This article has been written by Rashmita Panigrahi pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

India is a country currently in the process of establishing a robust market economy that requires the implementation of modern, well-drafted laws to replace the outdated ones from the past centuries. So, it is essential to have efficient and effective organisations that enforce these new laws.

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Companies in India are registered under the Company Act, 2013, which provides a legal framework for the incorporation, operation and governance of companies. Similarly, the Limited Liability Partnership Act, 2008; the Micro, Small and Medium Enterprise Development Act, 2006, Partnership Act, 1932, etc. are there for the registration of different types of business entities. However, there were no proper provisions for resolving insolvency, liquidation or bankruptcy for these business entities.

In December 2015, the government passed a new law called the Insolvency and Bankruptcy Code Bill. This law was created by a special group called the Bankruptcy Law Reforms Committee, which works under the Ministry of Finance. After asking the public for their opinions and getting suggestions from a group of lawmakers, both Parliament’s houses agreed on the Insolvency and Bankruptcy Code, 2016. This became official on May 28, 2016, and was put into action on August 5th and August 19th, 2016.

The old laws for dealing with financial problems were outdated and not very helpful. But now, the Insolvency and Bankruptcy Code, 2016 is here to replace them. This new law is great because it helps companies, individuals, partnerships, and other groups that are having money troubles. It focuses on helping the people or companies that are owed money (creditors) sort out these problems. It’s a big change that was really needed.

Who is a creditor

Before understanding the committee of creditors, first we need to understand who is a creditor and why he is most important for a company.

In the realm of finance and accounts, a creditor is an individual, financial institution, business owner, organisation or entity that lends money or extends credit in exchange for receiving money in the future, with or without any additional interest. In simple terms, we can say that a creditor is an entity to whom money is owed. The debtor owes money to the creditor.

If you have ever purchased a car or home through a loan, then you must know about the concept of debtor and creditor. In this case, you are the debtor, and the financial institution where you took the loan is the creditor. A creditor can be anyone to whom you owe an outstanding balance; however, typically, it means a financial organisation or any business entity.

But do you know that there are two types of creditors? One is a secured creditor, and the other is an unsecured creditor.

The division of creditors is only based on the asset given by the debtor as collateral. Secured creditors always lend credit when the debtor pledges any asset, like a title deed, salary slip, gold ornaments, etc., as collateral to his debt so that the creditor can recover his amount from that asset if the debtor becomes bankrupt or insolvent.

Whereas, the unsecured creditors are mostly at risk, as they do not take any collateral from their debtors. There are very few chances to recover the entire amount from the debtor when the debtor becomes bankrupt.

But as per the Insolvency and Bankruptcy Code (IBC) 2016, creditors can also be divided as financial creditors (FC) and operational creditors (OC).

According to Section 5(7) of the Insolvency and Bankruptcy Code 2016, a financial creditor is defined as “a person to whom the debt is owed, including a person to whom such debt has been legally assigned.” For example, banks, financial institutions, etc.

Whereas according to Section 5(20) of the Insolvency and Bankruptcy Code 2016, an operational creditor is defined as “a person to whom the debt is owned, which includes the person to whom such debt has been legally transferred.” It means they are the entities to whom money is paid in return for the services they have delivered. For Example: vendors and suppliers, employees, government, etc.

Both the creditor and the debtor play very important roles in every business, as they can impact the cash flow of your business. They affect the assets and liabilities on the balance sheet of any company. When a company lend credit to another company, then the credit can be considered as an asset. But the debts taken by the company always count as liabilities.

Committee of creditors

When we hear the word “Committee of Creditors”, the one thing that comes to mind is that there may be some group of creditors who hold a round table conference to discuss any banking-related matters in a company.

But what exactly does the committee of creditors mean? Where is it written? And why do they form?

The answer is that during the bankruptcy of a company, a group of people represents the company’s creditors, driving the insolvency process under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). In 2016, the law of insolvency and bankruptcy was codified in the form of the Insolvency and Bankruptcy Code, 2016 (IBC Code). According to this code, when the company defaulted in paying a debt for an amount over ₹ 1 crore, all the creditors of such a company were created into a group that is referred to as the Committee of Creditors ( ) of that company.

The Committee of Creditors is created immediately after the initiation of the insolvency process. The Committee of Creditors (COC) spearheads the Corporate Insolvency Resolution Process (CIRP), very effectively taking over control from the former Board of Directors of the debtor-company.

The Committee of Creditors typically consists of financial creditors who have voting rights based on the proportion of their dues. Operational creditors may also be a part of the COC, but their participation and voting rights are often limited unless they meet certain thresholds.

Composition of COC

The Committee of Creditors is a decision-making body in the Corporate Insolvency Resolution Process, having all financial creditors of the corporate debtor. Section 21 of the IBC deals with the committee of creditors.

Sec-21(1) of the code says, “The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors”.

But there is another provision, too. The financial creditor or the authorised representative of the financial creditor should not be a related party to the corporate debtor. But if it is a related party, then it shall not have any right of representation, participation or voting in a meeting of the committee of creditors.

Roles and responsibility of COC

Within seven days of its formation, the Committee of Creditors must convene its initial meeting, during which it has the authority to designate a Resolution Professional or replace the existing Interim Resolution Professional with another, contingent upon obtaining a vote representing no less than sixty-six percent of the voting shares held by the financial creditors. But, in Dharmendra Kumar vs. IBBI & Ors., NCLAT held that COC can appoint the IRP as RP only after obtaining consent from the proposed person.

Decision making

When it comes to the resolution of the debtor’s insolvency, the Committee of Creditors is the primary and supreme decision-making body. It also takes important decisions regarding the future of the company.

Otherwise, as per a separate provision in the Insolvency and Bankruptcy Code of 2016, all decisions made by the Committee of Creditors (COC) must receive approval from at least fifty-one percent of the financial creditors’ voting shares. In the case of K. Sashidhar vs. Indian Overseas Bank & Ors. (2019), the honourable Supreme Court clarified that the law does not authorise the Resolution Professional (RP), the National Company Law Tribunal (NCLT), or the National Company Law Appellate Tribunal (NCLAT) to overturn the COC’s commercial decisions, as no such provision has been established by the legislature.

Protection of interests

The Committee of Creditors’ main responsibility is to protect the interests of all the creditors representing them, including their own and to maximise the value of the debtor’s assets for distribution. They should ensure that the debtor does not abuse the bankruptcy process and take advantage of the creditors.

Information gathering

It is the responsibility of the Committee of Creditors to gather all the relevant information regarding the financial situation of debtors, including assets, liabilities, and operations.

Resolution plan evaluation

The Committee of Creditors evaluates and approves the resolution plans submitted by resolution applicants. It also supervises the work of the resolution professional, who manages the debtor during the insolvency process.

Approval of transactions

At the time of the insolvency process, the Committee of Creditors approve the significant transactions. The transactions may include the sale of assets or the initiation of new contracts.

Engagement of professionals

The Committee of Creditor’s main responsibility is to process the insolvency proceedings. But they also have the power to engage legal or financial professionals to assist them in the insolvency proceedings.

Operational management

The Committee of Creditors can take any decision on the insolvency of a debtor. So, they can also make key decisions regarding the debtor’s operations during the insolvency process, such as whether the business should continue to operate or not.

Advocating for fair treatment of creditors

The creditors’ committee has the duty of making sure that every creditor is treated fairly during the bankruptcy process. This involves making sure that assets are distributed in a way that is fair to all creditors and speaking up against any actions proposed by the debtor or trustee that could hurt the creditors’ interests.

Ensuring compliance

The Committee of Creditors also ensures that the insolvency process is compliant with the appropriate law and that the rights of all stakeholders are protected.

Functions of COC

Meeting regularly

According to the committee of creditors, the meeting will be conducted by the insolvency professionals, who act as chairpersons of the meeting. For the voting, every member should be present at the meeting. The Committee of Creditors is required to meet periodically to discuss the progress and make decisions regarding the insolvency process. 

Voting on resolutions: Voting is the most important function of the Committee of Creditors. Each member of the committee of creditors shall vote on various matters, such as approval of resolution plans, extension of the resolution process, and deciding on the liquidation of the debtor. But they shall vote in accordance with the voting share assigned to them based on the financial debts owed to such creditors as per the IBC.

Consideration of resolution plans

The Committee of Creditors reviews, negotiates, and approves resolution plans that aim to resolve the debtor’s insolvency and ensure the viability of the business.

Monitoring the assets

The Committee of Creditors monitors the management and disposition of the debtor’s assets by the resolution professional during the insolvency process.

Judicial interpretation

There are so many cases in our Indian Judiciary relating to the Committee of Creditors. Some are as follows:

K. Sashidhar vs. Indian Overseas Bank & Ors.

In the landmark Supreme Court case of K. Sashidhar vs. Indian Overseas Bank & Ors., the Committee of Creditors (COC) plays a crucial role in considering and approving resolution plans under the Insolvency and Bankruptcy Code (IBC). The process begins when a resolution plan is submitted to the COC by a potential investor or a group of investors.

The COC is responsible for evaluating the resolution plan based on various criteria, including its feasibility, viability, and compliance with the provisions of the IBC. The plan must also address the interests of all stakeholders, including creditors, shareholders, and employees.

Before presenting the resolution plan to them, the Resolution Professional (RP) must vet and verify it to ensure that it complies with all statutory requirements specified under Section 30(2) of the IBC. This includes assessing the plan’s financial feasibility, operational viability, and legal compliance.

The COC has the primary responsibility of approving or rejecting the resolution plan. The Code grants paramount status to the commercial wisdom of the COC, recognising that they are best placed to make decisions in the best interests of the corporate debtor and its stakeholders. The COC’s decision-making process is guided by the principle of maximising the value of the corporate debtor’s assets and ensuring a fair and equitable distribution of proceeds among creditors.

To ensure transparency and accountability, the COC must follow a structured voting process. Creditors with voting rights, typically determined by their debt exposure to the corporate debtor, cast their votes in favour of or against the resolution plan. The plan is approved if it secures the requisite majority as specified under Section 30(4) of the IBC.

Once the resolution plan is approved by the COC, it is submitted to the National Company Law Tribunal (NCLT) for final approval. The NCLT reviews the plan to ensure that it complies with the provisions of the IBC and protects the interests of all stakeholders. If the NCLT approves the plan, it becomes binding on all parties involved, including the corporate debtor, creditors, and shareholders.

The K. Sashidhar case emphasises the importance of the COC’s role in the IBC process. By granting paramount status to the commercial wisdom of the COC, the Code aims to facilitate efficient and effective resolution of corporate insolvency while ensuring a fair and equitable outcome for all stakeholders.

Shaji Purushothaman vs. Union Bank of India and Ors.

In the case of Shaji Purushothaman vs. Union Bank of India and Others, the National Company Law Appellate Tribunal (NCLAT) ruled that the Committee of Creditors (COC) must determine whether a settlement proposal made under Section 12(1) of the Insolvency and Bankruptcy Code (IBC) is superior to the Resolution Plan. This decision has significant implications for the corporate insolvency resolution process in India.

Section 12(1) of the IBC allows for the submission of settlement proposals by any interested party, including the corporate debtor, during the corporate insolvency resolution process. These proposals can include a plan for restructuring the debtor’s debt, selling its assets, or a combination of both.

The COC is responsible for evaluating settlement proposals and deciding whether to accept them. If the COC accepts a settlement proposal, it will then be binding on all stakeholders, including the corporate debtor, its creditors, and shareholders.

The NCLAT’s decision in Shaji Purushothaman vs. Union Bank of India & Ors. clarifies that the COC must compare the settlement proposal with the Resolution Plan when making its decision. The Resolution Plan is a plan submitted by a potential investor or acquirer that outlines how they intend to revive the corporate debtor and repay its creditors.

The NCLAT’s decision ensures that the COC must carefully consider all options available to them and select the proposal that is most likely to maximise the value of the corporate debtor’s assets and provide the best outcome for all stakeholders. This decision will help protect the interests of creditors, shareholders, and other parties involved in the corporate insolvency resolution process.

Overall, the NCLAT’s decision in Shaji Purushothaman vs. Union Bank of India & Ors. is a significant development that will have a positive impact on the corporate insolvency resolution process in India. By ensuring that the COC must compare settlement proposals with Resolution Plans, the NCLAT has helped to ensure that the best possible outcome is achieved for all stakeholders involved.

Ms. Rama Subramaniam vs. M/s Sixth Dimensions Project Solution Limited

In the case of Ms. Rama Subramaniam vs. M/s Sixth Dimensions Project Solution Limited, the National Company Law Tribunal (NCLT) ruled on the authority of the Committee of Creditors (COC) to change the Insolvency Resolution Professional (IRP). While acknowledging that the COC has the ability to replace the IRP, the tribunal emphasised that this power is not absolute and must be exercised for valid and tenable reasons.

The NCLT’s decision in this case serves as a reminder that the COC’s authority is subject to legal limitations and that arbitrary or unjustified changes to the IRP are not permissible. The tribunal’s ruling helps ensure that the insolvency resolution process remains transparent, fair, and accountable.

The IRP plays a crucial role in the insolvency resolution process, overseeing the management of the corporate debtor, formulating and implementing resolution plans, and facilitating negotiations between creditors and stakeholders. Therefore, it is essential that the IRP is a competent and experienced professional who can effectively discharge their responsibilities.

The NCLT’s ruling also highlights the importance of due process in insolvency proceedings. By requiring the COC to provide valid reasons for changing the IRP, the tribunal ensures that decisions are made in a transparent and well-reasoned manner. This helps protect the rights and interests of all stakeholders involved in the insolvency resolution process.

Furthermore, the NCLT’s decision underscores the need for robust oversight mechanisms in the insolvency regime. The tribunal’s role in reviewing and approving changes to the IRP acts as a check against arbitrary or capricious decisions by the COC. This oversight mechanism helps maintain the integrity and credibility of the insolvency resolution process.

Overall, the NCLT’s ruling in Ms. Rama Subramaniam vs. M/s Sixth Dimensions Project Solution Limited sets an important precedent for the exercise of the COC’s authority to change the IRP. By emphasizing the need for valid reasons and due process, the tribunal has contributed to the development of a fair and transparent insolvency resolution framework in India.

Conclusion

The Committee of Creditors plays a very important role in the insolvency process. But the specific roles and functions of the Committee of Creditors can vary based on the insolvency and bankruptcy laws of the relevant jurisdiction and depending on the circumstances and developments. The Committee of Creditors has the supreme powers, but it has to operate within the boundaries of law and it is always answerable to the adjudicating body for its decisions. The Committee of Creditors’ role is critical for ensuring that the resolution process is fair, transparent, and efficient and that it balances the interests of various stakeholders, including the creditors, the debtor, employees, and others.

References

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