IBC: Ensuring dissenting creditors get fair deal

BANKRUPTCY & INSOLVENCY

A resolution plan passed under the Insolvency and Bankruptcy Code, 2016 (IBC), binds all stakeholders of the company including any dissenting creditors. Providing a 66% voting threshold by value for approval is a useful tool to ensure that a revival plan is not held to ransom by minority financial creditors.

Before 5 October 2018, regulation 38(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, required that a resolution plan provide for payment of liquidation value (the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date) due to dissenting financial creditors (including abstaining creditors) prior to any recoveries being made by the assenting financial creditors.

The guiding principle appears to be that the outcome of a successful corporate insolvency resolution process (CIRP) for creditors cannot be worse than a liquidation with a “hypothetical liquidation value” being calculated as per the “liquidation waterfall” prescribed under section 53 of the IBC, applying pre-insolvency entitlements of the creditor.

DHANANJAY KUMAR is partner and co-author GAUTAM SUNDARESH is an associate in the restructuring and insolvency practice at Cyril Amarchand Mangaldas. They can be contacted at dhananjay.kumar@cyrilshroff.com and gautam.sundaresh@cyrilshroff.com.