Constitution of Committee of Creditor
A creditors’ committee is a group of people who represent a company’s creditors in a bankruptcy proceeding. As such, a creditors’ committee has broad rights and responsibilities, including devising a reorganization plan for bankrupt companies or deciding whether they should be liquidated. The creditors’ committee is usually further divided between secured and unsecured creditors.
Brief Legal history:
The Bankruptcy Law Reforms Committee (‘BLRC’) was tasked with the onerous responsibility of rewiring the insolvency and bankruptcy framework in India. The BLRC presented an exhaustive report in November 2015 (‘BLRC Report’) for crafting a comprehensive code.
The Committee of Creditors (‘CoC’) was fashioned as one of the steering bodies driving the insolvency process under the Insolvency and Bankruptcy Code, 2016. Part II of the IBC does not define CoC for corporate persons, though CoC is a defined term for individuals and partnership firms in Part III of the IBC.
Generally, as per IBC, the COC consists of the financial creditors only. In other words, all the Creditors who have financed the corporate debtor against the consideration of time value of money are included in the Committee of Creditors. In case if there are no financial creditors, in such case eighteen largest Operational Creditors along with one representative from workmen and from employee will be the members of the COC. The powers of these members are quite akin to the powers of the members of the financial creditors. The Operational creditors will not find any place in the COC except in case if the debt of the operational creditors are more than 10%, in such case the operational creditors will participate the COC through a representative. after supreme court’s judgement on Essar Steel case, it can be concluded that the Code is moving towards achieving its intended goal of swift redeployment of productive assets trapped in insolvent companies, and discouraging the notion that big loans are the lenders’ problem, not the borrowers’. The net result is significantly positive for credit discipline in India.
Committee of Creditors of Essar Steel India Limited through Authorized Signatory v. Satish Kumar Gupta
A petition for initiating the insolvency resolution process against Essar was admitted by the National Company Law Tribunal. ArcelorMittal was the successful resolution applicant. The resolution plan submitted by ArcelorMittal provided that the operational creditors with an exposure of above INR 1 crore would not be entitled to any distributions. The NCLT approved ArcelorMittal’s resolution plan and asked the CoC to distribute 85% of the amount under the resolution plan amongst financial creditors and the remaining 15% amongst the operational creditors. The decision of NCLT was subsequently challenged. Hon’ble supreme court upheld the primacy of the Committee of Creditors (‘CoC’) in distribution of funds of INR 42,000 crore received under the resolution plan submitted by ArcelorMittal.
Role the COC in CIPR (corporate insolvency resolution process): The Supreme Court upheld the concept of supremacy of the commercial wisdom of the CoC in approval of the resolution plan, provided they take into consideration/ account for interest of all stakeholders.
Comparison with International Scenarios:
The Bankruptcy Law Review Committee report 2015 pondered upon various aspects of the Code including the formation and composition of the CoC, concluding that members of the CoC have to be creditors both with the capability to assess viability, as well as be willing to modify terms of existing liabilities in negotiations. With this reasoning, operational creditors were intentionally left out of the CoC under the presumption that such creditors would neither be able to decide on matters regarding the insolvency of the entity, nor would they be willing to take the risk of postponing payments for better future prospects. This reasoning of the BLRC stands in stark contrast with the Legislative Guide on Insolvency Law (“LGIL“) proposed by The United Nations Commission on International Trade Law (“UNCITRAL“), wherein the UNCITRAL recognised that the first key objective of a resolution process is to balance the advantages of near-term debt collection through liquidation against preserving the value of the debtor’s business through reorganization.
UK Insolvency laws: Secured creditors are generally not represented on a creditor committee if they are fully secured or over-secured. Where they are under-secured, however, their interests are more likely to align with those of unsecured creditors and their participation in the committee or in voting by creditors may be appropriate, at least to the extent that they are under-secured. An example of this would be the Company Voluntary Arrangement (CVA) mechanism under UK insolvency laws, where secured creditors are entitled to vote only in specific circumstances.
Under German insolvency law: the creditors vote by groups. The consent of every group is needed. Within a group the majority of creditors (as headcount) and creditors having the majority of debt need to approve the insolvency plan.
Changes and Suggestions:
The legislature was quick to amend the Code to protect the interests of homebuyers by according them the status of a financial creditor, allowing each and every homebuyer irrespective of the quantum of his financial debt to a vote on the CoC. it has is tilted the already lopsided scales further against operational creditors, ultimately leading to frequent challenges to resolution plans by operational creditors before courts and delaying the resolution process.
A comprehensive overhaul of the constitution of the CoC is thus urgently required to preserve the purpose and the actual intent of the Code. A reference could be made to Section 230 of the Companies Act, 2013, where certain provisions are made that secure the interests of all creditors. This security is however, contingent on the actual appointment of operational creditors to the CoC which is the primary need of the hour.
Submitted by: Purvi Goyal