Since the votes are assigned on the basis of preferences among the plans offered, chances of a liquidation — the last resort in an insolvency — will also likely be minimised.
These amendments were put forth in arecent discussion paper, and the IBBI has invited comments on the proposal until June 27.
Currently, resolution professionals (RPs) present all the resolution plans to the committee of creditors (CoC) for voting. The COC, consisting of financial creditors, can approve a resolution plan if it receives at least 66% of the voting share, considering factors like viability and distribution methods. COC members have the choice to vote on each plan or abstain from voting.
However, this often leads to none of the plans receiving the required 66% approval, causing potential complications.
Under the proposed system, all plans will be evaluated based on their first preference. If no plan secures the required 66% votes, the plan with the fewest first preference votes will be eliminated, and its first preference will be assigned to the second preference. This process of elimination and exclusion will continue until a plan obtains the necessary votes or it is determined that none of the plans have gained approval from the CoC.To tackle this issue, the proposed system focuses on the number of highest preferences (H1s) received by a resolution plan. If a plan obtains 66% or more H1 votes, it will be deemed approved.Through the preferential voting system, plans with the lowest first preference votes will be eliminated, and their votes will be transferred to the higher preference options indicated by the voters.
“The aim of this system is to prevent unnecessary liquidation of companies. It follows a widely used approach seen in various countries, including the voting process in Rajya Sabha,” explained Mamta Binani, an insolvency resolution professional.
“This proposed voting system for resolution plans is similar to the elections held in Rajya Sabha, Company Secretary, Chartered Accountant, and Cost Accounting elections.”
The “single transferable vote” mechanism allows voters to rank their preferences on a ballot, said IBBI. They can designate their preferred plan as the first choice and assign rankings to other plans in order of preference. If their top choice is eliminated due to insufficient votes, their vote is not wasted.
Instead, it is transferred to their next preferred plan that remains in contention.