Ramesh Kymal: Analysing the Need for a Lesser ‘Creditor-Heavy’ Force Majeure Model under the IBC
[Tejas and Diksha are students at National Law Institute University, Bhopal.]
On 9 February 2021, the Supreme Court of India (SC), in the case of Ramesh Kymal v. Siemens Gamesa Renewable Power Private Limited, ruled that Section 10A of the Insolvency and Bankruptcy Code 2016 (IBC) as inserted by the Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 (Ordinance) forbids the commencement of a corporate insolvency resolution process (CIRP) with regard to a default that happened on or after 25 March 2020, even if the CIRP proposal was filed before 5 June 2020, i.e. the date on which the provision was inserted. While Section 10A intends to cover the defaults of all kinds, this piece aims to address the impact of this provision on operational creditors with particular emphasis.
The judgement has attracted significant backlash not only for making the existing ‘creditor-heavy’ paradigm heavier, but also for not looking at the situation of operational creditors from a futuristic perspective. By overlooking potential harms that the COVID-19 pandemic may have on them, the court did not deem it necessary to decisively state anything pertaining to recovery at some point in future and thus effectively rendered the operational creditors in a continued disadvantaged position.
The ‘Creditor-Heavy’ Paradigm
A primary aim behind the implementation of the IBC is insolvency resolution of corporate individuals in a time bound manner, so as to optimize the worth of their assets. In addition to this, the IBC tried to bring about a paradigm change from the model of debtor-in-control to a mechanism guided by creditors. The Ordinance, by temporarily doing away with the application of Sections 7, 9 and 10 ignored not only the potential financial hassles an operational creditor may face in force majeure situations, but also the legitimate need for recovery of debts. The Ordinance notably failed to acknowledge the existence of financial creditors behind a corporate debtor in most circumstances as security for temporary clearances of debt liabilities. The financial creditor could then in turn be mandated to obtain respective portions in differed installments from the corporate debtor owing to the force majeure situation, as financial creditors are in possession of securities and assets of the corporate debtors and are protected under Section 5(8) of the IBC.
The judgment adds to the disadvantaged position of operational creditors after the Ordinance barred them from filing CIRP applications for debt defaults after 25 March 2020. As a result of the strict interpretation by the court in this case, defaults occurring after 25 March 2020 cannot be remedied against through applications that were made even before the Ordinance was promulgated, which just marked the initiation of the force majeure situation. Further, neither the Ordinance nor the judgment called upon adjudicating authorities to assess whether the cause for default was financial difficulties posed due to the pandemic or any other cause independent of it.
Section 30(2)(b) of the IBC mandates that a resolution plan is to be examined to ensure that it “provides for the payment of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under Section 53.” Additionally, under a settlement agreement, the minimum payout to operational creditors should not be less than the liquidation value of the operational debt.
Instead of an absolute deferment of the CIRP, some respite in the form of a minimum and mandatory sum to be paid to the operational creditors after regular intervals could have been envisaged. The basis of payment could be the kind of debt to be paid and the financial position of the corporate debtor, adjudicated by the Committee of Creditors (CoC), formed through some restructuring to its composition to suit the situation. Therefore, the Ordinance was definitely not the most effective in striking a balance between how much corporate debtors could be mandated to pay and the financial position of the corporate debtor, so as to ensure that debt control and regulation is feasible from a futuristic perspective of a corporate debtor.
The Road Ahead
Since the operational creditors are in a significantly disadvantaged position, it is imperative to ensure that the financial interests of operational creditors are now secured by (a) a balanced and portioned debt payment, increasing or decreasing as per the financial standing of the corporate debtors and/or the financial creditors vis-à-vis the operational creditors, and (b) ensuring representation of the operational creditors in the CoC.
Balanced and Portioned Debt Payments
The objective of IBC is to ensure balance of stakeholder interests, which is inclusive of the interests of operational creditors. Hence, in force majeure situations, it would be prudent to work out on debt amounts that could be relayed progressively to operational creditors, so that a complete absence of payments is extinguished. This could either happen through informal communication amongst all the stakeholders as part of risk management procedures in the pre-CIRP situation or through a formal representation in the CoC (inclusive of operational creditors) in case CIRP has already been initiated. The aim would be to decide on the periodic payments of debt to operational creditors, keeping in primary consideration factors like the nature of debt and financial stability of the corporate debtors and/or the financial creditors as against the operational creditors.
Representation of Operational Creditors in the CoC
Since operational creditors are not allowed any representation within the CoC, the same renders them incapable of expressing their legitimate interests before the corporate debtors and the financial creditors. Hence, they are unable to contribute towards the construction of an effective resolution, which is also inclusive of the interests of operational creditors. It is to be noted that it is incorrect to assume that simply because financial creditors have the opportunity to assess a plan's viability and feasibility for essentially all the stakeholders, they will also be able to set aside personal bias and justify the exercise from the perspective of operational creditors.
To highlight the importance of including operational creditors in CoC, reliance is placed on the Supreme Court’s decision in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others. The court herein noted that it is imperative for CoC to render decisions which are reflective of the objectives of the IBC, i.e., maximization of the value of the assets of the debtor as well as a balance between the interests of all stakeholders including operational creditors. In addition to being antithetical to the objectives of the IBC, the exclusion of the operational creditors from the CoC also leads to marginalization of financial requirements of the operational creditor in force majeure situations. They continue to be devoid of any power to influence decisions surrounding insolvency resolution process, which notably includes acceptance of a resolution plan, that may exhibit crucial changes in debt payment composition. In the absence of such involvement and consent of operational creditors, they have no way of ensuring the payment of at least the liquidation amount and the recovery preference over financial creditors at any stage.
To demonstrate how an Indian model on the above lines could be worked out, it would be pertinent to consider Chapter 11 of the US Bankruptcy Code, which provides for creation of a committee of unsecured creditors during the insolvency resolution process. This committee puts out representations to the committee of corporate debtors and, in furtherance of an internal discussion between these two committees, an effective resolution plan is drawn up, thereby ensuring satisfaction of commercial and financial interests on both the sides. In the Indian context, the latter committee could have the financial creditors included, working with the corporate debtors on representations made by the operational creditors, who could then form an effective resolution in the presence of the operational creditors after a feasibility analysis of all the representations made.