Examples of Resolution Plans

 

Examples of Resolution Plans

Let’s look at real-life examples of how resolution plans and creditor voting work.

Example 1: Resolution Plan for a Corporate Debtor

• Company A is facing financial difficulties and defaults on its loans. The CIRP is initiated, and a Resolution Professional (RP) is appointed.

• Several financial creditors, including Bank X, Bank Y, and Supplier Z, make up the CoC.

• A resolution applicant (Company B) submits a resolution plan, which involves:

  • Debt restructuring: Extending the repayment period by 5 years.

  • Equity infusion: Company B will inject additional capital into Company A.

  • Repayment to creditors: The plan proposes that creditors receive 60% of their dues, which is more than they would receive in liquidation.

• The CoC reviews and votes on the plan. Bank X and Bank Y, holding 40% and 30% of the claims respectively, vote in favor.

• Supplier Z, holding 10% of the claim, votes against, but the plan passes with 75% approval.

• The plan is submitted to the NCLT, and after review, it is approved, and the company is saved from liquidation.

Example 2: Operational Creditors in CIRP

• Company C owes significant amounts to operational creditors, such as suppliers and service providers.

• The CIRP is initiated, and the CoC is formed.

• Supplier A, Supplier B, and Service Provider C, though not financial creditors, are part of the CoC because they hold unpaid dues.

• They are outvoted by financial creditors who hold a larger portion of debt.

• The resolution plan, which may provide only a small fraction of what they are owed, is approved by the CoC, and the operational creditors get a proportion of their claims based on the distribution under the liquidation waterfall.

Voting Process in CoC and Voting Rights

 

Voting Process in CoC and Voting Rights

The voting process in the Committee of Creditors (CoC) is one of the key decision-making mechanisms during the CIRP. The voting process ensures that creditors with significant claims have more influence in the resolution process.

A. Voting Power and Share

1. Voting Rights Based on Debt:

   • Creditors in the CoC vote based on the value of their claims. For example, if a financial creditor holds 40% of the total debt, they will have 40% of the voting power in the CoC.

   • The voting rights of financial creditors are generally higher because they are the primary creditors in insolvency proceedings.

2. Operational Creditors:

   • Operational creditors (e.g., suppliers, service providers) also have the right to vote, but their voting power is generally lower because their claims tend to be smaller.

   • In certain cases where the operational creditors’ dues are large, they may have a stronger influence on decisions.

B. How Voting Works: Majority and Approval

1. 75% Majority Vote for Resolution Plan:

   • A resolution plan can only be approved if it receives the consent of 75% of creditors (by value of debt).

   • If the majority agrees, the plan is then submitted to the NCLT for final approval. If not, the debtor faces liquidation.

2. Simple Majority for Other Decisions:

   • For routine decisions (such as the appointment or removal of the Resolution Professional), a simple majority (50%) of creditors by value is enough to make decisions.

C. Voting Procedure

1. Electronic Voting:

   • The CoC meetings can be conducted through electronic means, ensuring transparency and allowing creditors to participate without being physically present.

2. Resolution for Voting:

   • The CoC typically votes on key decisions, such as:

     • Approval of the Resolution Plan.

     • Appointment and Removal of the Resolution Professional.

     • Extending the CIRP timeline.

     • Acceptance of the liquidation process, if the resolution plan is not approved.

D. Influence of Creditors in the CoC

• Financial creditors, who typically hold larger claims, have a significant influence on the decisions taken in the CoC.

• Operational creditors, despite being part of the CoC, often have limited voting power unless they have significant claims.

• The CoC members can form alliances or negotiate to influence the outcome of the resolution plan or the approach to liquidation.

Resolution Plan Process under IBC

 

Resolution Plan Process under IBC

A resolution plan is the key component in the Corporate Insolvency Resolution Process (CIRP). This plan is meant to revive the company by restructuring its debt, bringing in a new investor, or selling the company to a bidder. The Committee of Creditors (CoC) is responsible for reviewing, approving, and ultimately deciding whether to accept or reject the plan.

A. Submission of Resolution Plan

1. Debtor’s Right to Propose:

   • Under Section 29A of the IBC, the debtor, along with its management, can submit a resolution plan if it is eligible and not disqualified.

   • The debtor can also work with potential investors or third-party bidders to propose a resolution plan.

2. Resolution Applicants:

   • Any third-party investor or bidders (who meet the eligibility criteria under Section 29A) may submit a resolution plan.

   • These plans should aim at ensuring the company’s revival, including restructuring the company’s debts, and must be submitted within the time frame prescribed by the IBC (180 days, extendable by 90 days).

B. Role of Committee of Creditors (CoC) in Reviewing the Resolution Plan

1. CoC’s Review Process:

   • The CoC reviews the resolution plan based on the following criteria:

     • Feasibility and Viability: Can the resolution plan realistically help the company recover and continue operations?

     • Repayment to Creditors: The plan must ensure that the creditors receive at least the liquidation value (the minimum amount they would receive if the company were liquidated).

     • Compliance with IBC: The plan must comply with the IBC provisions and protect the interests of all creditors.

2. Approval or Rejection of Resolution Plan:

   • After reviewing the resolution plan, the CoC votes on it.

   • The plan can only be approved if it receives at least 75% voting share of the CoC members (based on the value of their claims).

   • If the plan is rejected, the company moves towards liquidation, unless the CoC decides to extend the process or invite new resolution plans.

3. Submission to NCLT:

   • If approved by the CoC, the resolution plan is submitted to the National Company Law Tribunal (NCLT) for its final approval.

   • The NCLT ensures that the plan complies with the IBC and public interest before approving it.

Debtor’s Rights and Participation in Liquidation

 

Debtor’s Rights and Participation in Liquidation

Even though the debtor loses control over its business once liquidation begins, it still retains certain rights during the liquidation process:

1. Right to Challenge Liquidation:

   • The debtor can challenge the decision to liquidate the company in the NCLT if it believes that the liquidation is premature or that the resolution process can still be revived.

2. Right to Participate in Liquidation Proceedings:

   • The debtor, through its representatives, has the right to participate in liquidation proceedings and can provide input on how assets should be sold or claims verified.

3. Cooperation with the Liquidator:

   • The debtor must cooperate with the liquidator by providing all necessary documents, assets, and other resources required to facilitate the liquidation.

4. Right to Receive Distribution:

   • If there are any proceeds left after all creditors are paid, the debtor (or its shareholders) may receive the residual assets.

Liquidation Process and Liquidation Waterfall

 

Liquidation Process and Liquidation Waterfall

If no resolution plan is approved during the CIRP or the resolution process fails, the company moves into liquidation. During this stage, the liquidator takes control of the company’s assets and proceeds with their sale to satisfy outstanding debts.

A. Appointment of Liquidator

• The liquidator is appointed by the National Company Law Tribunal (NCLT) and replaces the Interim Resolution Professional (IRP) or the Resolution Professional (RP). The liquidator is responsible for the management, sale, and distribution of the company’s assets.

• The liquidator must act in good faith, transparently, and ensure the liquidation process adheres to the IBC guidelines.

B. Liquidation Waterfall: Order of Priority in Payment

The liquidation waterfall is the process by which the proceeds from the sale of the debtor’s assets are distributed among the creditors. The order of priority for distribution is strictly defined under the IBC.

1. Secured Creditors (1st Priority):

   • These creditors hold collateral or security interests in the debtor’s assets.

   • They are paid first from the proceeds of the sale of the secured assets.

   • If the proceeds from the sale of secured assets are insufficient to cover their debt, they may have a claim against the remaining assets of the debtor as unsecured creditors.

2. Workmen's Dues (2nd Priority):

   • Workmen and employees of the company are given priority after secured creditors. Their dues, such as wages, salaries, and other employee benefits, are paid from the liquidation proceeds.

   • The employees are prioritized over other unsecured creditors, reflecting the importance of their claims.

3. Unsecured Creditors (3rd Priority):

   • After workmen’s dues, unsecured creditors (both financial and operational creditors) are paid.

   • Unsecured creditors have no collateral or security interests but will receive a proportionate share of the liquidation proceeds, based on the total amount of claims.

   • Financial creditors usually receive a higher proportion of the distribution compared to operational creditors, as they generally hold a larger debt.

4. Government Dues (4th Priority):

   • Government dues, including taxes, duties, and other statutory obligations, are paid after unsecured creditors.

   • This includes sales tax, GST dues, customs duty, and any other regulatory obligations owed to the government.

5. Residual Shareholders/Equity Holders (5th Priority):

   • Shareholders or equity holders are the last in line to receive any remaining proceeds after all debts and statutory dues have been paid.

   • If there are any assets left after paying creditors, the shareholders may receive the remainder, but this is rare in liquidation scenarios where the company has substantial debts.

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C. Role of Liquidator in Distribution

The liquidator’s responsibilities during liquidation include:

1. Realizing Assets:

   • The liquidator sells the debtor’s assets through auction or private sale to maximize recovery for creditors.

2. Verification of Claims:

   • The liquidator verifies the claims submitted by creditors and determines the amount owed to each creditor.

3. Distribution of Proceeds:

   • The liquidator distributes the proceeds from asset sales according to the liquidation waterfall.

4. Final Report:

   • After distributing the proceeds, the liquidator must submit a final report to the NCLT, outlining the liquidation process and how assets were sold and distributed.

Creditor Voting in CIRP

 

Creditor Voting in CIRP

A. Role of Creditors in the CIRP Process

Under the IBC, the Committee of Creditors (CoC) holds the primary decision-making authority. This committee is formed after the Corporate Insolvency Resolution Process (CIRP) is initiated and is composed mainly of financial creditors, though operational creditors also have a presence in certain cases.

B. Voting Power and Mechanism

1. Voting Power of Creditors:

   • The voting power of each creditor in the CoC is determined by the value of the debt they hold (i.e., the amount of money owed to them by the debtor).

   • Financial creditors generally hold greater voting power compared to operational creditors because they tend to be owed larger amounts.

2. Threshold for Approval:

   • 75% of the total voting share of the CoC (based on the value of claims) is required to approve any resolution plan. This supermajority ensures that the resolution plan has substantial creditor backing before it is sent for approval by the National Company Law Tribunal (NCLT).

   • The CoC can also decide on other major decisions by a simple majority (50% of the creditors by value), such as the appointment of the resolution professional or the removal of the resolution professional.

3. Voting Process:

   • The CoC meets at regular intervals, where creditors discuss and vote on key decisions, including the resolution plan.

   • Voting is typically done through electronic means to ensure transparency and ease of participation for all creditors.

4. Influence of Financial Creditors:

   • Financial creditors hold substantial influence in the decision-making process because they often constitute the majority vote in the CoC, especially when the value of the debt owed to them far exceeds that of operational creditors.

   • Operational creditors, while having a vote, generally have limited influence due to their relatively smaller share of the total debt.

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C. Rights of Operational Creditors in Voting

While financial creditors dominate in the CoC, operational creditors are also included in the decision-making process. Their voting rights are typically based on the amount of unpaid dues they have from the debtor.

1. Operational Creditors’ Voting Power:

   • Operational creditors can express their views and vote on the resolution plan, but their voting power is usually lesser compared to financial creditors.

   • In certain cases, if operational creditors are owed a significant amount (e.g., suppliers, service providers), they may have more influence, but generally, their claims are smaller compared to those of financial creditors.

2. Non-Voting Influence:

   • Although operational creditors have lower voting power, they can still voice concerns and influence decisions through discussions with financial creditors in the CoC.

   • Operational creditors can also challenge the resolution plan if they believe their interests are not adequately protected.

Debtor's Rights During CIRP and Liquidation

 

Debtor's Rights During CIRP and Liquidation

A. Rights of the Debtor During CIRP:

1. Right to Propose a Resolution Plan:

   • The debtor has the right to propose a resolution plan, either on its own or in collaboration with an investor or third-party bidder.

   • The debtor can negotiate terms with the CoC and seek to restructure its debts, propose a settlement, or make arrangements to revive the business.

2. Right to Challenge the Admission:

   • If the debtor believes the CIRP was initiated wrongly (for example, if there was no default or a pre-existing dispute), it has the right to challenge the admission of the CIRP before the NCLT.

3. Cooperation with IRP:

   • The debtor is required to cooperate with the Interim Resolution Professional (IRP), provide necessary documents, and allow the IRP to take control over the company’s assets and operations.

4. Protection from Legal Actions (Moratorium):

   • Once the CIRP is initiated, the debtor is provided a moratorium (temporary protection) from any further legal actions, suits, or recoveries against it by creditors.

5. Right to Participate in CoC Meetings:

   • The debtor can participate in CoC meetings and may present a resolution plan, especially if it believes that the company can be revived.

B. Rights of the Debtor During Liquidation:

1. Right to Challenge Liquidation:

   • If the debtor believes the liquidation process is unfair or wrongful, it can challenge the NCLT’s decision to liquidate the company.

2. Right to Receive Final Distribution:

   • If there are any remaining assets after all creditors are paid, the debtor (or its shareholders) may be entitled to the final distribution.

3. Obligation to Cooperate:

   • The debtor must cooperate with the liquidator during the liquidation process, allowing the liquidator to manage the sale of assets, verify creditor claims, and distribute the proceeds accordingly.