Introduction
The Insolvency and Bankruptcy Code (Code), which was enacted in 2016, completely overhauled the Indian bankruptcy regime following the obvious failure of the Sick Industrial Units Act of 1987 (SICA). The Code became a tool for promoting entrepreneurship and credit availability in the market, with its main goals being the timely settlement of debt, asset value maximization, and corporate debtor rehabilitation. The Insolvency and Bankruptcy Code (Code), which was enacted in 2016, completely overhauled the Indian bankruptcy regime following the obvious failure of the Sick Industrial Units Act of 1987 (SICA). The Code became a tool for promoting entrepreneurship and credit availability in the market, with its main goals being the timely settlement of debt, asset value maximization, and corporate debtor rehabilitation.
As a result, the BLRC created a “creditor-in-control” model under the Code after realizing the positional vulnerability of creditors under the current bankruptcy regime. In the event of financial trouble, the creditors will have complete control over the management of the corporate debtor’s affairs, under this model. Similarly, in Innoventive Industries v. Union of India[ii], the Hon’ble Supreme Court affirmed the BLRC’s purpose and noted that “… the most important change being that creditors should take over the company’s management after a default on its debt, instead of the management who was holding control before the default.”
As a result, we note that the justification offered by the courts has been consistent with the goals of the Code, giving the corporate debtor’s creditors even more ability to facilitate efficient debt settlement and guarantee the company’s resuscitation. This article will go into additional detail regarding the establishment, make-up, and operations of the Committee of Creditors, emphasizing the relevant jurisprudence and the interpretation that the courts have chosen to support the bankruptcy laws in India.
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Formation and Composition of Creditors
The highest decision-making body in a corporate bankruptcy resolution process (CIRP) is the Committee of Creditors (CoC). At the Committee meetings, decisions about the corporate debtor’s management are made by a majority vote of the members. Following the compilation of the proof of claims, the Interim Resolution Professional is required under Sections 18 and 21 of the Code to form the Committee of Creditors. The Committee will be made up of “all financial creditors of the corporate debtor,” per Section 21 Subsection (2).
Difference between Operational and Financial Creditor
The Bankruptcy Law Reforms Committee distinguished between an operational creditor and a financial creditor in paragraph 5.2.1 of its final report. Any person to whom a financial debt is owing is considered a financial creditor, including someone to whom the debt has been lawfully assigned or transferred. A person to whom an operational debt is owed, including those to whom it has been lawfully assigned or transferred, is referred to as an operational creditor.
A financial creditor’s ability to vote is determined by the percentage of debt that is owing to them. A vote of at least 75% of the voting shares is required to win the approval of the creditor committee. Operational creditors are not entitled to vote in committee of creditors meetings (CoC)
The name of the resolution expert suggested to serve as an interim resolution expert must be provided by the financial creditor with the application. Section 9(4) – One resolution expert who wants to serve as an interim resolution professional can be suggested by an operational creditor.
Only financial creditors and all of the corporate debtor’s financial creditors shall make up the committee of creditors. Committee membership is not permitted for operational creditors.
Can Operational Creditors be part of COC
The BLRC placed a strong focus on operational creditors’ exclusion from the CoC. They reasoned that in order to support the corporate debtor’s revival, the Committee’s creditors needed to be able to assess a debt’s commercial viability while simultaneously remaining receptive to debt restructuring. The Code gives financial creditors priority when it comes to being included in the CoC because operational creditors would neither wish to delay recovering the sums owed nor have the capacity to determine the corporate debtor’s viability.
Notwithstanding the reasoning behind it, operational creditors may only establish a Committee of Creditors in the following situations: (i) the corporate debtor has no financial debt; or (ii) all financial creditors are related parties. This is stipulated in Regulation 16 of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations).
However, there is still uncertainty about the operational creditors’ capacity to run the corporate debtor’s business and contribute to its recovery. Although the ultimate goal of the Code is to preserve the firm as a going concern, a Committee of Operational Creditors may not favor the recovery of short-term debts by immediate liquidation.
Who can take decisions in COC
A piece of economic legislation, the Insolvency and Bankruptcy Code of 2016 was created primarily to assist financially troubled corporations in order to foster entrepreneurship and increase credit availability. After careful consideration, the BLRC decided to give the corporate debtor’s financial creditors primary control in order to achieve these objectives. This drastic change from the previous system gave the BLRC the authority to let the CoC to use their “commercial wisdom” to bring the heavily indebted corporate debtor back to life.
Throughout the bankruptcy resolution process, CoC has the authority to determine whether the corporate debtor will continue to operate regularly. All such decisions shall be subject to a minimum majority of 51% of the voting share of the financial creditors, in accordance with subsection (8) of Section 21. The CoC meets on a regular basis to discuss the corporate debtor’s fate. It controls how the Resolution Professional (RP) operates and has the authority to contact the Adjudicatory Authority if misconduct occurs. It also validates any administrative choices made by the RP. The CoC makes it easier for the insolvency resolution procedure to run smoothly.
COC – the Adjudicatory Authority
Perhaps the most important task carried out by the CoC is approving, rejecting, or changing a resolution plan in accordance with Section 30(4) of the Code. According to Section 31, the Adjudicatory Authority (“AA”) must receive the resolution plan that the Committee on Corrections (“CoC”) has authorized before it may be approved. At this point, if the AA is certain that the resolution plan meets Section 30(2) standards and is compliant with the law, it may approve the plan. As stated by the Ahmedabad Bench of the NLCT in the case of Vivek Vijay Gupta v. Steel Konnect (India) Private Limited & Others[v]:The Adjudicating Authority is empowered by Section 31 of the Code to accept the plan once it has been approved by the CoC and to reject it if it does not meet the requirements referred to in Section 30 (2). However, the Adjudicating Authority is not permitted to sit over judgment on the Resolution Plan approved by the CoC in rejecting the Resolution Plan.
Voting power of COC
As was previously mentioned, the collection and validation of the supplied proof of claims falls within the purview of Section 18 of the Code and is the responsibility of the Interim Resolution Professional (IRP). This provision’s objective is to: Examine whether debt and default are present. assemble the Creditors Committee. Ascertain each Committee member’s vote percentage.
According to Section 21(8), unless otherwise specified, the CoC will make decisions by simple majority, requiring a minimum vote of 51% of the voting share of the financial creditors. The exemption applies to Section 27(2), which allows the CoC to elect to replace the Resolution Professional by a 66% majority, and to Section 30(4), which stipulates that the CoC may accept a resolution plan by a minimum vote of 66% of the voting share of the financial creditors. Furthermore, in order to decide whether to withdraw the insolvency resolution procedure under Section 12A of the Code, the CoC needs to receive a minimum majority of 90% of votes.
Conclusion
Since the Insolvency and Bankruptcy Code of 2016 came into effect, creditors of corporate debtors have been given more authority and responsibility. The corporate debtor’s management will be fully under the control of its creditors, who will also have the power to negotiate resolution plans and make important decisions. Nevertheless, they are tasked with bringing the company’s operations back to life and are expected to use their business acumen to the corporate debtor’s advantage. The influence of the creditor-in-control model of management promises a more robust bankruptcy regime in the overall context of the Code.
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The blog is written by Ayush Sehrawat, BBA LLB(Hons.) student of Manav Rachna University. The article consists of information on creditors such as its formation, power etc.
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