Real-Life Example of CoC Voting and Negotiations

 

Real-Life Example of CoC Voting and Negotiations

Scenario:

• Company ABC, a tech firm, has defaulted on its loans. The CoC comprises Bank X, Bank Y, and a group of operational creditors.

• A resolution plan is submitted by Company M, an investor, proposing:

  • Debt restructuring: A 3-year moratorium and repayment over 10 years for financial creditors.

  • Operational creditors will receive 60% of their dues.

Step-by-Step Process:

1. Initial Vote by CoC:

   • Bank X (holding 50% of claims) and Bank Y (holding 30%) vote in favor of the plan.

   • The operational creditors (with 20% of claims) vote against the plan, as they demand 80% of their dues.

2. Negotiation:

   • Company M offers operational creditors equity in the company in exchange for their reduced payment. This helps the operational creditors have ownership and potential future profits.

   • After further negotiations, the operational creditors agree to the plan if they receive 70% of their dues instead of the original 60%.

3. Revised Vote:

   • The CoC reconvenes, and the revised plan receives approval with the 75% majority (by value of claims).

4. Final Approval by NCLT:

   • The plan is approved by the National Company Law Tribunal (NCLT), and Company ABC avoids liquidation, leading to recovery for the creditors and business continuity.

Negotiation Dynamics: Debtors vs. Creditors

 

Negotiation Dynamics: Debtors vs. Creditors

The negotiation process between the debtor and creditors is often complex and intense, especially when dealing with large companies in distress. Both sides aim to achieve favorable terms, but they approach negotiations with different priorities.

A. Debtor’s Strategy in Negotiations

1. Preserving Business Continuity:

   • The primary objective of the debtor is to avoid liquidation and keep the business running. This can involve negotiating:

     • Extended repayment terms with financial creditors to ease the burden.

     • Debt restructuring through equity infusion by a new investor to revitalize the company.

2. Restructuring Debt to Improve Cash Flow:

   • The debtor may negotiate to reduce the debt burden in exchange for equity or a longer repayment schedule.

   • Reducing operational costs (e.g., renegotiating contracts or wages) could be a key part of the negotiation to improve profitability.

3. Addressing Operational Creditors’ Concerns:

   • Operational creditors may often be concerned with the future viability of the business, and the debtor might promise to:

     • Ensure continued operations (with payment to operational creditors in full or at a higher percentage).

     • Provide incentives such as guaranteeing future business if the company is revived.

   • Debtors may offer operational creditors a stake in the company (via equity allocation) to win their support.

4. Equity Offers and Control:

   • The debtor may offer creditors equity in the company in exchange for debt forgiveness, providing them with ownership and a future share in profits if the company performs well post-restructuring.

B. Creditors’ Strategy in Negotiations

1. Maximizing Recovery:

   • Creditors, especially financial creditors, aim to recover as much of their dues as possible, and may seek:

     • Larger repayments upfront.

     • Interest on the debt or penalties for missed payments.

   • Creditors may also negotiate to preserve their rights in case the resolution plan fails, ensuring they are compensated fairly in case of liquidation.

2. Coercing the Debtor to Accept Terms:

   • Creditors may use their leverage (e.g., holding large claims) to force the debtor into accepting a resolution that is in their favor. For instance:

     • Diluting the debtor’s control over the company (if equity restructuring is involved).

     • Ensuring better treatment for senior creditors (like financial institutions) in the resolution plan.

3. Incentivizing Debtors to Accept the Plan:

   • Creditors may provide incentives to the debtor, such as offering more favorable repayment terms or deferring interest payments, in exchange for the company agreeing to the resolution plan.

4. Impact of Operational Creditors:

   • While operational creditors have lower voting power, they can still influence negotiations if they hold significant claims. Creditors in this category may push for better terms for:

     • Full payment of dues (if possible).

     • Faster repayment timelines to ensure they can continue their business relations with the company.

C. External Negotiations with Resolution Applicants

1. Bidding for Control:

   • In cases where multiple resolution applicants are involved, the debtor and creditors may negotiate with the bidders to determine the best proposal, considering:

     • Financial backing: Does the resolution applicant have the ability to fund the plan?

     • Strategic fit: Is the bidder capable of ensuring business continuity and growth post-resolution?

2. Bidding and Competition:

   • Creditors may be involved in choosing between multiple bidders based on which offer guarantees the best outcome for them.

     • Debt restructuring terms, equity offers, and the long-term viability of the plan will be weighed against each other.

Evaluation of Resolution Plan by the CoC

 

Evaluation of Resolution Plan by the CoC

The CoC is tasked with evaluating the resolution plan to determine whether it is feasible, viable, and in the best interests of the creditors. The primary goal is to maximize the recovery for the creditors, and this is done by assessing several key factors:

A. Key Criteria for Evaluating a Resolution Plan

1. Feasibility and Viability:

   • The CoC ensures that the resolution plan is realistic and implementable. It should outline how the company will be able to repay its debts over time and ensure business continuity.

   • Viability is assessed in terms of whether the business model can be sustained after the plan is implemented. If the company has a future potential for growth, this becomes a key aspect for approval.

2. Maximum Recovery for Creditors:

   • The resolution plan must guarantee that creditors receive at least the liquidation value of their claims (i.e., the amount they would receive if the company is liquidated).

   • The value maximization principle under the IBC ensures that creditors get the best possible recovery from the plan.

3. Compliance with the IBC and Other Legal Requirements:

   • The plan must comply with the IBC and any other regulatory frameworks (e.g., the Companies Act, tax laws).

   • It should also adhere to the eligibility criteria set under Section 29A of the IBC for resolution applicants.

4. Treatment of Creditors:

   • The CoC evaluates how the plan treats different categories of creditors, especially the financial and operational creditors.

   • Operational creditors, although given lower priority in the liquidation waterfall, must receive a fair portion of their dues.

   • The priority of payments in the resolution plan should reflect the IBC's hierarchical approach to the distribution of assets.

5. Sustainability of the Business Post-Resolution:

   • The CoC assesses whether the company can continue its operations after the resolution plan is implemented. If the company remains sustainable, it will generate future value, which ultimately benefits creditors through the restructuring.

6. Cash Flow and Financial Projections:

   • The CoC looks at the cash flow projections of the resolution plan to see if the debtor will be able to meet future obligations and continue paying creditors. A good resolution plan will have clear and realistic cash flow projections for the next few years.

B. Resolution Plan Review Process

1. Initial Assessment:

   • After receiving the resolution plans, the Resolution Professional (RP) compiles them and presents them to the CoC. The RP may also provide insights or recommend one plan over others based on their assessment.

2. Detailed Scrutiny:

   • The CoC conducts a detailed review of each resolution plan. This could include:

     • Ensuring the liquidation value of the creditors is at least met.

     • Evaluating whether the resolution applicant is capable of executing the plan (in terms of financial resources and expertise).

3. Consultation with Experts:

   • The CoC might engage external experts to assess the viability of the resolution plan, such as financial advisors, legal experts, or industry consultants.

4. Voting on the Plan:

   • Once the plan is reviewed, the CoC will vote on it based on the value of their claims.

     • 75% majority by value is required to approve the resolution plan.

     • If the plan is not approved, the company may go into liquidation.

5. Final Submission to NCLT:

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

Negotiating Resolution Terms: A Deeper Dive

 

Negotiating Resolution Terms: A Deeper Dive

During the CIRP, the debtor and creditors engage in intense negotiations, especially if the debtor has significant operational creditors. These negotiations often revolve around:

• Amount to be Paid: Whether operational creditors should receive full dues or a reduced amount.

• Payment Terms: How much should be paid upfront versus deferred payments, especially in the case of financial creditors.

• Business Continuity: Operational creditors often influence the terms based on the belief that they will continue to provide goods or services to the debtor post-restructure.

Successful negotiation strategies might include:

• Offering equity in the restructured company to creditors as part of the repayment.

• Moratorium periods for financial creditors, where the debtor can delay interest payments to stabilize operations.

• For operational creditors, ensuring that future business opportunities are considered as part of the resolution, ensuring long-term relations.

Negotiations Between Debtors and Creditors

 

Negotiations Between Debtors and Creditors

Scenario:

• Company Z, a construction firm, is facing financial distress and enters CIRP. The CoC is dominated by financial creditors (mainly banks), but there are also significant operational creditors (e.g., subcontractors).

• The debtor (Company Z) has been trying to negotiate with creditors to avoid liquidation.

Key Steps:

1. Initial Submission of Resolution Plan:

   • The debtor proposes a resolution plan that includes:

     • Restructuring of financial debt, with reduced interest rates and extended timelines.

     • Payment of 50% of operational creditors' dues within the first 2 years.

     • Equity infusion by a new investor, which will help improve the company's cash flow.

2. Creditor Reaction:

   • Financial creditors want a larger repayment and argue for more extended terms. They suggest that the company could be profitable if the restructuring is done correctly.

   • Operational creditors, on the other hand, demand full payment of their dues and argue that their support is vital for the company’s ongoing operations (e.g., future projects).

3. Negotiations:

   • The debtor and resolution applicant enter negotiations with the CoC.

   • Bank A (financial creditor) demands higher recovery, but Supplier Y (operational creditor) pressures the CoC, arguing that the company will not be able to function without their suppliers.

   • After several rounds of negotiation, the debtor and the resolution applicant agree to:

     • Increase payment to operational creditors to 60%.

     • Financial creditors accept slightly reduced terms to allow the plan to proceed, but they maintain longer repayment terms.

4. Final Vote:

   • The CoC votes again. The financial creditors, along with the operational creditors, agree to the revised plan.

   • The resolution plan is approved and submitted to the NCLT for approval.

5. Outcome:

   • The company avoids liquidation.

   • The debtor is relieved that the business will continue, and creditors (both financial and operational) reach a compromise.

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.

Liquidation Process and Liquidation Waterfall

 

Liquidation Process and Liquidation Waterfall

If a resolution plan is not approved, the company moves into liquidation. The liquidator is appointed, and the company’s assets are sold to repay creditors.

A. Liquidation Waterfall

In liquidation, the proceeds from asset sales are distributed in the following order:

1. Secured creditors (first priority).

2. Workmen’s dues (second priority).

3. Unsecured creditors (third priority, including operational creditors).

4. Government dues (fourth priority).

5. Residual payment to shareholders (last priority).