With the introduction of above concept as authorized representative in 2018 by IBBI vide its communication dated 13th July, 2018, many discussions have taken place among the homebuyers as a class and interesting issues have arisen to be solved with limited case studies available under Insolvency and Bankruptcy Code, 2016. (IBC 2016 or IB Code)
Let us learn from the very beginning the evolution of Authorized Representative, the necessity to introduce the concept, and what confrontations are faced by AR due to multifarious groups who emerge out of homebuyers whose loss of financial assets, running away of the builders who promised the heaven in the early stages, and the active collaboration of politicians, industrialists, and vested interests emerging to annex the capital of homebuyers.
Historical background
Mankind has always been enthused to get a permanent living place which later on emerged as a single house, flats for multitude of homebuyers, commercial investments as shops, plots, or even investments linked to builders of huge housing complexes.
The obvious results were the greed of the supply and demand side in the housing sector which resulted in huge investments from all types of investors who found it very easy to invest and expect the assured results of the home builders to a sky-high level.
With the intention of the home builders turning towards changing goal posts of delivery of homes and other related products, the end users started facing a huge loss of capital, non- delivery of housing units and cheating of capital itself. Many home builders have been reported as financial absconders and ultimately left the nation.
At that stage, it was felt by judiciary to bring homebuyers dues under Insolvency and Bankruptcy Code, 2016 (I B C 2016) by stipulating minimum lodging of claims by 100 home buyers or 10% of homebuyers
Who will represent these homebuyers who are now classified as financial creditors in the committee of creditors who will run the company through the appointment of insolvency professional as interim insolvency professional at the beginning stage of CIRP process itself under IBC 2016.
Copy of IBBI circular 015/2018 reproduced below will lead us legally.
IBC: Appointment of IP as authorised representative for classes of creditors
“Sub: Appointment of Authorised Representative for Classes of Creditors under section 21 (6A) (b) of the Insolvency and Bankruptcy Code, 2016 Section 21 (6A) (b) of the Insolvency and Bankruptcy Code, 2016 (Code) read with regulation 16A (1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (Regulations) provide that where the corporate debtor has at least ten financial creditors in a class, the interim resolution professional shall offer a choice of three insolvency professionals and a creditor in the class may indicate its choice of an insolvency professional, from amongst the three, to act as its authorised representative. The insolvency professional, who is the choice of the highest number of creditors in the class, is appointed as the authorised representative of the creditors of the respective class. The authorised representative collects voting instructions from the respective class of creditors, attends the meetings of the committee of creditors (CoC) and casts vote in respect of the said class in accordance with the instructions he receives from the creditors.”
The above circular clearly states further that Section 21 (6A) (b) of the Code read with regulation 16A of the Regulations provide for a simplified mechanism of representation of financial creditors through authorised representatives, as detailed in Para 1 above, and are, therefore, matters of procedure.
Now let us discuss the function of Authorized Representative (AR) in the corporate insolvency resolution process.
Later instructions as how the AR would vote in COC meetings are equally revealing and confusing as well.
Let us again fall back to the instructions from IBBI.
What are the rights and duties of authorised representative of home buyers as financial creditors?
Ans. As per Section 25A, the rights and duties of authorised representative of financial creditors are:
1. The authorised representative under sub section (6) or sub section (6A) of section 21 or sub section (5) of section 24 shall have the right to participate and vote in meetings of the committee of creditors on behalf of the financial creditors he represents in accordance with the prior voting instructions of such creditors obtained through physical or electronic means.
2. It shall be the duty of the authorised representative to circulate the agenda and minutes of the meeting of the committee of creditors to the financial creditor he represents.
The authorised representative shall not act against the interest of the financial creditor he represents and shall always act in accordance with their prior instructions: Provided that If the authorised representative represents several financial creditors, then he shall cast his vote in respect of each financial creditor in accordance with instructions received from each financial creditor, to the extent of his voting share.
Provided further that if any financial creditor does not give prior instructions through physical or electronic means, the authorised representative shall abstain from voting on behalf of such creditor. 3A. Notwithstanding anything to the contrary contained in subsection (3), the authorised representative under sub-section (6A) of section 21 shall cast his vote on behalf of all the financial creditors he represents in accordance with the decision taken by a vote of more than fifty per cent of the voting share of the financial creditors he represents, who have cast their vote: Provided that for a vote to be cast in respect of an application under section 12A, the authorised representative shall cast his vote in accordance with the provisions of subsection (3) 4.
The authorised representative shall file with the committee of creditors any instructions received by way of physical or electronic means, from the financial creditor he represents, for voting in accordance therewith, to ensure that the appropriate voting instructions of the financial creditor he represents is correctly recorded by the interim resolution professional or resolution professional, as the case may be.”
- Let us put the whole instructions in simple words as under:
- Authorised Representative to shall act as per the directions received from the homebuyers and even 51% of votes cast could enable him to vote as if it is 100%.
Now let us discuss the various scenarios presented by actual situations.
Most of the housing projects previously constituted had a good share of housing, commercial units, and in some cases just advance of money for investment purposes. The companies entering in real estate projects with ample measure of exposure did not bother to draw a time line which would enable them to complete on time. If declared in the beginning, the timelines were more often than not violated.
Situation 1
The owner of the company has been declared a financial absconder and has run away from the country. After calling the claims from those who were eligible, the only left over is neither any cash in the bank nor any building to function as a CIRP unit. With the IRP being decided by COC, either for extension as RP or bid good bye with even his/her claims for functioning left in limbo, will the RP alone carry the whole group of home buyers and others to contribute towards CIRP costs without the assistance of AR who is an elected member from those three originally proposed indicating his popularity among the homebuyers.
IB Code 2016 is blank and stares at the sky for any solution. Can the AR issue request to the members of homebuyers for active contribution?
Can AR talk over physical/online means for contribution of CIRP costs?
Situation 2
If the RP proposes some names of professionals and needs the help of AR to convince the members of COC, represented by him/her, can AR take the motivation to get the message carried.
Though I would have acted “yes” in above situations 1 and 2, there is no guidance from either IBBI or IB Code 2016. But the actual voting is strictly in terms of instructions of homebuyers normally exercised through electronic means and kept confidential till the voting process is completed.
Situation 3
If no progress has been made by the RP and the projects are languishing, the Code provides as under:
Section 27 Replacement of resolution professional by Committee of Creditors-
(1) “Where, at any time during the corporate insolvency resolution process, the committee or creditors is of the opinion that a resolution professional appointed under section 22 is required to be replaced, it may replace him with another resolution professional in the manner provided under this section.
(2) The committee of creditors may, at a meeting, by a vote of sixty-six per cent of voting shares, resolve to replace the resolution professional appointed under section 22 with another resolution professional, subject to a written consent from the proposed resolution professional in the specified form.]
(3) The committee of creditors shall forward the name of the insolvency professional proposed by them to the Adjudicating Authority.
(4) The Adjudicating Authority shall forward the name of the proposed resolution professional to the Board for its confirmation and a resolution professional shall be appointed in the same manner as laid down in section 16.
(5) Where any disciplinary proceedings are pending against the proposed resolution professional under sub-section (3), the resolution professional appointed under section 22 shall continue till the appointment of another resolution professional under this section.”
Let me explain the role of authorized representative under the above process.
If the authorized representative receives in writing electronic means intimation clearly requesting for replacement of RP, he should ensure that minimum 33% of voting share of COC homebuyers had instructed him to call for a COC and forward the same to RP to convene a COC meeting where 66% of voting shares decide to replace the current RP with another whose consent had been taken. AR has to get electronic voting from his homebuyers, get the required percentage, and ensure a replacement of a RP who agrees in writing to work in place of the current one.
In case the current RP refuses to forward the resolution to Adjudicating authority, can the AR forward the same if other FCs have voted in the voting process. Or the homebuyers themselves carry the required 66% voting share. In real situation, AR does the needful by moving papers to AA.
Discussion on voting share
Let us analyze an actual situation with some statistical information.
Let us imagine the voting share of homebuyers as 70% and the share of other financial institutions as 30%.
Out of those voted, with only 51% voted in favour of removal of RP, it is presumed that the whole homebuyers have voted for the removal for 100% which nullifies even if the banks/other financial institutions have not taken part or voted otherwise.
In case RP refuses to move the resolution for his removal, AR can move the resolution to AA who would after a confirmation from IBBI would pass the required orders.
Another not an uncommon situation exists.
RP does not consider it appropriate to pay fee payable to AR or his out-of-pocket expenses as provided in the code.
Let us look at this explanation from I B Code 2016.
What are Insolvency Resolution Process costs as per Sec. 5(13)(e)?
Ans. Regulation 31 of Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 specifies other costs as: a) amounts due to suppliers of essential goods and services under Regulation 32; b) fee payable to authorised representative under Regulation 16A(8). c) out of pocket expenses of authorised representative for discharge of his functions under section 25A.
AR may complain to IBBI under its prescribed procedure on complaints.
Can AR be on regular communication either in person or by electronic means to know the views of homebuyers whom he/she represents on all matters related to CIRP? IBBI has so far kept it unattended query.
Conclusion
Authorized Representative as a concept has got minimum coverage under I B Code 2016 or its relative guidelines from IBBI. With hundreds of homebuyers falling under the code as claims, their relative requests have to be looked after AR in actual situation. I request IBBI to look at the present situation, conduct a survey among current Ars, and issue new directions wherever needed.
Those working as AR can give their views/arguments to enhance the value of this article. The writer an experienced IP does not need any reference to the Code for guidance. Can we have a meaningful discussion?
Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.
Reference
IB Code 2016 from IBBI Website
Insolvency and Bankruptcy Code, 2016
Frequently Asked Questions on The Insolvency and Bankruptcy Code, 2016 (Revised January 2022 Edition) – a book.
https://ibbi.gov.in/uploads/publication/6adaf64e3d3221399cfcda795de38a23.pdf
The above book is one of the most useful publications for any insolvency professional, lawyers, academics, or other stakeholders of CIRP.
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