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Committee of Creditors under the Insolvency and Bankruptcy Code: A Deep Legal Analysis
Introduction
The Insolvency and Bankruptcy Code, 2016 represents a watershed moment in India’s financial and economic jurisprudence, fundamentally restructuring the nation’s approach to corporate insolvency resolution. At the heart of this transformative legislation lies the Committee of Creditors, an institution that has redefined the balance of power between creditors and debtors in situations of financial distress. The Committee of Creditors operates as the principal decision-making body during the Corporate Insolvency Resolution Process, wielding significant authority over the fate of distressed corporate entities. While Part II of the Insolvency and Bankruptcy Code does not explicitly define the Committee of Creditors for corporate persons, its composition, powers, and limitations are detailed across various provisions of the legislation, particularly within Section 21 read with Section 18.
The evolution of the Committee of Creditors must be understood within the broader context of India’s insolvency framework. Prior to the enactment of the Code in 2016, India’s bankruptcy regime was characterized by multiple, often conflicting pieces of legislation including the Sick Industrial Companies Act of 1985, the Recovery of Debt Due to Banks and Financial Institutions Act of 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002.[1] These laws operated in silos, creating a fragmented system that failed to provide timely resolution of stressed assets. The inadequacy of this framework became particularly evident during economic downturns, where prolonged delays in insolvency proceedings resulted in significant value erosion and minimal recovery for creditors.
The Bankruptcy Law Reforms Committee, constituted in 2014 and chaired by Dr. T.K. Viswanathan, was tasked with comprehensively reimagining India’s insolvency landscape.[2] The Committee submitted its seminal report in November 2015, which served as the intellectual foundation for the Insolvency and Bankruptcy Code. Central to the Committee’s recommendations was the proposition that control of a corporate entity must shift from the management to creditors upon default. The report categorically stated that when default takes place, control is supposed to transfer to the creditors, while equity owners have no say in the matter.[3] This philosophical shift from a debtor-in-possession model to a creditor-in-control paradigm represents the foundational principle upon which the Committee of Creditors was conceptualized.
Constitutional Framework and Legal Foundations
The Insolvency and Bankruptcy Code received Presidential assent on May 28, 2016, with its corporate insolvency resolution provisions becoming operational from December 1, 2016. The Code was enacted under Entry 9 of the Concurrent List in the Seventh Schedule to the Constitution of India, which deals with bankruptcy and insolvency. This constitutional positioning enables both Parliament and State Legislatures to legislate on matters of insolvency, though Parliament’s enactment takes precedence in case of any repugnancy.
The constitutional validity of various provisions of the Insolvency and Bankruptcy Code was extensively examined by the Supreme Court of India in the landmark case of Swiss Ribbons Pvt. Ltd. v. Union of India.[4] In this matter, multiple writ petitions challenged the constitutionality of several provisions, including those relating to the differential treatment of financial creditors and operational creditors, the composition of the Committee of Creditors, and the exclusion of operational creditors from voting rights. The Supreme Court, in a comprehensive judgment delivered on January 25, 2019, upheld the constitutional validity of the Code in its entirety, finding no violation of Article 14 which guarantees equality before law. The Court recognized that financial creditors possess an intelligible differentia from operational creditors, justifying their predominant role in the Committee of Creditors. Justice R.F. Nariman, writing for the bench, observed that financial creditors are involved with assessing the viability of the corporate debtor from the very beginning and can engage in restructuring of loans and reorganization of the corporate debtor’s business during financial stress, capabilities that operational creditors neither possess nor demonstrate.[5]
Composition and Constitution of the Committee of Creditors
Section 21 of the Insolvency and Bankruptcy Code delineates the framework for constituting the Committee of Creditors. Upon the admission of an application for initiation of Corporate Insolvency Resolution Process under Section 7, Section 9, or Section 10 of the Code, an Interim Resolution Professional is appointed who assumes control of the management of the corporate debtor. The Interim Resolution Professional, acting under Section 18 read with Section 21 of the Code, is duty-bound to collate all claims received against the corporate debtor and determine its financial position. Following this collation and determination, the Interim Resolution Professional constitutes the Committee of Creditors.
The composition of the Committee of Creditors is primarily governed by Section 21(2) of the Code, which provides that the Committee shall comprise all financial creditors of the corporate debtor. Financial creditors are defined under Section 5(7) of the Code as persons to whom a financial debt is owed, including those to whom such debt has been legally assigned or transferred. Financial debt, as elaborated in Section 5(8), encompasses debts disbursed against consideration for the time value of money and includes various forms of financing such as term loans, working capital facilities, bonds, debentures, and other instruments creating a debt obligation.
However, the first proviso to Section 21(2) introduces a significant exclusion, stipulating that a financial creditor who is a related party of the corporate debtor shall not have any right of representation, participation, or voting in meetings of the Committee of Creditors. The concept of related party is exhaustively defined in Section 5(24) of the Code and encompasses a wide range of relationships including directors, key managerial personnel, holding companies, subsidiary companies, associate companies, and persons who control or are controlled by the corporate debtor. The rationale behind this exclusion is to prevent conflicts of interest and ensure that the Committee of Creditors functions independently without influence from parties whose interests may not align with genuine resolution of the corporate debtor’s financial distress.
Where the corporate debtor owes financial debts to multiple financial creditors as part of a consortium or agreement, Section 21(3) provides that each such financial creditor shall be part of the Committee of Creditors, with their voting share determined on the basis of the proportion of financial debt owed to them relative to the total financial debt owed by the corporate debtor. This proportional voting mechanism ensures that creditors with larger exposures have commensurate influence in decision-making, reflecting the principle that those bearing greater financial risk should have correspondingly greater say in determining the resolution strategy.
In situations where a corporate debtor has no financial creditors, or where all financial creditors are related parties and thus excluded from the Committee, the proviso to Section 21(8) read with Regulation 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides an alternative mechanism. In such cases, a Committee of Creditors is constituted comprising the largest operational creditors, along with representatives of workmen and employees. This provision ensures that the Corporate Insolvency Resolution Process can proceed even in the absence of eligible financial creditors, though such situations are relatively rare in practice.
Powers and Responsibilities of the Committee of Creditors
The Committee of Creditors exercises extensive powers throughout the duration of the Corporate Insolvency Resolution Process. These powers are fundamental to achieving the objectives of the Code, namely maximization of the value of assets of the corporate debtor, promotion of entrepreneurship, availability of credit, and balancing the interests of all stakeholders. Section 28 of the Code makes it mandatory for the Resolution Professional to obtain prior approval of the Committee of Creditors for all actions undertaken during the Corporate Insolvency Resolution Process, underscoring the Committee’s supervisory authority.
Among the most significant powers vested in the Committee of Creditors is the authority to appoint or replace the Resolution Professional. While the Interim Resolution Professional is initially appointed by the Adjudicating Authority at the time of admission of the insolvency application, Section 22 empowers the Committee of Creditors to either confirm the appointment of the Interim Resolution Professional as the Resolution Professional or to replace them by appointing another insolvency professional. This decision requires approval by a vote of not less than sixty-six percent of the voting share of the financial creditors in the Committee. Notably, under Section 27 of the Code, the Committee of Creditors may subsequently replace the Resolution Professional at any time during the Corporate Insolvency Resolution Process, and the Code does not mandate that the Committee record reasons for such replacement, though this has been subject to some judicial commentary regarding the potential for arbitrary exercise of this power.
The Committee of Creditors also exercises control over the continuation of business operations of the corporate debtor during the insolvency resolution process. Section 25 read with Section 28 empowers the Committee to decide whether the corporate debtor should continue as a going concern or whether certain operations should be suspended or curtailed. These decisions must be taken by a vote of not less than sixty-six percent of the voting share and are critical to preserving the value of the corporate debtor’s assets pending resolution.
Perhaps the most crucial power exercised by the Committee of Creditors pertains to the approval or rejection of resolution plans submitted by resolution applicants. Section 30 of the Code requires that any resolution plan, before being submitted to the Adjudicating Authority for approval, must first be approved by the Committee of Creditors with a voting share of not less than sixty-six percent. The Committee’s decision in this regard is guided by what has been termed as the commercial wisdom of the creditors, a doctrine that recognizes the Committee’s superior position to assess the commercial viability of proposed resolution plans given their financial stake and familiarity with the corporate debtor’s business.
The Committee of Creditors is also empowered under Section 12A of the Code to approve withdrawal of the insolvency application at any time before approval of a resolution plan. Such withdrawal requires approval by ninety percent of the voting share of the Committee, reflecting the legislature’s intent to place significant decision-making authority in the hands of creditors while maintaining a high threshold for decisions that would terminate the insolvency process prematurely.
Judicial Interpretation and Landmark Judgments
The functioning and powers of the Committee of Creditors have been the subject of extensive judicial scrutiny since the Code’s inception. The Supreme Court of India delivered its first comprehensive judgment interpreting the Code in Innoventive Industries Ltd. v. ICICI Bank,[6] decided on August 31, 2017. This case arose from an application filed by ICICI Bank as a financial creditor seeking initiation of Corporate Insolvency Resolution Process against Innoventive Industries Limited under Section 7 of the Code. The corporate debtor challenged the admission of the application on various grounds, including the assertion that its debt obligations had been temporarily suspended under the Maharashtra Relief Undertakings Act, 1958.
The Supreme Court, speaking through Justice R.F. Nariman, noted that this was the very first application moved under the Code and delivered a detailed judgment to ensure that all courts and tribunals took notice of the paradigm shift in the law brought about by the Code. The Court emphasized that entrenched managements are no longer allowed to continue in management if they cannot pay their debts. The judgment traced the legislative history and scheme of the Code, noting that it represented a conscious policy choice to shift control from debtors to creditors upon default. The Court specifically endorsed the principle articulated by the Bankruptcy Law Reforms Committee that when default takes place, control must transfer to creditors while equity owners have no say.[7]
In Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court addressed constitutional challenges to the differential treatment accorded to financial creditors and operational creditors, particularly the exclusion of operational creditors from the Committee of Creditors. The Court recognized that this distinction, while creating different classes of creditors, was based on intelligible differentia having rational nexus with the object sought to be achieved by the Code. The Court observed that financial creditors are engaged from the inception in assessing the viability of the corporate debtor, structuring loan agreements with covenants and conditions, and monitoring the corporate debtor’s financial health. In contrast, operational creditors typically supply goods or services without the same level of ongoing financial assessment and restructuring capability. The Court therefore upheld the legislative wisdom in restricting voting rights in the Committee of Creditors to financial creditors, finding no violation of Article 14 of the Constitution.[8]
The interpretation of related party exclusions under the first proviso to Section 21(2) received important clarification in Phoenix Arc Private Limited v. Spade Financial Services Limited,[9] decided by the Supreme Court on February 1, 2021. This case involved complex factual circumstances where certain entities claimed status as financial creditors but were alleged to have been related parties to the corporate debtor at the time the purported financial debts were created, though they had subsequently divested themselves of relationships that would classify them as related parties.
The Supreme Court adopted a purposive interpretation of the first proviso to Section 21(2), holding that while the default rule is that only those financial creditors who are related parties in praesenti would be debarred from the Committee of Creditors, this interpretation must be qualified to prevent circumvention of the provision’s object and purpose. The Court held that where a related party financial creditor divests itself of its relationship or ceases to be a related party with the sole intention of participating in the Committee of Creditors and potentially sabotaging the Corporate Insolvency Resolution Process by diluting the vote share of genuine creditors, such former related party should be considered as debarred under the first proviso. The Court emphasized that determining the status of related parties requires examination of the substance of relationships and transactions, not merely their formal structure, necessitating a lifting of the corporate veil to identify the real actors and beneficiaries behind transactions.[10]
Regulatory Framework and Procedural Requirements
The Insolvency and Bankruptcy Board of India, established under Section 188 of the Code as the regulatory authority for insolvency professionals, information utilities, and insolvency professional agencies, has issued detailed regulations governing the functioning of the Committee of Creditors. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, particularly Regulations 16, 17, 19, 20, and 21, prescribe procedural requirements for constitution of the Committee, conduct of meetings, voting procedures, and maintenance of records.
Regulation 21 specifically addresses the conduct of Committee of Creditors meetings and mandates that minutes of each meeting must be circulated to all participants within forty-eight hours of the meeting. These minutes must record all decisions taken, voting patterns, and any dissent expressed by members. The requirement for prompt circulation of minutes serves the dual purpose of maintaining transparency and creating a contemporaneous record of the Committee’s decision-making process, which may be subject to scrutiny by the Adjudicating Authority or appellate tribunals in case of disputes.
The regulations also prescribe detailed procedures for determining voting shares of financial creditors, mechanisms for representation of financial creditors who wish to appoint authorized representatives or insolvency professionals to act on their behalf, and protocols for resolution of disputes regarding claims or voting rights. These procedural safeguards are essential to ensuring that the Committee of Creditors functions in a structured, transparent, and accountable manner, balancing the need for commercial flexibility with requirements of procedural fairness.
Conclusion
The Committee of Creditors represents a fundamental reimagining of the insolvency resolution process in India, shifting decision-making authority from judicial or quasi-judicial bodies to commercial creditors with direct financial stake in the outcome. This paradigm shift, premised on the belief that creditors are best positioned to assess viability and determine optimal resolution strategies, has been consistently upheld by Indian courts including the Supreme Court. While the Committee’s composition and powers have been subject to constitutional challenges, particularly regarding the exclusion of operational creditors from voting rights, these challenges have been consistently rejected by courts recognizing the intelligible differentia between categories of creditors and the rational nexus of the legislative scheme to the Code’s objectives.
The extensive jurisprudence developed through landmark cases has provided important clarifications on critical issues including the scope of related party exclusions, the extent of the Committee’s commercial wisdom, and the balance between creditor autonomy and judicial oversight. As India’s insolvency framework continues to mature, the Committee of Creditors will remain central to achieving the Code’s objectives of timely resolution, maximization of asset value, and revival of distressed corporate entities, contributing to the broader goals of economic growth and financial stability.
References
[1] Insolvency and Bankruptcy Board of India. (2015). The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design. https://www.ibbi.gov.in/BLRCReportVol1_04112015.pdf
[2] Press Information Bureau, Government of India. (2015). Summary of the Recommendations of the Bankruptcy Law Reforms Committee. https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=130208
[3] Insolvency and Bankruptcy Board of India. (2015). The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, p. 29-31. https://www.ibbi.gov.in/BLRCReportVol1_04112015.pdf
[4] Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17. https://indiankanoon.org/doc/17372683/
[5] Ibid.
[6] M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407. https://indiankanoon.org/doc/181931435/
[7] Ibid.
[8] Supra, 4.
[9] Phoenix Arc Private Limited v. Spade Financial Services Limited & Ors., Civil Appeal No. 3044 of 2020. https://ibbi.gov.in/uploads/order/a05b0fb37f6ba33290c7e0bfc690cf75.pdf
[10] Ibid.
