INSOLVENCY AND BANKRUPTCY INFORMATION
President Approves Promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018.
"The Ordinance provides significant relief to home buyers by recognizing their status as financial creditors. This would give them due representation in the Committee of Creditors and make them an integral part of the decision making process. It will also enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers."
BUT QUESTION STILL STAND THAT
"WHAT IF In practice, the number of creditors/Home Buyer are huge in case of large companies and it may be inefficient, unmanageable and expensive to hold meetings of the CoC with all such creditors present."
This is article of the series of editorials written by the CS Jeetam Kumar Saini on Corporate Laws(He also Written many articles Including Companies Act, 2013, SEBI, RBI Regulations, IBC) pcsjeetamsaini@gmail.com - 9785949998
Under CA 2013, debenture trustees were considered to be creditors for the purposes of representation of the debenture holders in certain meetings during winding up which was operative prior to the enactment of the Code. A plain reading of the Code suggests that only financial creditors i.e. persons to whom a financial debt is owed will be a part of the CoC.
A formal reading of code states that guardian of a financial creditor, administrator or executor of estate of a financial creditor or debenture trustee and the like can trigger insolvency of a corporate debtor and be a part of the CoC.
Further, on a perusal of section 21(6) of the Code,it provides that creditors in respect of certain debts, like those extended as syndicate facilities, consortium arrangements, and issued as securities, may choose to be present in the meetings themselves or appoint a single trustee, agent, or insolvency professional to act and vote on their behalf. Thus, this provision allows for certain persons other than the financial creditors to be a part of the CoC for the purposes of representation and voting. It was noted that this sub-section allows appointment of a representative for certain creditors but does not mandate it.
Further, though the definition of ‘security’ is wide enough to include debts issued through instruments like debentures, it may not allow all creditors who are not security holders but are beyond a certain number, as a class, to jointly appoint a representative to act and vote on their behalf. Thus, section 21(6) as it currently stands may not completely solve the problem of managing a large number of creditors in the CoC.
In large CoCs, compliance with the provisions of the Code and the CIRP Regulations could have various challenges:
- Logistical challenges -Code aims at ensuring increased participation of all the members of the CoC in the decision-making process in the meetings, large CoCs pose significant logistical challenges.
- Technical problems -In large CoCs, it may be a technical challenge to have a large number of voters registered on the e-voting portal and then to ensure that each one of them has access to it.
In light of the logistical and technical difficulties in ensuring participation by all members of the CoC in large CoCs, need for a provision for representation of retail creditors, public depositors or any other individual financial creditors above a certain threshold in terms of number through an authorised representative. Such authorised representative may attend and vote on behalf of such financial creditors in the said meeting, express the concerns of the creditors being represented by it in the meeting, obtain clarity on issues and communicate any important concerns to the represented creditors.
For example,
A debenture trustee would be appointed if debentures exceeding 500 have been issued or if secured debentures are issued. Such creditors may be represented through such pre-appointed trustees or agents. For other classes of creditors which exceed a certain threshold in number, like home buyers or security holders for whom no trustee or agent has already been appointed under a debt instrument or otherwise, an insolvency professional (other than the IRP) shall be appointed by the NCLT on the request of the IRP. It is to be noted that as the agent or trustee or insolvency professional, i.e. the authorised representative for the creditors discussed above and executors, guarantors, etc. as discussed in paragraph 9 of this Report, shall be a part of the CoC, they cannot be related parties to the corporate debtor in line with the spirit of proviso to section 21(2).
Hence in light of the deliberation above,mechanism requires to be provided in the Code to mandate representation in meetings of security holders, deposit holders, and all other classes of financial creditors/Home buyer which exceed a certain number, through an authorized representative.
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