Decisions of Committee of Creditors to Liquidate under IBC: A NCLAT Judgment Analysis

Understanding the Role of Single Operational Creditor in CoC Under IBC and the Requirement of Reasoning for Liquidation

The Insolvency and Bankruptcy Code, 2016 has fundamentally transformed the corporate insolvency landscape in India by establishing a time-bound framework for resolution and liquidation of financially distressed companies. Within this framework, the role of the Committee of Creditors in liquidation under IBC is crucial, as it decides the course of action for corporate debtors. Recent judgments by the National Company Law Appellate Tribunal have provided clarity on key issues, including whether a Committee of Creditors can be constituted with a single operational creditor and the requirement that liquidation decisions be supported by reasoned justifications. These rulings have significant implications for creditors, corporate debtors, and resolution professionals navigating the insolvency process.

The Legislative Framework Governing Liquidation

The Insolvency and Bankruptcy Code establishes a structured mechanism for initiating liquidation proceedings when resolution efforts fail or prove impossible. Section 33 of the Code delineates the circumstances under which liquidation may be commenced. The provision grants the Adjudicating Authority the power to order liquidation in specific situations: when no resolution plan is received before the expiry of the insolvency resolution process period, when a submitted resolution plan fails to meet statutory requirements and is consequently rejected, or when the Committee of Creditors decides to liquidate the corporate debtor during the resolution process itself [1].

The statutory scheme empowers the Committee of Creditors with significant authority. Under Section 33(2) of the Code, where the resolution professional intimates the Adjudicating Authority of the Committee’s decision to liquidate at any time during the corporate insolvency resolution process but before confirmation of a resolution plan, approved by not less than sixty-six percent of the voting share, the Adjudicating Authority must pass a liquidation order. This provision reflects the legislature’s intent to vest primary decision-making authority in the hands of creditors who have financial stakes in the corporate debtor’s assets [2].

The composition and functioning of the Committee of Creditors is governed by Sections 21 and 24 of the IBC. The Committee typically consists of all financial creditors of the corporate debtor, excluding related parties. Financial creditors are entitled to voting rights proportionate to their claims. Operational creditors, conversely, occupy a different position within the statutory framework. They may attend meetings of the Committee if their aggregate dues constitute at least ten percent of the total debt, but they possess no voting rights regardless of the magnitude of their claims [3].

This distinction between financial and operational creditors finds its roots in the recommendations of the Bankruptcy Law Reforms Committee. The Committee observed that operational creditors typically lack the capacity to assess the commercial viability of a corporate debtor and are generally unwilling to accept the risks associated with postponing payments in exchange for potentially better future prospects. Financial creditors, being institutions that have extended credit with consideration for the time value of money, are better positioned to make informed decisions about resolution versus liquidation.

The Jaipur Trade Expocentre Judgment and Reasoned Decision-Making

The NCLAT’s judgment in Jaipur Trade Expocentre Private Limited v. Metro Jet Airways Training Private Limited and Others represents a watershed moment in understanding the obligations of the Committee of Creditors when deciding to liquidate a corporate debtor. The tribunal unequivocally held that decisions of the Committee to liquidate must be accompanied by reasons and cannot be made arbitrarily [4].

In this particular matter, the Committee of Creditors had passed a resolution to liquidate the corporate debtor. The resolution recorded specific reasons supporting the liquidation decision: the company had no employees, no active business operations, no registered office, had failed to file annual accounts with the Ministry of Corporate Affairs since March 31, 2011, had not filed any returns, and had conducted no transactions since 2017. The tribunal examined these recorded reasons and found them sufficient to justify the liquidation decision.

The tribunal emphasized that while the statutory scheme under Section 33(2) empowers the Committee of Creditors to decide on liquidation after its constitution, this power cannot be exercised capriciously. The requirement of providing reasons serves multiple purposes within the insolvency framework. First, it ensures transparency in the decision-making process, allowing stakeholders to understand the basis for liquidation. Second, it facilitates meaningful judicial review by enabling the Adjudicating Authority and appellate tribunals to assess whether the Committee’s decision is grounded in legitimate commercial considerations. Third, it protects against arbitrary exercises of power that might prejudice the interests of other stakeholders.

This principle aligns with the broader jurisprudence established by the Supreme Court in landmark cases interpreting the Code. The apex court has consistently held that while the commercial wisdom of the Committee of Creditors is supreme and deserves judicial deference, it must operate within the boundaries of the statutory framework. The requirement of reasoned decision-making represents one such boundary that safeguards the integrity of the insolvency process.

Single Operational Creditor and Committee Constitution

A particularly contentious issue that has emerged in insolvency jurisprudence concerns whether a Committee of Creditors can be constituted with a single operational creditor. The NCLAT addressed this question with clarity in its analysis of V. Duraisamy v. Jeyapriya Fruits and Vegetables Commission Agent and Others. The tribunal held that the Insolvency and Bankruptcy Code contains no provision enabling the constitution of a Committee of Creditors with a single operational creditor when no claims have been received from financial creditors [5].

In the Duraisamy case, the corporate debtor had been struck off by the Registrar of Companies for failing to file financial statements. An operational creditor subsequently filed a petition under Section 9 of the Code seeking initiation of corporate insolvency resolution process. Following admission of the petition, the Interim Resolution Professional issued a public announcement inviting claims from creditors. However, not a single claim was received from any financial creditor. The only claim before the resolution professional came from the operational creditor who had initiated the proceedings.

The Adjudicating Authority directed the Interim Resolution Professional to constitute a Committee of Creditors with the sole operational creditor as its member. On appeal, the NCLAT reversed this direction and held that the corporate insolvency resolution process should be closed with respect to the corporate debtor. The tribunal reasoned that the statutory scheme contemplates the Committee of Creditors as a body of financial creditors possessing the commercial acumen and risk appetite necessary to make informed decisions about resolution. Operational creditors, while entitled to attend meetings when their dues exceed the statutory threshold, are deliberately excluded from voting precisely because they lack the characteristics that justify membership in the decision-making body.

This interpretation finds support in the fundamental architecture of the Code. Section 21 defines the Committee of Creditors as comprising all financial creditors of the corporate debtor. Section 24 permits operational creditors to participate in meetings without voting rights under specified conditions. The statutory language and structure leave no room for constituting a Committee consisting exclusively of operational creditors in the ordinary course.

Importantly, the Jaipur Trade Expocentre judgment clarified that the Duraisamy decision does not establish any ratio preventing the constitution of a Committee of Creditors where a single operational creditor is involved alongside financial creditors. The tribunal distinguished between two scenarios: one where no claims are filed and no Committee is constituted at all (as in Duraisamy), and another where a Committee is duly constituted but happens to include a single operational creditor along with financial creditors. The latter scenario does not violate any provision of the Code.

Judicial Review of Liquidation Decisions

The extent of judicial review over decisions regarding liquidation by the Committee of Creditors under the IBC represents a critical aspect of insolvency jurisprudence. In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the Supreme Court established foundational principles that define the scope of judicial intervention, balancing respect for the Committee’s commercial wisdom with the need to ensure compliance with statutory requirements. [6].

The apex court held that the Adjudicating Authority’s jurisdiction is circumscribed by Section 30(2) of the Code when reviewing resolution plans. The authority cannot interfere with the commercial wisdom of the Committee of Creditors. However, it retains limited jurisdiction to ensure that the Committee has taken into account certain fundamental considerations: that the corporate debtor needs to continue as a going concern during the insolvency resolution process, that the value of the corporate debtor’s assets should be maximized, and that the interests of all stakeholders including operational creditors have been adequately addressed.

This principle extends to decisions regarding liquidation. While the Committee of Creditors possesses authority to decide whether to pursue resolution or liquidation under IBC, the decision must reflect consideration of the statutory objectives. The Adjudicating Authority cannot substitute its own business judgment for that of the Committee, but it can examine whether the decision is supported by reasons and whether it contravenes any provision of law.

The NCLAT has repeatedly affirmed that the decision of the Committee of Creditors regarding liquidation, when properly made with reasons and in accordance with statutory requirements, is entitled to significant deference. Courts will not interfere merely because an alternative course of action might have been preferable. The standard of review focuses on procedural propriety and statutory compliance rather than the substantive merits of the business decision.

Treatment of Operational Creditors in Insolvency

The position of operational creditors within the insolvency framework warrants careful examination. While these creditors lack voting rights in the Committee of Creditors, the Code incorporates several protections to safeguard their interests. Section 30(2)(b) of the Code, as amended in 2019, mandates that operational creditors must receive at least the higher of two amounts in any resolution plan: the liquidation value of their claims under Section 53, or the amount they would receive if the resolution plan amount were distributed according to the priority order specified in Section 53 [7].

This statutory mandate emerged following the Supreme Court’s intervention in the Essar Steel litigation. The original NCLAT judgment in that matter had directed equal distribution among all creditors, disregarding the distinction between secured and unsecured creditors and between financial and operational creditors. The Supreme Court reversed this approach and upheld the Committee’s authority to determine distribution among different classes of creditors, subject to the minimum payment requirements.

The apex court clarified that equitable treatment does not mean equal treatment. Creditors in different classes are entitled to differential treatment based on the nature of their claims and security interests. However, the Court emphasized that while the Committee has discretion in determining what to pay and how much to pay to each class of creditors, the decision must demonstrate that the Committee has balanced the interests of all stakeholders and that it has not completely excluded operational creditors from any meaningful recovery.

In practical terms, operational creditors face significant challenges in insolvency proceedings. Their exclusion from voting rights means they cannot directly influence critical decisions such as approval of resolution plans or decisions to liquidate. Their only recourse lies in approaching the Adjudicating Authority or appellate tribunals if they believe their statutory rights have been violated. The limited judicial review available focuses on ensuring minimum statutory protections rather than maximizing recovery for operational creditors.

The Supreme Court in Swiss Ribbons Private Limited v. Union of India examined constitutional challenges to the differential treatment of financial and operational creditors. The Court upheld the classification as based on intelligible differentia serving the legitimate objectives of the Code. The Court noted that financial creditors typically have longer-term relationships with corporate debtors and are better equipped to evaluate prospects for revival. Operational creditors, being primarily concerned with recovery of dues for goods supplied or services rendered, lack the same incentive to take risks associated with corporate revival [8].

Commercial Wisdom and Stakeholder Interests

The doctrine of commercial wisdom represents a cornerstone principle in insolvency jurisprudence. The Supreme Court has repeatedly emphasized that the Committee of Creditors, being composed of sophisticated financial institutions with economic stakes in the outcome, is best positioned to make decisions about the fate of corporate debtors. Courts should not second-guess these decisions unless they contravene statutory provisions or reflect procedural irregularities.

However, commercial wisdom is not absolute and must operate within the framework established by the Code. When the Committee of Creditors decides on liquidation under IBC, it must ensure that its decisions reflect the core objectives of the insolvency regime: time-bound resolution, maximization of asset value, and protection of stakeholder interests. In making such decisions, the Committee should carefully weigh whether liquidation would produce better outcomes than continued resolution efforts, whether the corporate debtor’s assets are deteriorating, whether operational viability can be restored, and the potential impact on stakeholders, including employees and operational creditors.

The requirement of providing reasons for liquidation decisions serves as a check on the exercise of commercial wisdom. Without this requirement, the Committee could make decisions based on considerations that might not align with statutory objectives or stakeholder interests. The recording of reasons creates a paper trail that enables meaningful review and ensures accountability.

Procedural Requirements for Liquidation

When a Committee of Creditors decides to proceed with liquidation under IBC, a clear procedural framework ensures transparency and protects stakeholders. The resolution professional must inform the Adjudicating Authority, providing supporting documentation such as minutes of the Committee meeting, the reasons for the liquidation decision, and proof that the required sixty-six percent voting threshold was met.

Upon receiving intimation of the Committee’s decision, the Adjudicating Authority examines whether procedural requirements have been satisfied. This includes verifying that proper notice was given to all Committee members, that the voting was conducted in accordance with the Code and applicable regulations, and that the decision was supported by adequate reasons. If satisfied, the authority passes a liquidation order directing that the corporate debtor be liquidated in the manner prescribed by the Code, issuing a public announcement of liquidation, and requiring the order to be sent to the authority with which the corporate debtor is registered.

The liquidation order triggers several consequences. Under Section 33(5), no suit or other legal proceeding can be instituted by or against the corporate debtor once liquidation commences, subject to specified exceptions. Section 33(7) deems the liquidation order as notice of discharge to officers, employees, and workmen of the corporate debtor, unless the liquidator continues business operations during liquidation. These provisions create a moratorium that protects the corporate debtor’s assets and facilitates orderly liquidation proceedings [9].

Conclusion

The NCLAT’s jurisprudence on liquidation decisions under the Insolvency and Bankruptcy Code reflects a careful balance between empowering creditors with decision-making authority and ensuring that such authority is exercised responsibly with adequate safeguards. The requirement that liquidation decisions under IBC, be supported by reasons represents a meaningful check on the Committee of Creditors’ powers while preserving the primacy of commercial wisdom. The clarification that Committees cannot be constituted with single operational creditors in the absence of financial creditors upholds the fundamental architecture of the Code, which places resolution and liquidation decisions in the hands of creditors best equipped to make them.

These principles serve the broader objectives of the insolvency regime: providing time-bound resolution, maximizing asset value, and balancing stakeholder interests. While operational creditors occupy a subordinate position within the Committee structure, the statutory framework incorporates minimum protections to ensure they are not entirely excluded from meaningful recovery. The limited scope of judicial review respects commercial wisdom while ensuring compliance with statutory mandates and procedural fairness.

As insolvency jurisprudence continues to evolve, these foundational principles established by the NCLAT and Supreme Court will guide future cases. The emphasis on reasoned decision-making, proper Committee constitution, and balancing stakeholder interests will shape how corporate insolvencies are resolved and liquidations are conducted. For creditors, corporate debtors, and insolvency professionals, understanding these principles is essential to navigating the insolvency process effectively and ensuring that outcomes align with the statutory framework and commercial realities.

References

[1] Insolvency and Bankruptcy Code, 2016, § 33, No. 31, Acts of Parliament (India). Available at: https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_11_00055_201631_1517807328273&orderno=39 

[2] IBC Laws, “Section 33 of IBC – Insolvency and Bankruptcy Code, 2016: Initiation of liquidation.” Available at: https://ibclaw.in/section-33-initiation-of-liquidation/ 

[3] Insolvency and Bankruptcy Code, 2016, § 24, No. 31, Acts of Parliament (India). Available at: https://ibclaw.in/section-24-meeting-of-committee-of-creditors/ 

[4] Jaipur Trade Expocentre Pvt. Ltd. v. Metro Jet Airways Training Pvt. Ltd. and Ors., Company Appeal (AT) (Insolvency) No. 1224 of 2023, NCLAT New Delhi (Dec. 21, 2023). Available at: https://ibclaw.in/jaipur-trade-expocentre-pvt-ltd-v-metro-jet-airways-training-pvt-ltd-and-ors-nclat-new-delhi/ 

[5] V. Duraisamy v. Jeyapriya Fruits and Vegetables Commission Agent & Ors., (2023) ibclaw.in 405 NCLAT. Available at: https://www.scconline.com/blog/post/2023/07/08/corporate-debtor-cannot-constitute-committee-of-creditors-with-a-single-operational-creditor-under-ibc-nclat/ 

[6] Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors., (2020) 8 SCC 531 (India). Available at: https://ibclaw.in/summary-of-landmark-judgment-of-supreme-court-in-committee-of-creditors-of-essar-steel-india-limited-vs-satish-kumar-gupta-ors-under-ibc/ 

[7] Insolvency and Bankruptcy Code (Amendment) Act, 2019, § 30(2)(b), effective from August 16, 2019. Available at: https://www.snrlaw.in/operational-creditors-in-insolvency-a-tale-of-disenfranchisement/ 

[8] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 (India). Available at: https://www.lexology.com/library/detail.aspx?g=28bf9d14-8644-4ea9-aba0-58fc8848b0ba 

[9] The Legal School, “Section 33 of IBC: A Detailed Overview of Liquidation Procedure.” Available at: https://thelegalschool.in/blog/section-33-ibc