UNIVERSITY OF MUMBAI LAW ACADEMY,

KALINA CAMPUS, SANTACRUZ (EAST).

INSOLVENCY AND BANKRUPTCY CODE

TOPIC: - ROLE OF COMMITTEE OF CREDITORS.

Name - Kallis Alphanso

Roll No – 02

Fourth Year B.B.A LL.B

Semester VIII.

Submitted To:-

Prof. Smital Desai

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 INDEX
Sr Topic Page
No. No.
1. Introduction 3
2. Functioning of the Committee of Creditors 5

3. What is Bankruptcy? 6

4. Proceedings of a CIRP 8

5. Powers of committee of creditors 9

6. Ritual of the COC meetings and voting 10

7. Role of COC 12

8. Case Laws 14

9. Conclusion 15

10. References 16

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 INTRODUCTION

In 2016, the law of insolvency and bankruptcy, a legal regime that had been long forgotten,
was unified and codified in the form of the Insolvency and Bankruptcy Code, 2016 (‘Code’).
The first set of provisions of the Code came into effect from 05.08.2016. Majority of the Part
I (Preliminary) and II (Insolvency Resolution and Liquidation for Corporate Persons) of the
Code had come into effect by 15.12.2016.

As per the Code, the Parliament had devised a new method for empowering the financial and
other creditors of a company, to seek resolution of a company by engaging independent
professional to take charge of the company from the board of directors, when the company had
defaulted in paying a debt for an amount over INR 1,00,000/- (Rupees One Lakh Only). All
the creditors of such a company were created into an organism and that has been referred to as
Committee of Creditors (‘CoC’) of the company.

In the process of insolvency, the committee of creditors holds an influential position. This
committee of creditors is considered to be a higher-level decision-making body in initiating
and governing the Corporate Insolvency Resolution Process. According to regulation 21 of the
code, a committee of creditors is formulated to fulfill the responsibility of the interim resolution
professional so as to call for claims from all the creditors. The maximum time duration should
be 14 days from the public announcement and once the claim gets verified, the committee of
creditors is formed.

The mandatory condition of the code is to have all financial creditors in the committee of
creditors. As per the regulations of the code, it also lists the financial creditors and operational
creditors separately. A financial creditor is the one to whom the financial debt and the interest
is due, for example Home-buyers, banks, bond holders, guarantee providers, etc. On the other
hand, an operational creditor is a person who owns debts related to the goods and services
supply, which includes employees, government dues.

Committee of creditors is formed under regulation 21 of the code, and a major decision-maker
in the corporate insolvency resolution process. Let’s find out more in detail.

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To make the Corporate Insolvency Resolution Process effective, based on the guidance and
suggestions of the members of the committee of creditors, the resolution plan is prepared for
the company. As per this code, a company that is registered under the Companies Act 1956,
such as Limited liability partnership, Partnership firms, and Individuals or under the Insolvency
and Bankruptcy Code, any financial or operational creditor can start the process of corporate
insolvency against the corporate debtor. This can be initiated only when the corporate debtor
is a defaulter in repayment of debts.

Definition: Committee of creditors

In the process of insolvency, the committee of creditors holds an influential position. This
committee of creditors is considered to be a higher level decision-making body in initiating
and governing the Corporate Insolvency Resolution Process. According to regulation 21 of the
code, a committee of creditors is formulated to fulfill the responsibility of the interim resolution
professional so as to call for claims from all the creditors. The maximum time duration should
be 14 days from the public announcement and once the claim gets verified, the committee of
creditors is formed.

The mandatory condition of the code is to have all financial creditors in the committee of
creditors. As per the regulations of the code, it also lists the financial creditors and operational
creditors separately. A financial creditor is the one to whom the financial debt and the interest
is due, for example Home-buyers, banks, bond holders, guarantee providers, etc. On the other
hand, an operational creditor is a person who owns debts related to the goods and services
supply, which includes employees, government dues.

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 FUNCTIONING OF THE COMMITTEE OF CREDITORS
Secured creditors usually get paid back first. This is because they can directly lay claim to the
collateral on their loans.

Unsecured creditors have more or less power depending on how much they are owed. The court
will have the final verdict on a fair decision for all parties involved.

The committee members can seek professional advice as a part of their work (legal counsel,
accountants, appraisers, etc.).

An important role of the committee of creditors is determining whether the company needs to
be liquidated immediately.

This is decided based on whether the repayment would be possible if the company's assets were
sold or if it remained in operation.

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 WHAT IS BANKRUPTCY?
Bankruptcy is a legal procedure through which people or other entities who cannot pay debts
to creditors are relieved of some or all of their debts.'

A debtor initiates a bankruptcy proceeding. The term 'bankruptcy' is often wrongly used as a
synonym for 'insolvency.'

Insolvency refers to a state of being unable to pay debts. Bankruptcy is a legal proceeding
which is imposed by a court order. Hence, it is wrong to use the two words interchangeably.

The committee of creditors makes all the important decisions in the Corporate Insolvency
Resolution Process (CIRP).

The CIRP is a recovery scheme for creditors. There are two methods used to evaluate the
corporate insolvency of a company:

1. Cash-flow Test

This checks whether the company can pay its debts currently or in the future.

2. Balance Sheet Test

This is the value of a company’s assets less than its liabilities.

Once the evaluation is done, a CIRP process can be initiated by the committee of creditors or
by a single creditor. The committee will then decide whether the debtor is capable of repayment
or not.

Repayment capability will be evaluated by IRPs (Insolvency Resolution Professionals). IRPs

will evaluate a company’s assets and liabilities and determine the defaulter’s repayment ability.

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 PROCEEDINGS OF A CIRP
Before applying for a CIRP, certain necessary documents have to be produced. Once the
documents are approved, the creditors can apply for a CIRP.

1. The committee of creditors or individual creditors must approach the National Company
Law Tribunal (NCLT). This confirms their entry into the CIRP proceedings.

The creditor/creditors must show proof of payment defaults by the debtor. The defaulted debt
must be upwards of one lakh rupees. The application is either accepted or denied by the NCLT.
The NCLT should pass the order within fourteen days.

2. Once the approval comes through, the creditors can make a demand for the repayment of
debt. It is then open to the debtor to defend the claim.

3. Once the debtor enters the CIRP proceedings, an Insolvency Resolution Professional is
appointed.

The company management is then placed under an interim resolution professional. From this
time, until the CIRP proceedings are completed, the management will not have any control
over the company's activities.

4. In addition to this, a moratorium is sanctioned. The moratorium prohibits certain activities.

These include:

• Transfer of the debtor’s assets

• Beginning any new legal matters on the debtor.
• Termination of the supply of basic goods and services

5. The moratorium lasts until the debtor enters the CIRP.

6. The IRP lists and verifies the claims made by the creditors. The committee of creditors is
officially formed within 30 days after entering the CIRP proceedings.

This is in case a single creditor initiates the CIRP proceedings. If this creditor is found to be
true, the claims made will allow other creditors to enter the proceedings and form a committee.

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7. The committee of creditors appoints another resolution professional. This individual will
carry out the remainder of the CIRP proceedings. The committee may also decide to appoint
the same person if they agree to do so.

8. Within 180 days of the initiation of the CIRP, a resolution plan has to be formulated. The
proposed resolution plan should satisfy the criteria of the IBC (Insolvency and Bankruptcy
Code). This is the duty of the resolution professional.

Once the plan is proposed, there are two outcomes:

1. The plan is approved – In this case, the resolution professional must coordinate all legal
proceedings and obtain necessary documents. The resolution plan should adhere to the criteria
laid down by all stakeholders/creditors/employees involved in the CIRP.

2. The plan is not approved – If the resolution plan is not approved, the NCLT is obliged to
order the liquidation of the corporate debtor. Once liquidation is approved, the committee of
creditors appoints a liquidator. The liquidator is responsible for selling the debtor’s assets,
which are shared among the stakeholders.

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 POWERS OF COMMITTEE OF CREDITORS
Being an authoritative entity, a committee of creditors are majorly involved in the decisions
and also determine the proceedings, actions and role of the creditors. Here are some of the
powers that are given to them as per the regulations of code:

❖ The committee of creditors have the power to decide about the regular functioning of
the corporate debtor and also can take the important decisions in the company’s favor.

❖ They can approach the adjudicating authority as it is the national company law
tribunal, especially when there is a doubt of any foul play.

❖ They can apply to the adjudicating authority to change the interim resolution
professional if needed.

❖ They can choose to proceed ahead with the liquidation process of the corporate debtor
even without any approval on any resolution plan.

❖ They are empowered to exercise their commercial wisdom to take any decision for the
corporate debtor. This is implied on the committee of creditors as they have a better
knowledge on the subject and are competent in addressing the serious situation of the
company under distress.

❖ Also, they are authorized to reduce the notice period, which ranges between five days
to 24 hours, only when it's necessary. If there is an authorized representative, the
minimum notice period is 48 hours.

Therefore, all the above-mentioned powers are given to the committee of creditors strictly
according to the insolvency and bankruptcy code, 2016.

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 RITUAL OF THE COC MEETINGS AND VOTING

The meetings are convened and chaired by the RP in his/her capacity as Interim Resolution
Professional (IRP) or RP, as the case may be. The notice period for a meeting is specified at
five days, which the CoC can reduce to not less than 24 hours (48 hours if there are a class of
creditors). The notice should contain the time, date, and venue of the meeting; and matters to
be discussed in the meeting along with all relevant documents should be shared with the
participants.

The notice should be shared with all its members- the unrelated FCs including the authorised
representative of a class of creditors; members of the suspended Board of Directors or Partners
of the CD and operational creditors (OCs) or their representatives if their aggregate dues is not
less than 10% of the debt. The notice can be shared electronically also. The notice should
contain the details of how participants who choose to attend the meeting using electronic/audio
and visual means can do so.

The notice should also list the agenda items that are required to be voted upon separately. Where
participants authorise other persons to attend on their behalf, information regarding the same
has to be shared with the RP in advance.

Quorum of at least 33% of the voting rights are present either in person or by video
conferencing or other audio and visual means is required for conduct of a meeting. If this is not
achieved the meeting stands adjourned to the same time and place on the next day.

The CoC has the power to modify the quorum requirement. The quorum requirement is to be
maintained throughout the conduct of the meeting. The CoC exercises its power of decision
making through the process of voting. The Code provides that the thresholds for general
decision making in the CoC should not be less than 51%.

Instances involving significant actions that impact the working of the CD or the CIRP inter alia
include raising of interim finance; creating security interest on assets of the CD; change in
ownership or capital structure; amend constitutional documents of the CD; change management
of the CD or its subsidiary; appointment of statutory auditor or internal auditor and replacement
of a RP require a higher threshold of 66%. Where the CoC decides to accept the applicants’
request for withdrawal which has the effect of terminating the CIRP midway requires a still
higher threshold of 90%. These are statutory requirements to which the CoC is bound.

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The solemnity of decisions the CoC is required to make warrants the process of voting be done
in a manner that is beyond doubt and is uncompromising of the integrity of the process. The
amount of detailing that the CIRP Regulations provides is a reflection of the importance of the
voting process.

Instructions regarding the process and manner of voting are to be communicated as part of the
notice. The RP is required to share the decision on all items at the end of the meeting along
with voting decisions of the members. Minutes are to be circulated within 48 hours of the
meeting. The RP has been tasked with the responsibility to provide secure system for voting
through electronic systems.

The CIRP Regulations go to the extent of describing the requirements of a secured system of
electronic voting in detail. Where the CoC includes an authorised representative for a class of
creditors, the CIRP Regulations provides for his working with the creditors and the RP. He
participates and votes in the CoC meetings after taking views of the class of creditors and
longer time limits to accommodate the voting of creditors in a class.

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 ROLE OF COMMITTEE OF CREDITORS

The Code clearly details the duties of CoC without ambiguity. Given the complex and dynamic
nature of businesses, the role of CoC is a difficult one. However, the Code has empowered the
CoC with the services of a capable and trained Resolution Professional (RP) to conduct the
process under its guidance. The role of the CoC in helping keep the CD as a going concern and
in assessing viability of the business is crucial to the entire insolvency process in search of
liquidation remote solutions. The CoC is at a vantage position to decide on meeting the needs
of the company to remain as a going concern including raising interim finance.

The CoC also decides on what and how expenses are to be made and approve the process cost.
It also decides the professional fees for the services of the Insolvency Professional (IP) it
chooses to conduct the process. In addition, the CoC makes the decision to retain or replace the
IP. Assessing viability of the business is done by the CoC at two levels; one an ex-post analysis
of financial position of the debtor’s business when the insolvency proceeding is initiated, to
understand the reasons for insolvency; and two an ex-ante evaluation of the feasibility and
viability of a resolution plan in addressing the cause of insolvency and putting the CD back in
business in a sustainable manner.

Such assessment forms the basis for the identification of criteria that prospective resolution
applicants (RAs) have to meet and construction of the evaluation matrix on which resolution
plans are evaluated. The CoC carries out its functions through its meetings and these meetings
are a sacred ritual. Recognising the need for sanctity of these meetings the IBBI (Insolvency
Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) provides in
detail, the manner in which these have to be conducted.

The CoC has been enabled under the Code, like the board of directors, to take the decisions in
respect of the Corporate Debtor, during the currency of the corporate insolvency resolution
process (‘CIRP’). As a part of this enabling system, the Adjudicating Authority while
commencing the process of CIRP for a company, appoints a resolution professional, who co-
ordinates and executes all the decision making during the CIRP and thereby conducts the CIRP
of the company. In respect of numerous aspects, the Resolution Professional is bound to take
the prior approval of the CoC, as per Section 28 of the Code.

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Taking a leave from the earlier regimes of Corporate Debt Restructuring and Strategic Debt
Restructuring, as prescribed by the Reserve Bank of India (RBI), the Code also vests the
supreme authority to take decisions in respect of the Corporate Debtor in the CoC.

One such crucial aspect in this power, lies the right of the CoC to consider and then approve a
resolution plan with respect to a company (as per Sections 30 and 31 of the Code). This
approval is subject to the final approval of the resolution plan by the concerned Adjudicating
Authority (Section 31 of the Code. Over the period of three years of the Code having been in
effect, the Adjudicating Authority, then the National Company Law Appellate Tribunal
(‘Appellate Tribunal’) and the Hon’ble Apex Court of India have time and again given
weightage to commercial wisdom of CoC, to finalise the next course of action of the Corporate
Debtor and thereby, bring resolution to the Corporate Debtor.

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 CASE LAWS

❖ K.N Rajakumar v. Nagarajan-

The Supreme Court recently in K.N Rajakumar v. Nagarajan has reiterated the ‘settled
principle’ of going concern of corporate debtor and held that “Every attempt has to be first
made to revive the concern and make it a going concern, liquidation being the last resort.”

This came in the backdrop of the order of the National Company Law Tribunal (NCLT),
Chennai, which approved the committee of creditors’ (CoC) decision regarding the withdrawal
of the corporate insolvency resolution process (CIRP) involving the corporate debtor and held
that the powers and management of the resolution professional (RP) and CoC were to be
handed over the to the directors of corporate debtor.

While agreeing with the findings of the aforesaid order, the Supreme Court in the instant case
held that since it has been unanimously resolved to withdraw CIRP proceedings under section
12A of the Insolvency & Bankruptcy Code, 2016 (“IBC”), the matter is settled between the
corporate debtor and erstwhile financial creditors. The CoC and the RP concerning the
corporate debtor had become functus officio.

However, because of applying the aforesaid ‘settled principle’ of going concern, the Court
showed reluctance in examining various contentions raised and has overlooked major concerns
of operational creditors regarding the constitution of the CoC. The bench was of the view: “It
is a settled principle of law that the Court should not go into the academic issues and seek to
interpret the provisions of law when it is not necessary for deciding the issues in the
appeal(s)”. Therefore, this post is an attempt to analyze the contentions raised during the
proceedings by the operational creditors concerning the formation of the CoC and related issues
involved therein.

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 CONCLUSION

From the above points, the role and relevance of the committee of creditors has been reflected
and how they can take up their roles and responsibilities in the right direction towards fulfilling
the process of corporate insolvency resolution. Though the conditions and demands vary
depending on the case they are dealing with, the core areas to remain active as a committee
member remains the same.

With the emergence of the Insolvency and Bankruptcy Code of 2016, the creditors of the
corporate debtor have been granted great powers, with even greater responsibilities. The
creditors shall take absolute control of the management of the corporate debtor, with the
authority to take key decisions and negotiate resolution plans. Nonetheless, they are entrusted
with the task of reviving the business of the company and are expected to apply their
commercial wisdom for the benefit of the corporate debtor. In the grand scheme of the Code,
the impact of the creditor-in-control model of management promises the likelihood of stronger
bankruptcy regime.

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 REFERENCES

Websites Referred:

• lawbhoomi.com
• https://www.resurgentindia.com/
• blog.ipleaders.in

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