Case Analysis for Limited Insolvency Exam

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Committee of creditors- responsibilities & functions

Committee of creditors- responsibilities & functions
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In 2016, the insolvency law had a major change in the enactment of the Insolvency and Bankruptcy Code, 2016. As per this Code, a new method was available for the creditors to seek resolution of a company by engaging an insolvency professional to take charge of the business operations of the corporate debtor when the company defaulted. The Committee of Creditors of a crucial pillar of the corporate insolvency resolution process that is completed with the help of a resolution professional.

The Committee of Creditors’ actions are towards reviving, rehabilitating, or restructuring the corporate debtor. Although the demands and conditions of each vary on the financial situation of the corporate debtor and the number of its creditors, the main responsibilities of the Committee of Creditors remain the same.

Understanding Creditors

In a business, creditors are important as they provide the necessary funds to sustain their business operations, invest in growth, and the required services that they need. Section 3(10) of the Insolvency and Bankruptcy Code, 2016 (IBC) defines creditors as any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor, and a decree-holder.

A secured creditor is a creditor in favour of whom security interest is created as per section 3 (30). Although unsecured creditors have not been defined under the IBC, upon the reading of the IBC provisions, unsecured creditors do not have any security interest. Financial creditors are any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to and comprise the Committee of Creditors (CoC). On the other hand, an operational creditor is a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

The Committee of Creditors 

The Committee of creditors is created immediately after the initiation of the insolvency process. It is the duty of the interim resolution professional to constitute the Committee of creditors after collating the creditor’s claims received against the corporate debtor and determining the current financial position.

The Committee of creditors plays a major role in deciding whether the company will be revived, rehabilitated or restructured. As per the IBC, when there has been a default of a debt for an amount over Rs. 1 crore, the Committee of creditors will comprise the financial creditors of the debtor as per section 21 of the IBC. Operational creditors can also be a part of the Committee of creditors, but their participation and voting share are limited unless they meet the circumstances under section 21.

Key Responsibilities of the Committee of Creditors

The first responsibility of the CoC is to hold the first meeting of the CoC within 7 days of its constitution. During the corporate insolvency resolution process (CIRP), the CoC makes important decisions regarding the approval or rejection of the resolution plan.

The National Company Law Tribunal (NCLT) relies on the decision of the CoC for its ultimate decision on whether the corporate debtor should be liquidated or not. The CoC also has the responsibility to protect the interests of the creditors and maximise the value of the debtor’s assets. It also supervises the actions of the resolution professional and any transactions during the CIRP. The CoC also decides on what and how expenses are to be made and approves the process cost.

Read more: 7 Difference Between Financial Debt and Operational Debt 

Functions of the CoC

According to the provisions of the IBC and its relevant regulations, the functions of the CoC include:

1. Initial Meetings:

As per section 22(1) of the IBC, the first meeting of the CoC should be held within 7 days of its constitution. During the first meeting, the resolution professional should also be appointed by the CoC by a majority vote of not less than 66% of the voting share of the financial creditors. These meetings are also governed by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which provides the details of this meeting and how it is to be conducted. 

2. Resolution Plan Evaluation:

After the resolution plan has been drafted by the resolution professional, the CoC may approve the resolution by a vote of not less than 66% of the voting share of the financial creditors as per section 30(4) of the IBC. If the resolution plan is not approved, the CoC should review and negotiate the details of the resolution plan before approving it. 

3. Monitoring and Oversight:

The CoC ensures the proper management of the corporate debtor’s assets and ensures that the business operations of the debtor continue during the CIRP by appointing the resolution professional to take custody and control of the assets.

4. Collecting Information:

The resolution professional has to provide the information memorandum in electronic form to each member of the CoC along with other relevant information. The CoC should ensure that the information submitted is accurate and up-to-date on the financial situation of the corporate debtor, such as its assets, liabilities, business operations, etc. 

5. Engagement of Professionals:

The members of the CoC may not have all the knowledge required to decide whether to approve or reject the resolution plan, or understand the financial status of the corporate debtor. In such citations, the CoC can engage legal or financial professionals to assist them in the CIRP.

6 Ensuring Compliance:

The CoC should ensure that the CIRP adheres to the statutory and regulatory compliances to protect the stakeholder’s interests. Hence, the CoC has an important part in ensuring that the CIRP is fair and transparent. 

Judicial Interpretations and Key Cases

  • K. Sashidhar vs. Indian Overseas Bank: The Hon’ble Supreme Court held that the legislature had consciously ensured that no ground was available to question the ‘commercial wisdom’ of the individual financial creditors of the decision of the CoC before the NCLT, in approving or rejecting the resolution plan. These commercial considerations lie outside of the scope of judicial review. It was further held that the amendment to section 30(4) was a mere restatement of the factors that the CoC was required to consider in any event while considering the resolution plan. 
  • Shaji Purushothaman vs. Union Bank of India: The National Company Law Appellate Tribunal (NCLAT) held that the CoC should determine whether a settlement proposal under section 12(1) of IBC is superior to the resolution plan. It was held that the CoC should consider all options available to them and select the proposal that will maximise the debtor’s assets, therefore, the CoC should compare the settlement proposal with the resolution plan when they are making their decision. 
  • Ms. Rama Subramaniam vs. Sixth Dimensions Project Solution Limited: The NCLT laid down an important decision that the CoC has the power to replace the interim resolution professional. This decision highlights the necessity of due process in the resolution process. The CoC has to give proper reasons for changing the interim resolution professional, to ensure that the NCLT makes a transparent and well-reasoned decision. 

Read more: How Does Liquidation Affect Employees?

Conclusion

The CoC has an important role during the corporate insolvency resolution process based on the insolvency and bankruptcy laws. The powers and functions of the CoC under the IBC are extraordinary but have to remain within the IBC and its relevant regulations. The NCLT has to supervise the actions of the CoC, hence the functioning of the CoC is kept in check by the NCLT.

Overall, the CoC has an important part in protecting the interests of the stakeholders, preserving the corporate debtor’s assets, and approval of the resolution plan which will decide the future of the corporate debtor. Therefore, the CoC has an important role in ensuring that the corporate insolvency resolution process is fair, transparent, and efficient while balancing the interests of the stakeholders, the corporate debtors, it creditors, the employees of the company, and other stakeholders.

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