Constitution of Committee of Creditors (CoC) under Section 21 of Insolvency and Bankruptcy Code 2016 (IBC)

CIRP
Committee of creditors and meetings

Constitution of Committee of Creditors under Section 21 of IBC

What is Committee of Creditors under IBC

Committee of Creditors(CoC) is formed by the Interim Resolution Professional once the Corporate Insolvency Resolution Process(CIRP) is initiated against a Corporate Debtor. Committee of Creditors (CoC) is a committee consisting of Financial Creditors of the Corporate Debtor. This body forms the decision-making body in the CIRP of the Corporate Debtor.

As per section 18 of the Code, it is the duty of the IRP to constitute the Committee based on all the claims received against the Corporate Debtor and determination of the financial position of the corporate debtor. It shall consist of those financial creditors whose claims have been received within the stipulated time. As per section 24(6) of the Code, each Creditor shall vote in accordance with the voting share assigned to it based on financial debts owed to such creditor.

 

1. Constitution of Committee of creditors(CoC)[Sec. 21(1)]

The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors. The interim resolution professional shall file a report certifying constitution of the committee to the Adjudicating Authority within two days of the verification of claims received under sub-regulation (1) of regulation 12.[CIRP Reg.-17(1)].

Where the creditor who submitted claim after the time stipulated in the public announcement but on or before the ninetieth day of the insolvency commencement date, it shall be included in the committee from the date of admission of such claim. Such inclusion shall not affect the validity of any decision taken by the committee prior to such inclusion.[CIRP Reg.-12(3)].

NCLAT in the matter of Punjab National Bank Vs. Mr. Kiran Shah Liquidator of ORG Informatics Ltd. 16(IBC)16/2020 held that after the liquidation the Committee of Creditors has no role to play and they are simply a claimant whose matters are to be determined by the Liquidator and cannot move an application for removal of Liquidator in absence of any provisions under the law.

 

2. Members of the CoC [Sec. 21(2) & (3)] 

The committee of creditors shall comprise all financial creditors of the corporate debtor. Where the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them.

Related party exception: 

A financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6A) of Section 21 or sub-section (5) of section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors. This condition is not apply to a financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date. [Sub-section(2) & (3)]

NCLAT in the matter of Jet Airways (India) Ltd Vs. State Bank of India & Anr held that if parallel insolvency proceedings has been initiated against the Corporate Debtor, the respective authority of other country has also right to participate in the meeting of CoC & joint CIRP will continue in accordance with IBC.

Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors. [2019] ibclaw.in 13 SC held that the other individuals, who have advanced monies to the Corporate Debtor, should have the right to be on the CoC.:

“54. It has been argued that different instructions may be given by different allottees making it difficult for the authorised representatives to vote on the Committee of Creditors and that in any case, the collegiality of the secured creditors will be disturbed.

To this the answer is that like other financial creditors, be they banks and financial institutions, or other individuals, all persons who have advanced monies to the corporate debtor should have the right to be on the Committee of Creditors. True, allottees are unsecured creditors, but they have a vital interest in amounts that are advanced for completion of the project, maybe to the extent of 100% of the project being funded by them alone. As has been correctly argued by the learned Additional Solicitor General, under the proviso to Section 21(8) of the Code if the corporate debtor has no financial creditors, then under Regulation 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, up to 18 operational creditors then become the Committee of Creditors or, if there are more than 18 operational creditors, the highest in order of debt owed to operational creditors to the extent of the first 18 are then represented on the Committee of Creditors together, with a representative of the workers. If allottees who have funded a real estate project of the corporate debtor to the extent of 100% are neither financial creditors nor operational creditors, the mechanism of the Committee of Creditors, who is now to take decisions after the Code is triggered as to the future of the corporate debtor, will be non-existent in a case where there are no operational creditors and no secured creditors, because 100% of the project is funded by the allottees. Even otherwise, as correctly argued by the learned Additional Solicitor General, it would in fact be manifestly arbitrary to omit allottees from the Committee of Creditors when they are vitally interested in the future of the corporate debtor as they have funded anywhere from 50% to 100% of the project in most cases.”

 

3. Person is a financial creditor as well as an operational creditor [Sec. 21(4)]

Where any person is a financial creditor as well as an operational creditor:

(a) such person shall be a financial creditor to the extent of the financial debt owed by the corporate debtor, and shall be included in the committee of creditors, with voting share proportionate to the extent of financial debts owed to such creditor;

(b) such person shall be considered to be an operational creditor to the extent of the operational debt owed by the corporate debtor to such creditor.

 

4. Transfer of Operational Debt to Financial Creditor [Sec. 21(5)]

Where an operational creditor has assigned or legally transferred any operational debt to a financial creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such assignment or legal transfer.

As per Reg. 28, in the event a creditor assigns or transfers the debt due to such creditor to any other person during the insolvency resolution process period, both parties shall provide the interim resolution professional or the resolution professional, as the case may be, the terms of such assignment or transfer and the identity of the assignee or transferee. The resolution professional shall notify each participant and the Adjudicating Authority of any resultant change in the committee within two days of such change.

 

5. Consortium arrangement or syndicated facility [Sec. 21(6)]

Where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility provide for a single trustee or agent to act for all financial creditors, each financial creditor may:

(a) authorise the trustee or agent to act on his behalf in the CoC to the extent of his voting share;

(b) represent himself in the CoC to the extent of his voting share;

(c) appoint an insolvency professional (other than the resolution professional) at his own cost to represent himself in the CoC to the extent of his voting share; or

(d) exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally.

 

6. Special members [Sec. 21(6A)]

(i) Security/Deposit holder Financial Creditors:

Where a financial debt is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for all the financial creditors, such trustee or agent shall act on behalf of such financial creditors and such authorised representative shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share. [Clause (a) of sub-section(6A)]

 

(ii) Class of creditors exceeding maximum nos:

Class of creditors means a class with at least ten financial creditors under clause (b) of sub-section (6A) of section 21 and the expression, “creditors in a class” shall be construed accordingly.[CIRP Reg.-2(1)(aa)]

Where a financial debt is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under clause (a) or sub-section (6), the interim resolution professional shall make an application to the Adjudicating Authority along with the list of all financial creditors, containing the name of an insolvency professional, other than the interim resolution professional, to act as their authorised representative who shall be appointed by the Adjudicating Authority prior to the first meeting of the committee of creditors and such authorised representative shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share. [Clause (b) of sub-section(6A)]

 

(iii) Guardian/executor or Administrator:

Where a financial debt is represented by a guardian, executor or administrator, such person shall act as authorised representative on behalf of such financial creditors and such authorised representative shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share. [Clause (c) of sub-section(6A)]

 

7. Committee with only Operational Creditors i.e. No Financial Creditor in CoC [CIRP Reg. 16]

Where the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor, the committee shall be consist of members as under:

(a) 18 largest operational creditors by value:[Reg. 16(2)(a)]

If the number of operational creditors is less than 18, the committee shall include all such operational creditors;

(b) one representative elected by all workmen other than those workmen included under point (a) i.e. under 18 operational creditors; and [Reg. 16(2)(b)]

(c) one representative elected by all employees other than those employees included under point (a) i.e. under 18 operational creditors. [Reg. 16(2)(c)]

A member of this committee shall have voting rights in proportion of the debt due to such creditor or debt represented by such representative, as the case may be, to the total debt. Herein, total debt means Sum of:

(a) the amount of debt due to the creditors listed in Regulation 16(2)(a);

(b) the amount of the aggregate debt due to workmen under Regulation 16(2)(b); and

(c) the amount of the aggregate debt due to employees under Regulation 16(2)(c).

A committee formed under this Regulation and its members shall have the same rights, powers, duties and obligations as a committee comprising financial creditors and its members, as the case may be.

 

8. Committee with only creditors in a class [Reg.-16B]

Where the corporate debtor has only creditors in a class and no other financial creditor eligible to join the committee, the committee shall consist of only the authorised representative(s).

 

9. Decision of the Committee[Sec. 21(8)]

Otherwise provided separate provision in the Insolvency and Bankruptcy Code, 2016, all decisions of the CoC shall be taken by a vote of not less than fifty-one per cent. of voting share of the financial creditors.

Hon’ble Supreme Court in the matter of K. Sashidhar Vs. Indian Overseas Bank & Ors. 72(IBC)03/2019 held that No provision has been envisaged by the legislature to empower the RP, the NCLT or NCLAT, to reverse the commercial decision of the CoC

NCLAT in the matter of Saravana Global Holdings Ltd. & Anr. Vs. Bafna Pharmaceuticals Ltd. & Ors. held that the company being MSME, it is not necessary for the CoC to follow all the procedures under the CIRP. For example, if case is settled before the constitution of the CoC or in terms of Section 12A on the basis of offer given by Promoter, in such case, all other procedure for calling of application of Resolution Applicant etc. are not followed. If the Promoter satisfy all the creditors and is in a position to keep the Corporate Debtor as a going concern, it is always open to CoC to accept the terms of settlement and approve it by 90% of the voting shares. The same principle can be followed in the case of MSME.

 

10. Financial Information from RP [Sec. 21(9) & (10)]

The CoC shall have the right to require the resolution professional to furnish any financial information in relation to the corporate debtor at any time during the CIRP. The resolution professional shall make available any financial information so required by the committee of creditors under sub-section (9) within a period of seven days of such requisition.

 

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