Authorised Representation under Sections 21(6) & 21(6A) of IBC
Table of Contents
The Committee of Creditors (CoC) is the primary decision-making body during the insolvency process, composed of financial creditors who collectively decide on the future of a corporate debtor, including approving resolution plans or initiating liquidation. It is crucial for maximizing asset value and ensuring creditor interests are protected through the insolvency process. In some insolvency cases they may need to handle a large number of creditors. The practical challenge of managing large numbers of creditor or complex syndicated or consortium debts, where individual lenders may lack the resources to participate effectively and can hinder efficient decision-making. To address this, sections 21(6) and 21(6A) of the Insolvency and Bankruptcy Code, 2016 (“the IBC”) were introduced through the IBC (Second Amendment) Act, 2018, allowing a single trustee or agent to represent multiple financial creditors, and enabling the appointment of an Authorised Representation (AR) for large creditor groups, thereby streamlining representative and participation.
What do Sections 21(6) & 21(6A) say?
Section 21(6) – Authorised Representation in Consortium / Syndicated Loans
When there is a consortium or syndicated facility with a trustee or agent for multiple financial creditors. The options for each financial creditor under this provision are:
- Authorise the trustee or agent to act on his behalf to the extent of his voting share.
- Represent itself in the CoC, to the extent of his voting share.
- Appoint an insolvency professional, other than the resolution professional, at his own cost, for representation.
- Exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally
Section 21(6A) – Authorised Representative for a Class of Financial Creditors
Section 21(6A) mandates the appointment of an AR for financial creditors in specific scenarios, such as when debt is held in the form of securities or deposits with a trustee, or when creditors form a large class exceeding a specified number. The interim resolution professional (IRP) must initiate this process by offering a choice of 3 insolvency professionals, with one receiving the most selections being appointed as the representative. This representative is responsible for attending CoC’s meetings and voting on behalf of the creditors according to their instructions.
Role, Rights & Duties of Authorised Representative
Under Section 25A of IBC lists the rights and duties of ARs, which are:
- Rights such as participating and voting in the CoC meetings with the prior voting instructions of such creditors obtained through physical or electronic means
- The duty to circulate the agenda and minutes of the meeting of the CoC to the financial creditor he represents.
- The AR must not act against the interest of the financial creditor they represent and must always act in accordance with their prior instructions.
- If the AR represents multiple financial creditors, they must cast votes for each creditor according to the specific instructions received from each, up to their representative voting share; if not further is received, they must abstain from voting on behalf of that creditor.
- The AR must file any voting instructions received from the financial creditor with the CoC to ensure correct recording by the interim or resolution professional.
Mechanism & Process: How AR is Appointed
Regulation 16B of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) explains the process for appointing an AR. The circular by IBBI dated 13 July, 2018 clarified that this procedure is a matter of procedure and also applies to existing insolvency cases. The process is as followsL
- First, the IRP reviews the corporate debtor’s books to identify if any financial debt is owed to a class of creditors, such as homebuyers, where there are at least 10 members in that class.
- To represent the class, the IRP must identify at least three independent insolvency professionals (IPs) and offer them to the financial creditors as choices for an AR.
- Creditors in the class indicate their choice of an IP in Form CA, which is submitted and their proof of claim. The IRP will only consider forms received by the deadline specified in the public announcement.
- The IRP determines which of the 3 IPs received the highest number of choices from the creditors in that class.
- Within 2 days of verifying the claims, the IRP applies to the Adjudicating Authority (AA) to officially appoint the highest-chosen IP as the AR. This appointment must be finalised before the first meeting of the CoC.
- In case the AA’s approval is pending, the selected IP acts as an interim AR. They can attend CoC meetings and exercise the same rights and duties as a regular AR.
- Once appointed, the AR represents the entire class of creditors. They collect voting instructions from the creditors, attend CoC meetings, and cast the vote for the class based on the collective instructions they receive.
Advantages & Rationale for AR Provisions
- It simplifies the participation process for a large number of creditors, small financial creditors like homebuyers by enabling collective representation.
- These provisions reduce logistical difficulties through many small meetings and repeated notices.
- Appointing an AR improves coordination and reduces the costs and efforts in the complexity of such insolvency cases.
Challenges, Criticisms & Practical Concerns
- The treatment of smaller creditors in an insolvency process, despite the appointment of ARs, may result in the risk of low participation or instructions.
- The costs of appointing IPs must be borne by individual financial creditors, increasing the cost of insolvency cases. This could be burdensome for small creditors.
- According to Regulation 16B of the CIRP Regulations the AR must be appointed before the first CoC meeting and any delays in such appointment may cause procedural complications.
- Voting instructions must be collected electronically or physically from multiple creditors can be complicated and burdensome for individuals.
Read more : Time Limit on Admissibility of Claims During CIRP: Where to Draw the Line?
Key Case Law & Illustrations
Individual homebuyers or small financial creditors have challenged the validity of the AR’s appointment, but courts have consistently ruled that a single homebuyer lacks independent locus standi to object to a plan approved by a majority of the class. For instance, the Delhi Branch of the National Company Law Appellate Tribunal (NCLAT) dismissed an application by a lone homebuyer who objectives to a resolution plan approved by 83.46% of creditors in the class, stating that the applicant, being part of a majority-voting class, cannot independently challenge the process. The NCLAT’s judgment in Sushil Ansal v. Ashok Triupathi underscores that the status of an allottee as a financial creditor is contingent on the nature of their claim and the absence of a final, enforceable decree from a regulatory authority like Real Estate Regulatory Authority (RERA). In contrast, the Supreme Court’s ruling in Vishal Chelani & Ors. v. Debashis Nanda affirmed that even homebuyers who secured RERA decrees remain financial creditors and are subject to the same treatment as others in the class. This creates a consistent framework where the collective decision of the class represented by the AR, prevails over individual objections, provided the process adheres to the IBC’s procedural safeguards.
Comparison: Section 21(6) vs 21(6A)
| Section 21(6) of the IBC | Section 21(6A) of the IBC | |
| Applicability | Applies to financial creditors in consortium or syndicated loans where loan documents appoint a single trustee or agent | Applies to specific scenarios, such as financial debt in the form of securities or deposits with a trustee or agent, debt owed to a large class of creditors exceeding a specified number, or creditors represented by a guardian, executor, or administrator. |
| Representation Flexibility | Provides flexibility to each creditors to choose their trustee or agent, to represent themselves, or appoint an independent IP, or vote jointly or severally with others. | Mandates the appointment of an AR for the specified cases and the AR acts on behalf of all creditors in the class. |
| Appointment of Representative | The trustee or agent is not automatically appointed as the AR and the creditor must choose to authorise them. Creditors may also appoint their own IP. | The IRP must apply to the AA to appoint an AR from a list of nominated IPs, other than the IRP, for the class of creditors. |
| Purpose | Balances efficiency and independence by preserving the individuality of each creditor’s rights while allowing collective action. | Ensures efficiency functioning of the CoC when dealing with large groups of creditors or those represented by third parties, preventing logistical challenges. |
| Voting Mechanism | Allows for jointly or separate voting, enabling collaboration or independence based on commercial interests. | The AR attends CoC meetings and votes on behalf of each creditor in the class according to their voting share, as per the creditors instructions. |
Implications for Stakeholders
- An AR votes on behalf of small creditors and homebuyers, thereby consolidating their violence and preventing them from being overwhelmed by large creditors. The process of appointing an AR simplifies involvement for a large and dispersed group, eliminating the burden of individual participation and enabling collective action.
- IPs must perform their duties with integrity, professionalism, and impartiality without being influenced by bias or conflicts of interest. They must conduct the insolvency process according to the strict timelines in the IBC and the CIRP Regulations.
- The corporate debtor
- The Insolvency and Bankruptcy Board of India has clarified the oversight of AR appointments, the clarity of procedure, and ensures fairness among creditors.
Conclusion
The appointment of an AR under Sections 21(6) & 21(6A) of the IBC constitutes a structural reform designed to enhance the manageability and inclusivity of the CoC. It addresses the practical challenges of convening and managing large creditor groups, particularly in cases involving syndicated loans or a large number of financial creditors, where individual participation would be inefficient and costly. Despite its benefits, its effectiveness depends on real participation and proper implementation. To ensure fairness and integrity, further oversight is essential, particularly in verifying the authenticity of voting instructions, ensuring timely communication between creditors and ARs, and maintaining transparency in CoC meetings and voting records.
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