Status as on- 25/05/2021

After the obvious disappointment of the Sick Industrial Units Act of 1987 (SICA), the Indian bankruptcy system saw a flat out upgrade with the sanctioning of the Insolvency and Bankruptcy (Code) in 2016. With the essential targets of time-bound goal of obligation, boost of resource worth and recovery of the corporate indebted person, the Code arose as a component for the advancement of business venture and accessibility of credit on the lookout.

Considering the previously mentioned targets, the Banking Law Reforms Committee (BLRC) has laid extraordinary accentuation upon the “privileges of lenders” under the Code. In its 2015 Report, the BLRC has expressed the accompanying;

“… When default takes place, control is supposed to transfer to the creditors; equity owners have no say.”

The BLRC along these lines perceived the positional shortcoming of leasers under the predominant liquidation system, and accordingly fostered a “creditor-in-control” model under the Code. As per this model, the administration of the corporate indebted person’s issues will vest totally in the possession of the lenders in case of monetary trouble. In like manner, the Hon’ble Supreme Court, in Innoventive Industries v. Association of India, maintained the expectation of the BLRC and saw that;

“… the most significant change being, that when a company defaults on its debt, control of the company should shift to creditors rather than the management who was retaining control after the default.”

Hence, we see that the reasoning given by the legal executive has been in consistency with the goals of the Code, along these lines further enabling the lenders of the corporate account holder; to advance compelling goal of obligations and guarantee the recovery of the organization.

This article will additionally dive into the arrangement, organization and working of the Committee of Creditors, while featuring the statute in question and the translation received by the legal executive to reinforce the Indian liquidation system.

FORMATION AND COMPOSITION OF THE COMMITTEE OF CREDITORS:

The Committee of Creditors (CoC) is the preeminent dynamic body in a Corporate Insolvency Resolution Process (CIRP). Choices with respect to the organization of the corporate borrower are taken at the gatherings of the Committee, in light of a dominant part vote of the individuals.

Section 18 and Section 21 of the Code, commit the Interim Resolution Professional to establish the Committee of Creditors, after the gathering of the verification of cases. According to sub-area (2) of Section 21, the Committee will contain “all financial creditors of the corporate debtor”.

FINANCIAL CREDITORS VERSUS OPERATIONAL CREDITORS-

The avoidance of operational creditors from the Committee of Creditors has been a central issue of conversation. In Akshay Jhunjhunwala and Anr. v. Association of India, the solicitor tested the protected legitimacy of the arrangements of the Code, fighting that the need given to monetary banks was outlandish and in this manner, illegal. Dismissing this conflict, the High Court of Calcutta reasoned that;

“The Bankruptcy Committee gives a rationale to the financial creditors being treated in a particular way vis-à-vis an operational creditor in an insolvency proceeding with regard to a company. The rationale is a plausible view taken for an expeditious resolution of an insolvency issue of a company.”

In this manner, in Swiss Ribbons v. Union of India, the Supreme Court upheld the discoveries of the BLRC and put together its reasoning with respect to the idea of advance arrangements, the working of monetary banks and the goals of the Code. Here, R.F. Nariman J. thought as follows;

“… financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor’s business when there is financial stress, which are things operational creditors do not and cannot do.”

Albeit the differentiation among financial and operational creditors has mixed a contention, we see that the plan of the Code is focused on the proficient restoration of the corporate debt holder, while guaranteeing greatest recuperation to its leasers; consequently advocating the structure of the Committee of Creditors.

CAN OPERATIONAL CREDITORS BE PART OF THE COMMITTEE OF CREDITORS?

As examined before, the BLRC laid weighty accentuation on the avoidance of operational creditors from the CoC. They contemplated that the creditors of the Committee should have the capacity to look at business reasonability, while additionally being available to rebuilding obligations to advance the restoration of the corporate debtor. Taking into account that operational creditor would neither need to delay recovery of the sums due, nor would they have the capacity to evaluate practicality of the corporate debtor, the Code prioritizes the inclusion of financial creditors to the CoC.

Notwithstanding the reasoning embraced, Regulation 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), gives that operational creditors may shape a Committee of Creditors just where the corporate account holder has (I) no monetary obligation; or (ii) where all financial creditors are related parties.

As per Regulation 16(2), this Committee will comprise of (a) eighteen biggest operational creditors by esteem; (b) one representative of workmen; and (c) one representative of employees of the corporate debtor. Further, Regulation 16(4) vests in this Committee, similar rights, forces, obligations and commitments as a committee comprising financial creditors may possess.

However, the capacity of the operational creditors to viably deal with the undertakings of the corporate debtor and to pursue its restoration stays a worry. While a Committee of operational creditors would preferably need to recuperate momentary obligations by means of quick liquidation, such a plan may not support the safeguarding of the organization as a going concern; which is a definitive target of the Code.

WHAT DECISIONS DOES THE COC TAKE?

The Insolvency and Bankruptcy Code, 2016 is a monetary enactment with the essential thought process of restoration of monetarily troubled corporates, in this manner advancing business and accessibility of credit. In quest for these objectives, the BLRC, after much consideration, decided to place the financial creditors of the corporate debtor steering the ship. With this extreme shift from the past system, the BLRC enabled the CoC to practice their “commercial wisdom” to restore the obligation ridden corporate debtor.

Under the Code, the CoC is approved to settle on the ordinary working of the corporate debtor during the indebtedness goal measure. According to subsection (8) of Section 21, all such decisions taken shall be subject to a minimum majority of 51% of the voting share of the financial creditors.

The CoC conducts regular meetings, wherein it examines the destiny of the corporate debtor. It rules over the working of the Resolution Professional (RP) and has the ability to move toward the Adjudicatory Authority in case of injustice. Further, it approves any managerial choices taken by the RP.

The CoC works with the smooth working of the bankruptcy goal measure. Where it considers fit, the CoC may choose getting an augmentation of time span as per Section 12 of the Code. In addition, it decides the suitability of the corporate debt holder’s business, looks at the possibility of future tasks, installments towards CIRP costs and may likewise take steps to promptly exchange the corporate indebted person, where it tracks down that the goal of bankruptcy will undoubtedly fall flat.

COMMITTEE OF CREDITOR VIS-Ā-VIS THE ADJUDICATORY AUTHORITY

The most significant capacity performed by the CoC is maybe the endorsement/dismissal or change of a resolution plan according to Section 30(4) of the Code. As examined over, the financial creditors; having recently surveyed the matter of the corporate debtor and being aware about the predominant economic situations, are needed to work out “commercial wisdom” to choose the most ideal methodology for the restoration of the corporate debtor.

Further, Section 31 states that the resolution plan supported by the CoC should be submitted before the Adjudicatory Authority (“AA”) for its endorsement. At this stage, the AA may endorse the resolution plan in the event that it is fulfilled that the arrangement consents to the prerequisites gave under Section 30(2) and isn’t conflicting with the law.

Considering the above arrangements, questions with respect to the self-governance of the CoC to endorse/reject a resolution plan vis-ā-vis the locale of the Adjudicatory Authority were raised.

In the case of Vivek Vijay Gupta v. Steel Konnect (India) Private Limited & Others, the Ahmedabad Bench of the NLCT propounded as follows;

” The Code, through Section 31 gives the authority to the Adjudicating Authority to approve the plan when approved by CoC and can reject if it does not conform to the requirements referred under Section 30 (2) but not to sit over Judgment on the Resolution Plan approved by the CoC in rejecting the Resolution Plan.”

Similarly, in M/s BhaskaraAgro Agencies v. M/s. Super Agri Seeds Private Limited, the NCLAT recognized the technical expertise of the financial creditors and concluded that;

“So far as the viability or feasibility of ‘Resolution Plan’ is concerned, the AA or the Appellate Tribunal cannot sit in appeal over the decision of the CoC.”

In the landmark case of K. Shashidhar v. Indian Overseas Bank and Others, the Supreme Court clarified that the Code does not empower the Adjudicatory Authority to assess the fairness of the resolution plan approved or rejected by CoC and that the “commercial wisdom” of the CoC shall not be challenged. With regard to judicial intervention, the Supreme Court stated that;

“… the legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority”.

Thus, we observe that the decision of the CoC enjoys the highest authority and the judiciary may only intervene where it finds that the resolution plan does not adhere to the provisions of the Code.

VOTING POWER OF THE COMMITTEE OF CREDITORS:

As examined beforehand, the Interim Resolution Professional (IRP), under Section 18 of the Code, is entrusted with the gathering and confirmation of the submitted evidence of claims. The reason behind this arrangement is to:

1. Evaluate the presence of debt and default.
2. Establish the Committee of Creditors.
3. Decide the democratic portion of the individuals from the Committee.

Section 21(2) provides that the voting share of the creditors shall be proportionate to the amount of debt owed to them, in accordance with the submitted claims. The BLRC Report thus stated as follows;

“The voting right of each creditor will be the weight of their liability in the total liability of the entity from financial creditors. The calculation for these weights will need to take into account all the contractual agreements between the creditor and debtor, so that the weight is the net of all these positions.”

As per Section 21(8), the CoC shall take decisions based on a simple majority, with a minimum vote of 51% of the voting share of the financial creditors, unless mentioned otherwise. The exception applies to Section 30(4), which states that the CoC may approve a resolution plan by a minimum vote of 66% of voting share of the financial creditors; and to Section 27(2), wherein the CoC may choose to replace the Resolution Professional by a 66% majority. Further, the CoC requires a minimum majority of 90% to rule upon the withdrawal of the insolvency resolution process under Section 12A of the Code.

Conclusion-

With the development of the Insolvency and Bankruptcy Code of 2016, the creditors of the corporate debtor have been allowed extraordinary forces, with considerably more noteworthy duties. The creditors will assume supreme responsibility for the administration of the corporate debtor, with the power to take key choices and arrange goal plans. In any case, they are depended with the assignment of restoring the matter of the organization and are relied upon to apply their business astuteness to help the corporate debt holder. In the fantastic plan of the Code, the effect of the lender in-control model of the board guarantees the probability of more grounded insolvency system.

Disclaimer– The above article is based on the interpretation of related laws which may differ from person to person. The readers are expected to take legal advice before placing reliance on it. For more information, please reach at support@centrik.in