Can a CoC member be asked to contribute towards CIRP cost ?

The question is whether CoC member(s) is/are required to or can be forced to, provide interim finance to CD or asked to contribute to fill the gap between the CIRP cost & internal resources of CD.

In the following cases, as in many other cases, CoC members were asked to contribute towards CIRP cost.

i). NCLT Mumbai-I (31.10.2018) in Aqua Omega Services Pvt. Ltd. vs Great United Energy Pvt. Ltd. [MA 986/2018 IN CP (IB)-2104/MB/2018] held that;. Therefore, as per the provisions of Regulation 33 and Regulation 34, it is the responsibility of the CoC to make the payment of Resolution professionals costs. In this case, CoC consists of sole Financial creditor, i.e. ICICI Bank. Therefore, ICICI Bank is directed to make the payment of the Resolution Professional cost along with IRP expenses, which has been ratified by the CoC before 5th November 2018.

ii).NCLAT (10.01.2020) in Committee of Creditors M/s. Smartec Build Systems Pvt. Ltd. Vs B. Santosh Babu & Ors. [Company Appeal (AT) (Insolvency) No. 48 of 2020] held that; we agree with the observations made by the Adjudicating Authority that the ‘Committee of Creditors’ is to pay the fees and cost incurred by Mr. B. Santosh Babu, ‘Interim Resolution Professional’, who also acted during the resolution process beyond 30 days till the date of liquidation having not allowed to continue as Liquidator.

iii) NCLAT (10.12.2020) in Newogrowth Credit Pvt. Ltd.Vs.Resolution Professional, Bhaskar Marine Services Pvt. Ltd. & Ors.[Company Appeal (AT) (Insolvency) No. 1053 of 2020] held that; a CoC  member is to bear his share of CIRP cost in proportion of his voting share and the period, he was a member of the CoC. 

Let’s look into the provisions of the Code & Regulations on this aspect;

Insolvency and Bankruptcy Code, 2016.

# Section 5 (13) “insolvency resolution process costs” means –

(a) the amount of any interim finance and the costs incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;

(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and

(e) any other costs as may be specified by the Board;

# Section 20. Management of operations of corporate debtor as going concern. -

(1) The interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.

(2) For the purposes of sub-section (1), the interim resolution professional shall have the  authority-

• (a) to appoint accountants, legal or other professionals as may be necessary;

• (b) to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process;

• (c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property:

Provided that no prior consent of the creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt.

• (d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and

• (e) to take all such actions as are necessary to keep the corporate debtor as a going concern.

# Section 28. Approval of committee of creditors for certain actions. -

(1) Notwithstanding anything contained in any other law for the time being in force, the  resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely: -

• (a) raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting;

• (b) create any security interest over the assets of the corporate debtor;

# Section 52. Secured creditor in liquidation proceedings. -

(1) A secured creditor in the liquidation proceedings may-

• (a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or

• (b) realise its security interest in the manner specified in this section.

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(8) The amount of insolvency resolution process costs, due from secured creditors who realise their security interests in the manner provided in this section, shall be deducted from the proceeds of any realisation by such secured creditors, and they shall transfer such amounts to the liquidator to be included in the liquidation estate.

# Section 53. Distribution of assets. -

(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -

• (a) the insolvency resolution process costs and the liquidation costs paid in full;

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

# Regulation 29. Sale of assets outside the ordinary course of business.

(1) The resolution professional may sell unencumbered asset(s) of the corporate debtor, other than in the ordinary course of business, if he is of the opinion that such a sale is necessary for a better realisation of value under the facts and circumstances of the case:

Provided that the book value of all assets sold during corporate insolvency resolution process period in aggregate under this sub-regulation shall not exceed ten percent of the total claims admitted by the interim resolution professional.

(2) A sale of assets under this Regulation shall require the approval of the committee by a vote of sixty-six per cent of voting share of the members.

(3) A bona fide purchaser of assets sold under this Regulation shall have a free and marketable title to such assets notwithstanding the terms of the constitutional documents of the corporate debtor, shareholders’ agreement, joint venture agreement or other document of a similar nature.

Author’s comments; Here it is quite important to note that the book value of  unencumbered assets which can be sold during CIRP have been restricted to the 10% of the admitted claim. [This regulation is contrary to the provisions of the Code, which directs IRP to make every endeavour to protect and preserve the value of the property of the corporate debtor - Section20(1)]

# Regulation 31. Insolvency resolution process costs.

“Insolvency resolution process costs” under Section 5(13)(e) shall mean-

(a) amounts due to suppliers of essential goods and services under Regulation 32;

(aa) fee payable to authorised representative under sub-regulation (8) of regulation 16A;

(ab) out of pocket expenses of authorised representative for discharge of his functions under section 25A;

(b) amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(1)(d);

(c) expenses incurred on or by the interim resolution professional to the extent ratified under Regulation 33;

(d) expenses incurred on or by the resolution professional fixed under Regulation 34; and

(e) other costs directly relating to the corporate insolvency resolution process and approved by the committee.

From the above provisions of the Code & CIRP Regulations following  position emerges;

1. The CIRP cost will be met from the following resources;

1. Internal Resources; 

(i). Liquid funds available with the corporate debtor.

(ii) Disposal of unencumbered assets of CD, book value of which not to exceed 10% of the admitted claims, with the prior approval of CoC.

2. External Resources ;

Interim finance, with or without coupon,  from CoC member or outside financier, with or without creating security interest over assets of the CD, with the prior approval of CoC. Interim finance ill form part of CIRP cost, which shall be repaid in priority during the liquidation process as per the provisions of section 52(8) & 53(1)(a). 

2. The unpaid CIRP cost, alongwith interim finance is to be provided for either in the resolution plan or paid in priority during the liquidation process. 

Nothing in the Code or Regulations suggest that a creditor or CoC member is obliged to contribute to CIRP cost or to provide interim finance to fund the CIRP cost. Rather unpaid CIRP cost is taken care in the resolution plan or is to be carried over to the liquidation process, to be paid in priority as per the provisions of the section 52(8) & Section 53(1)(a).

In chapter II ( CIRP) & chapter III (Liquidation Process), only section 52(8) provides creditor to share insolvency resolution process cost, that too out of  the proceeds of enforcement of security interest. Nowhere else, as per the provisions of the Code, a creditor is required to contribute towards the CIRP cost. Thus, in my views, a creditor can not be forced to contribute towards the CIRP cost during the insolvency resolution process.

Now comes the practical aspect of the problem;

In most of the cases of CD under insolvency, the CD is either facing negative cash flows or the operations are closed. It’s very difficult to envisage a company under insolvency with positive cash flows. It’s only companies with negative cash flows face difficulty in meeting their obligations and slip into insolvency.

 

As per the Code and regulations, IRP/RP is broadly responsible for the follow;

1. Execution of Corporate Insolvency Resolution Process in accordance with the provisions of the Code & Regulations thereof.

2. Manage the CD as a going concern, if it has not stopped operations prior to the date of commencement of insolvency.

In a fairly good number of cases, CoC is reluctant to approve interim finance. This puts the IRP/RP in a precarious situation, as he is responsible to carry out certain statutory duties under the Code besides managing the CD as a going concern. Practically IRP/RP cannot go to AA for directions, as he holds the office of  IRP/RP at the will & pleasure of CoC.

Author is of the opinion that CIRP Regulations should have enabling provision (similar to # Regulation 2A of Liquidation process regulations), that the FC with the biggest vote share will provide interim finance, as estimated by IRP /RP, with interest @ SBI MCLR + 2%.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

# Regulation 2A. Contributions to liquidation costs.

(1) Where the committee of creditors did not approve a plan under sub-regulations (3) of regulation 39B of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall call upon the financial creditors, being financial institutions, to contribute the excess of the liquidation costs over the liquid assets of the corporate debtor, as estimated by him, in proportion to the financial debts owed to them by the corporate debtor.