Cramming down under the Insolvency Code

The hot topic of conversation in India is the (Indian) Insolvency and Bankruptcy Code, 2016 (IBC), and one aspect that demands attention is “liquidation value”. Under IBC, a resolution plan must identify sources of funds to pay (in priority) the liquidation value due to: (a) operational creditors; and (b) dissenting financial creditors. The intention is to allow operational and minority creditors to be crammed down by ensuring optimal recovery, while allowing the reorganization of the debtor company as per majority creditors decision.

In order to assess where this places minority creditors, it becomes crucial to look at the options available. In a liquidation scenario, secured creditors have an option either to relinquish security interest in favour of the common pool and take a preferential pay out in the liquidation waterfall, or to enforce their security interest outside of liquidation. A creditor is likely to exercise either option on the basis of the overall returns anticipated and time value of money considerations. A moot question arises as to whether the resolution professional, while producing liquidation value vis-à-vis each creditor before the Committee of Creditors (CoC), takes the preference of each creditor in a liquidation scenario.

Upon relinquishment of security by a secured creditor, Section 53 of the IBC ranks such secured creditors in priority over unsecured creditors. Though there is no specific provision for distribution priority at the stage of a resolution plan, implicitly from a reading of Section 30(2) of the IBC, the principles of Section 53 appear to be incorporated. The resolution plan once approved by the CoC and NCLT is contractual between the financial creditors and the resolution applicant and binding on the corporate debtor acting through the resolution applicant and other stakeholders.

Veena Sivaramakrishnan is a partner and Dhananjai Charan is an associate at Shardul Amarchand Mangaldas & Co