“Explore the crucial coordination between the Committee of Creditors (COC) and Insolvency Professionals (IP) in the insolvency ecosystem. From the importance of transparent decision-making by COC to timely assistance for interim finance, delve into the complexities of the Insolvency and Bankruptcy Code. Understand the key roles of COC and IP in ensuring the business of the Corporate Debtor as a going concern. Navigate the challenges and legal nuances for effective insolvency resolution.”
The Committee of Creditors as well the Insolvency Professionals is the important Pillars of the Insolvency Ecosystem. The role of COC and IP are very crucial in the IBC and hence effective co-ordination is required between them. The role of COC is very crucial and it is also emphasized in various judicial pronouncements. The Apex court has reiterated that the Commercial Wisdom of the COC is very important and nobody is having powers to interfere with it. Similarly the Apex court has also upheld that the Professional sanctity of the IRP/RPs in dealing with insolvency cases. In the Swiss Ribbons case it is emphasized that the IRP/RP work as an administrator and he is expected to function under the guidance and directions of the COC. Further it is emphasized in the Code that there is a shift from debtor’s possession to Creditors possession of the Property of the CD.
The IP while acting as IRP/RP is bound to perform various statutory as well as legal duties under the Code. The duties envisaged by the Code are Taking custody and control of the assets of the CD, issue Public Announcement and invite claims from the stakeholders, Collect and verify the claims, constitute COC and invite resolution Plans and also ensuring the business of the CD as a going concern basis .Certain functions envisaged under the section 28 of the Code suggest that the IP has to take consent of the COC before performing the duties.
A greater coordination is required in the following fields in order to complete the Insolvency resolution Process to end smoothly
1. Whether the COC is taking decisions in timely manner in the important matters
2. Whether COC is acting in a transparent manner in removing the IP
3. Whether COC is assisting Promptly with IP in ensuring the business of the CD as a going concern basis
4. Whether the COC is prompt in communicating its decision in the appointment of other Professionals
5. Whether the COC is prompt in timely manner for conducting avoidance transactions
6. Whether COC is prompt and timely in rendering help to the IP for Interim finance required for conducting the business of the CD as a going concern
7. Whether COC is prompt in sharing the available information of the CD with IP
Page Contents
- 1. Whether the COC is taking the decisions in a timely manner in the important matters
- 2. Whether COC is acting in a transparent manner in removing the IP
- 3. Whether COC is assisting promptly with IP in ensuring the business of the CD as a going concern basis
- 4. Whether the COC is prompt in communicating its decision in the appointment of other Professionals
- 5. Whether the COC is prompt in timely manner for conducting avoidance transactions
- 6. Whether COC is prompt and timely in rendering help to the IP for Interim finance required for conducting the business of the CD as a going concern
1. Whether the COC is taking the decisions in a timely manner in the important matters
Committee of Creditors is an important pillar in the IBC ecosystem. It is an amalgamation of financial creditors. These Creditors will have different objects and aspirations. Sometimes there will be a friction among themselves results in delay in communicating their decisions on important matters .Similarly their exposure to the Corporate debtors business is also different. The Creditors who have small exposure to the CD may not show interest in communicating their decision. Hence there is a delay in the conduct of CIRP.They have a fiduciary duty in respect of other stakeholders in preserving and protecting their interest by conducting the CIRP as a going concern. Hence all the members of the COC must acting diligence and timely manner in communicating decisions on important matters of the CIRP.
2. Whether COC is acting in a transparent manner in removing the IP
At present there are no prescribed guidelines and procedure for unjustified removal or replacement of RP. The COC should act deligenently and in a transparent manner in removing and replacing the RP. The COC before invoking the Provision of removal or replacement of RP, they should provide an opportunity of being heard to be given to him before replacement. Otherwise the Principle of natural justice will be defeated. If any member of the COC disagree or dissatisfied with RP they may propose an application for removal or replacement of RP. This casts shadow on the independence of the RP. Hence prescribed guidelines must be incorporated for removal or replacement of RP in order to ensure independence and impartiality of the RP in conducting CIRP Process .The Process of obtaining No objection certificate must be introduced as prevailing in other professions. The RP must be replaced only in exceptional cases and in cases where RP is not adhering to the timelines prescribed under the Code. If RP is replaced in arbitrarily manner, he may not cooperate and may not disclose the challenging facts in the CIRP to the incoming RP results in delay in the CIRP Process. Similarly RP should not be replaced on the ground of remuneration and it will result in unjustified competition among the RPs. If RP is replaced on the basis of cost of remuneration, the incoming RP should place on record the grounds for justifying the reasons for low remuneration.
3. Whether COC is assisting promptly with IP in ensuring the business of the CD as a going concern basis
It is very important obligation casted upon the Members of COC in assisting the IP for running the business of the corporate debtor as a going concern because it is one of the important objects of the Code. Hence the members are invariably assist or help the IP in ensuring the business of the CD as a going concern basis. It is necessary for the members of the COC to disclose the important files relating to the inspection reports, forensic reports and other important reports to be shared with IP so that he can understand the business of the CD in a better manner in carrying out the business as a going concern basis. As per Regulation 40 a certain timelines are prescribed for RP to carry out the duties but no such timelines are prescribed for taking decisions by the members of COC. Hence the possibility of time delay may happen due to not taking timely decisions by COC members
4. Whether the COC is prompt in communicating its decision in the appointment of other Professionals
RP needs to appoint other Professionals to carry out the duties enumerated under the Code. These appoints are required for undertaking certain important functions like updating of the books of the CD, to carry out the duties relating to the avoidance transactions, to attend Tribunals, to carry out the valuation of the assets of the CD etc. But these appointments are interlinked with the payment of fees. Hence for the appointment as well as making payment of fees to these Professionals require consent of the COC. The timely approval of the decisions taken in this regard by the COC will help the RP in timely completion of the CIRP/Liquidation process.
5. Whether the COC is prompt in timely manner for conducting avoidance transactions
Avoidance transactions are those transactions undertaken by the Corporate Debtor prior to the initiation of the CIRP in order to defraud its Creditors or to benefit the related parties as well as its own Management. Under IBC the sections 43 and 66 will regulate Preferential and Fraudulent transactions .These transactions will be initiated by the RP and these transactions will continue irrespective of finalization of resolution plan or completion of CIRP if the resolution plan does not accounted for it.
Hence initiation of avoidance transactions is very much essential in order to bring back the value lost in the avoidance transactions .The aim of the Code is to maximization of the value of the assets of the CD. When the Companies start approaching insolvency, its Promoters most often attempt dissipating the assets to minimize their losses and by the time the Company comes under CIRP, they have negligible value of assets or no assets causing negligible prospects for the creditors to recovery their money. Hence Code has prescribed certain provisions to claw back the lost value and to improve the assets of the CD. Hence in the interest of the Creditors, they should promptly accord their approvals for the appointment of Professionals to carry out the functions enumerated under sections 43,45,50 and 66 of the Code
6. Whether COC is prompt and timely in rendering help to the IP for Interim finance required for conducting the business of the CD as a going concern
Insolvency and Bankruptcy code was enacted with main objective of revival of sick companies and to avert liquidation The objectives of the code is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, Partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interest of all stake holders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy fund etc.
Hence the main objective is to maximization of value of assets and to ensure the entity on a going concern basis. For achieving these objectives the Resolution Professional needs certain money. But the Corporate debtor cannot lend this required money because the CD is already under stress and having insufficient funds. The Creditors are quiet reluctant to lend as there are quiet hesitant to lend their money as they have already invested the money in the business and incurred loss. Hence it is very difficult for the RP to raise finance to run the entity on a going concern basis.
Once the Application for initiation of Corporate Insolvency Resolution Process has been initiated by the Adjudicating Authority, all the Operations and daily functions are to be carried out by the Interim Resolution Professional in order to keep the entity as a going concern. Hence Code has vested with enormous responsibility on the Resolution Professional to carry out the business of the entity as a going concern and to avoid the entity to meet the fate of liquidation .As per Section 20(1) of the Code, the IRP has to undertake all out efforts and make every endeavor to protect and preserve the value of the assets of the Corporate debtor as a going concern Similarly as per Section 25(1) of the Code, it is the responsibility of the RP to Protect and preserve the assets of the Corporate debtor including continuing the business operations of the Corporate debtor. Hence for fulfilling the duties enumerated under section 20(1) and also Under Section 25(1) of the Code the IRP/RP requires certain funds to carry out these duties. Hence the Code has prescribed certain powers on the IRP/RP to raise finance to carry out the business of the corporate debtor as a going concern. This finance is called Interim finance.
As per Section 5(15) of the Code prescribe that the Interim finance as any financial debt raised by the Resolution Professional during the period of the Corporate Insolvency Resolution Process or in the Pre-packaged Insolvency Resolution Process. In other words, Interim finance under the Code can be defined as short term loan which is raised by the IRP/RP in order to continue the business operations of the corporate debtor as a going concern. But this right of the IRP/ RP needs the approval of Committee of Creditors by a vote of sixty six percent of the voting share as per Section 28(a) of the Code. The Hon!ble Tribunal in the case of Sajeve Bhushan Deora Vs Axis Bank ltd & ors it was clearly held that in order to raise interim finance by the IRP/RP , the approval of COC with a requisite majority of 66% is mandatory.
In the decided case of M/s Edelweiss Asset Reconstruction company ltd Vs Sai Regency Power Corporation Pvt ltd & others it was held that approval of COC with a requisite majority is mandatory even though the purpose of the finance is for rising for non-essential services of the corporate debtor. Similarly the IRP/RP cannot raise interim finance by creation of security interest over the encumbered assets of the corporate debtor without the approval of the COC. In other words the IRP/RP can raise interim finance over the Unencumbered assets of the Corporate debtor or raise interim finance over the encumbered assets of the Corporate debtor only with the approval of the COC.Thus it is a major safeguard is provided in the Code to prevent the IRP/RP to raise finance over secured assets of the Corporate debtor unauthorisedly.
From the above discussion it is very clear that IRP/RP should resort to this type of Interim finance only in absolute terms it is in absolute need to raise finance only to explore new opportunity of business or activity thereby it will provide additional window for raising resources as a result of which, it would become possible for the IRP/RP to make payments to the Creditors
However there are certain safeguards have been provided in the Code such as IRP/RP can raise interim finance only on
a) Unencumbered Assets of the Corporate Debtor
b) Encumbered Assets of the Corporate Debtor only with the Prior approval of Secured Creditors
This is one of the major safeguard has been provided in the Code to the Secured Creditors against the Unauthorized Creation of security interest over the secured assets of the Corporate debtor.
Hence the it is paramount important for the members of the COC to help the RP in timely manner in raising interim finance required to carry out the business of the CD as a going concern.
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