should be better addressed to maintain business relations and encourage future business.

3. Negotiations and Vote:

   • After intense negotiations, the resolution applicant agrees to increase the operational creditors’ share to 50% of their dues, instead of the original 40%.

   • The CoC votes on the revised resolution plan. Now, Bank Z (70% share) agrees to the revision, while the operational creditors vote in favor due to the improved terms.

   • The plan is approved with a 75% majority by value.

4. Outcome:

   • The company is saved from liquidation.

   • The operational creditors, who initially felt sidelined, are satisfied with the revised terms.

   • Financial creditors are able to recover their debt in a structured manner, and the debtor (Company Y) avoids liquidation.