The recent circular from the Insolvency and Bankruptcy Board of India (IBBI) issued on 10 August 2018
makes interesting reading. While it is lamenting the fact that the hard timeline-bound regime of the insolvency process will lead to unintended corporate mortality if the bank representatives attending the committee of creditors (CoC) meetings are not empowered to take decisions, the amusing undertone is that it has directed the resolution professionals to ensure that the attendees in CoC meetings are decision-makers themselves.
It is a matter of common knowledge that India's is one of the few insolvency frameworks in the world which incorporate hard timelines. If insolvency is not resolved within 180 (or, on extension, 270) days, the company will be mandatorily moved to the liquidation path. Since the resolution process is entirely based on decisions at the CoC meetings, the CoC may arrive at some conclusive resolution only if the CoC members are empowered to decide and vote at the meetings. The irony is that the attendees at the CoC meetings are rarely decision-makers themselves. They come to discuss the matter at the meeting, but would mostly take the matter to their respective offices to get the view of their seniors and, very often, to committees in their respective offices too. The indecision of the CoC itself may be the reason for corporate mortality.
As a resolution professional, one witnesses this situation time and again: there is a patient on the operation table, and a panel of doctors is to decide upon a line of treatment. Assume that the doctors have to decide by a certain majority, and they themselves, in turn, have to depend on their seniors to give their views. The patient will surely be killed by indecision.
No matter what the IBBI has to say or what the NCLT or the National Company Law Appellate Tribunal (NCLAT) might have ruled, the irony is that the CoC attendees are rarely able to decide.
There are several reasons for their indecisiveness, such as the seniority of the person attending, the recent transfer of the attendee into the resolution matters, or the internal hierarchy of the bank itself. However, the most important issue that affects decision-making is the fear of persecution that the banker feels if he has hard decisions to make. And, surely, the most important decision in the insolvency process is the decision about the haircut.
Bankers have a natural fear, born out of years of experience, that the one who decides has to face the three Cs – the Central Bureau of Investigation (CBI), Comptroller and Auditor General (CAG) and Central Vigilance Commission (CVC). There is no pursuit against indecision. No one is punished for not deciding. However, decision-making invites internal and external action. Therefore, banks just do not decide on matters like haircuts.
Practically, one would have seen several situations where the attendee at CoC would have confessed that he knows that the value he will get in liquidation will be far lower than the haircut placed for approval, but he would rather let the haircut be faced as a fait accompli in liquidation, than decide upon a much lower haircut in resolution.
Added to the problem of indecision is the prevailing notion, incorrect in the view of the author, that the abstinence of a creditor from voting amounts to disapproval. That is, if a certain creditor at a CoC meeting decides not to vote at all, his vote will be counted as a negative vote, as the required decision-making should be positive votes out of total votes, and not out of those voting.
The author strongly argues that this is a wrong view; however, this view is being espoused by several people. This exacerbates the issue of decision-making at CoCs.
Undoubtedly, the intent of the Code as well as the IBBI is absolutely clear. It is resolution before liquidation. Hence, the voting percentage required for approval by CoC has also been reduced, by way of an ordinance, from a flat 75% to 66% for substantial decisions and 51% for routine matters.
So, will the scenario be better after this IBBI circular? Surely, one may ensure compliance by writing, perhaps as a part of the notice calling the CoC meetings that only those empowered to decide should be attending, but practically, no resolution professional may reasonably expect there would be much change. Unless, of course, the Reserve Bank of India (RBI) sends out a directive – that the member attending the CoC should be sent with a pre-approval of the relevant hierarchy so that the attendee may take a decision at the meeting or the banks become proactive enough to prepare their own evaluation matrices, approved by the senior-most personnel, which can serve as basis for the attendees at CoC to take a decision.
(Vinod Kothari is a chartered accountant, trainer and author. Mr Kothari, through his firm, Vinod Kothari and Company, is also engaged in the practice of corporate law for over 25 years.