Understanding the Committee of Creditors under the IBC, 2016

Introduction

The insolvency resolution framework in India underwent a significant transformation with the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC). At the core of this system is the Committee of Creditors, the primary decision-making body established by the IBC to oversee the Corporate Insolvency Resolution Process (CIRP). It represents creditors’ interests and holds substantial authority in determining the future of distressed companies, including whether to revive them through a resolution plan or proceed with liquidation. This article explores the composition, powers, and functioning of the Committee, while analyzing relevant statutory provisions and landmark judicial pronouncements.

Genesis and Legislative Intent

The Bankruptcy Law Reforms Committee, established by the Ministry of Finance in 2014, was entrusted with restructuring India’s insolvency landscape. The Committee submitted its comprehensive report in November 2015, recommending a unified insolvency framework that would replace the fragmented regime existing under various statutes. The report specifically addressed the composition of the Committee of Creditors, emphasizing that members should possess both the capability to assess commercial viability and the willingness to negotiate terms of existing liabilities.

The drafters of the Code deliberately structured the Committee to include financial creditors as primary members. The underlying rationale was that financial creditors, having extended credit based on the time value of money, maintain a continuing economic interest in the debtor’s business. Unlike operational creditors who typically supply goods or services, financial creditors are better positioned to evaluate restructuring proposals and assess the long-term viability of distressed enterprises. This distinction reflects the Code’s philosophy of prioritizing informed commercial decision-making over simple democratic representation.

Composition of the Committee of Creditors Under IBC

Section 21 of the Insolvency and Bankruptcy Code (IBC) governs the composition of the Committee of Creditors. The Committee comprises 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 and includes any person to whom such debt has been legally assigned or transferred.[1] This category encompasses banks, financial institutions, debenture holders, and other lenders who have provided credit facilities against consideration for the time value of money.

The voting rights within the Committee are proportionate to the financial debt owed to each creditor. This means a creditor holding a larger debt carries greater voting power, ensuring that those with more significant financial exposure have commensurate influence over resolution decisions. When the Committee takes decisions, they require approval by at least sixty-six percent of the voting share, as mandated by Section 30(4) of the Code.

In scenarios where a corporate debtor has no financial creditors, the Committee is constituted differently under Section 21(6A) of IBC. The eighteen largest operational creditors, along with one representative of workmen and one representative of employees, form the Committee. These members exercise powers similar to those of financial creditors, though such situations are relatively uncommon in practice.

Operational creditors, who are suppliers of goods and services, generally do not find representation on the Committee except in limited circumstances. Under Section 24(3), if operational creditors collectively hold at least ten percent of the total debt, they may be represented through a single authorized representative who may attend Committee meetings. However, this representative lacks voting rights, limiting operational creditors’ influence over the resolution process.[2]

Powers and Functions During Insolvency Resolution

The Committee of Creditors exercises extensive powers during the Corporate Insolvency Resolution Process. Section 23 of the IBC mandates that the Committee of Creditors must be constituted within seven days of the appointment of an Interim Resolution Professional. Once formed, the Committee becomes the nerve center of the insolvency proceedings, making critical decisions that determine the corporate debtor’s future.

One of the Committee’s primary responsibilities involves appointing the Resolution Professional. While an Interim Resolution Professional is initially appointed by the Adjudicating Authority, the Committee has the power under Section 22 to replace this professional or confirm the appointment. This ensures that creditors have confidence in the person managing the resolution process.

The Committee evaluates and approves the resolution plan submitted by prospective resolution applicants. Section 30 requires that any resolution plan must provide for payment of insolvency resolution process costs and be approved by at least sixty-six percent of the voting share. The Committee assesses whether the plan maximizes asset value and whether the proposed resolution is feasible and in the collective interest of creditors.

Beyond plan approval, the Committee decides whether to continue or cease the corporate debtor’s operations during CIRP. It approves significant transactions that fall outside the ordinary course of business and provides necessary directions to the Resolution Professional. These powers enable the Committee to preserve asset value and prevent value destruction during the resolution period.

The Essar Steel Judgment and Commercial Wisdom

The landmark case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta decided by the Supreme Court in 2019 fundamentally shaped the understanding of the Committee’s powers and responsibilities.[3] The National Company Law Tribunal (NCLT) had admitted a petition for initiating CIRP against Essar Steel, and ArcelorMittal emerged as the successful resolution applicant with a plan valued at approximately forty-two thousand crore rupees.

The resolution plan submitted by ArcelorMittal proposed that operational creditors with exposure exceeding one crore rupees would receive no distribution. This differential treatment sparked controversy, with operational creditors challenging the fairness of the plan. The NCLT intervened, directing that eighty-five percent of the resolution amount be distributed to financial creditors and fifteen percent to operational creditors.

The Supreme Court reversed this intervention, holding that the Committee of Creditors possesses primacy in commercial decision-making. The Court recognized that financial creditors, having extended funds based on commercial assessment, are best positioned to evaluate resolution proposals. The judgment established that the Adjudicating Authority cannot interfere with distribution mechanisms approved by the Committee unless the plan violates statutory provisions or suffers from patent illegality.

However, the Court clarified that this commercial wisdom is not absolute. The Committee of Creditors must consider the interests of all stakeholders when approving resolution plans. Section 30(2) of the IBC mandates that resolution plans must address various stakeholders’ interests, including operational creditors and employees. While the Committee determines the quantum of payments, it cannot completely ignore legitimate stakeholder claims without justification.

Operational Creditors and Representation Concerns

The limited role accorded to operational creditors within the Committee structure has generated considerable debate. Operational creditors often include small suppliers, contractors, and service providers who depend on timely payments for their survival. The Code’s framework, which excludes them from voting rights, has been criticized for potentially enabling resolution plans that inadequately address their claims.

The legislative rationale for this exclusion rests on the assumption that operational creditors lack the expertise to assess corporate viability and may prioritize immediate payment recovery over long-term restructuring benefits. However, this reasoning has faced scrutiny, particularly given that operational creditors may collectively hold substantial claims against distressed companies.

International insolvency frameworks offer contrasting approaches. The United Nations Commission on International Trade Law’s Legislative Guide on Insolvency Law recognizes that resolution processes must balance near-term debt collection against preserving business value. Under United Kingdom insolvency law, secured creditors participate in creditor committees only to the extent they are under-secured, ensuring that voting reflects actual economic interest. German insolvency law requires group voting, where different creditor classes must approve plans, providing operational creditors with meaningful participation rights.[4]

Following the Essar Steel decision, operational creditors have increasingly challenged resolution plans before appellate forums, arguing discriminatory treatment. These challenges have sometimes delayed resolution processes, undermining the Code’s objective of time-bound insolvency resolution. The tension between swift resolution and equitable treatment remains an ongoing concern within India’s insolvency jurisprudence.

Homebuyers as Financial Creditors

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 introduced significant changes to creditor classification by including homebuyers within the definition of financial creditors. This amendment responded to widespread distress among homebuyers whose investments remained trapped in incomplete real estate projects undertaken by insolvent developers.

Section 5(8)(f) now recognizes amounts raised from allottees under real estate projects as financial debt. Consequently, each homebuyer, regardless of the amount invested, becomes entitled to representation and voting rights within the Committee of Creditors. This development fundamentally altered Committee composition in real estate insolvency cases, where thousands of homebuyers may collectively hold significant voting shares.

While this amendment addressed homebuyers’ legitimate concerns, it created practical challenges. Coordinating Committee meetings and securing decisions when membership includes numerous individual homebuyers with relatively small individual claims poses logistical difficulties. The amendment has also intensified the asymmetry between operational creditors, who remain excluded from voting, and homebuyers who now exercise substantial influence over resolution outcomes.

Comparative Analysis with International Practices

Examining international insolvency frameworks provides valuable perspective on the Committee of Creditors model. The United States Bankruptcy Code employs a creditor committee structure where the United States Trustee appoints committees representing unsecured creditors. These committees participate in negotiations, review financial information, and communicate with creditors they represent. Importantly, the committee structure recognizes different creditor classes and provides mechanisms for addressing inter-class conflicts.[5]

Australian insolvency law provides for creditor meetings where all creditors may vote on significant decisions, including appointing administrators and approving deeds of company arrangement. Voting is typically based on both the number of creditors and the value of debts, balancing democratic participation with economic interest representation.

The German insolvency regime requires approval from multiple creditor groups, ensuring that no single class can impose outcomes on others without broader consensus. This approach recognizes that different creditors maintain distinct relationships with the debtor and may require different protections. The Indian Code’s exclusive reliance on financial creditor voting represents a more concentrated decision-making model that prioritizes efficiency over inclusive representation.

Challenges and Reform Considerations

The current composition and functioning of the Committee of Creditors under IBC have raised several concerns that merit legislative attention. Excluding operational creditors from meaningful participation creates questions of fairness, especially when operational debts make up a significant portion of total claims. While the Code aims for swift resolution, it is equally important that all creditors receive treatment proportionate to their contributions to the debtor’s business.

Resolution plans frequently offer minimal distributions to operational creditors while providing significant recoveries to financial creditors. The Essar Steel judgment, while upholding Committee autonomy, noted that stakeholder interests must be considered. However, the practical implementation of this requirement remains unclear, with Adjudicating Authorities hesitant to intervene in Committee decisions.

The Companies Act, 2013 offers potential guidance through Section 230, which governs schemes of arrangement. This provision requires court approval after creditor and shareholder meetings, with the court assessing whether the arrangement is fair and reasonable. The scheme mechanism provides safeguards ensuring that minority interests receive protection against majority decisions. Incorporating similar safeguards within the Insolvency Code could address operational creditor concerns without compromising resolution efficiency.

Another consideration involves distinguishing between sophisticated and unsophisticated operational creditors. Large corporate suppliers may possess assessment capabilities comparable to financial creditors, while small vendors may lack such expertise. Differentiated treatment based on creditor sophistication rather than categorical exclusion might better serve the Code’s objectives.

Judicial Oversight and the Scope of Intervention

The relationship between the Committee of Creditors and the Adjudicating Authority represents a delicate balance between commercial autonomy and judicial oversight. The Essar Steel judgment established that courts must respect the Committee’s business judgment unless resolutions violate mandatory statutory requirements or public policy. This deference reflects the Code’s philosophy that commercial decisions should rest with creditors who bear financial consequences.

However, Section 30(2) and Section 31 impose substantive requirements on resolution plans, including compliance with applicable laws and feasibility of implementation. The Adjudicating Authority retains responsibility for verifying that approved plans satisfy these criteria. Courts have intervened where plans violated fundamental legal principles or where Committee decisions reflected arbitrary or discriminatory treatment without commercial justification.[6]

The Supreme Court in K. Sashidhar v. Indian Overseas Bank emphasized that the Adjudicating Authority cannot supplant the Committee’s commercial wisdom but must ensure procedural compliance and statutory adherence. This judgment reinforced that judicial review focuses on legality rather than commercial merit, preserving the Committee’s central role while preventing abuse of the resolution process.[7]

Conclusion

The Committee of Creditors constitutes the cornerstone of India’s corporate insolvency resolution framework, exercising decisive authority over distressed company outcomes. The Code’s structure, which concentrates power among financial creditors, reflects deliberate policy choices favoring informed commercial decision-making and efficient resolution processes. The Essar Steel judgment validated this approach while establishing that Committee decisions must demonstrate regard for stakeholder interests.

Nevertheless, the framework’s treatment of operational creditors raises ongoing concerns about fairness and inclusive participation. The complete exclusion of operational creditors from voting rights, combined with frequent minimal distributions under approved plans, suggests that the current model may require recalibration. International practices demonstrate alternative approaches that provide broader creditor representation while maintaining resolution efficiency.

Future reforms should consider mechanisms that balance the legitimate interests of all creditor classes without compromising the Code’s core objectives. Enhanced transparency requirements, mandatory minimum distributions based on creditor categories, or differentiated representation models could address existing inequities. As India’s insolvency regime matures, continued refinement of the Committee structure will prove essential to ensuring that the resolution process serves both efficiency and equity objectives.

The evolution of insolvency law necessarily involves adapting legislative frameworks to practical experiences and emerging challenges. The Committee of Creditors, as currently constituted, has facilitated numerous successful resolutions and contributed to credit discipline improvements. However, achieving the Code’s ultimate goal of maximizing asset value while treating all stakeholders fairly requires ongoing evaluation and thoughtful reform of the Committee’s composition, powers, and decision-making processes. Only through such continuous improvement can India’s insolvency framework fulfill its promise of swift, fair, and effective resolution of corporate distress.

References

[1] Insolvency and Bankruptcy Code, 2016, Section 5(7). https://ibbi.gov.in/uploads/legalframwork/2f284a4f7f0eef5aba86e233c925cdfd.pdf 

[2] Insolvency and Bankruptcy Code, 2016, Section 24(3). https://ibbi.gov.in/uploads/legalframwork/2f284a4f7f0eef5aba86e233c925cdfd.pdf 

[3] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, (2020) 8 SCC 531. https://main.sci.gov.in/supremecourt/2018/28892/28892_2019_Judgement_15-Nov-2019.pdf 

[4] UNCITRAL Legislative Guide on Insolvency Law. https://uncitral.un.org/en/texts/insolvency/legislativeguides/insolvency_law 

[5] United States Bankruptcy Code, 11 U.S.C. § 1102. https://www.law.cornell.edu/uscode/text/11/1102 

[6] Insolvency and Bankruptcy Code, 2016, Section 30(2) and Section 31. https://ibbi.gov.in/uploads/legalframwork/2f284a4f7f0eef5aba86e233c925cdfd.pdf 

[7] K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150. https://indiankanoon.org/doc/133204846/ 

[8] Companies Act, 2013, Section 230. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf 

[9] Bankruptcy Law Reforms Committee Report, 2015. https://ibbi.gov.in/BLRCReportVol1_04112015.pdf 

Authorized and Published by : Rutvik Desai