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Analysis of the role of Committee of Creditors in IBC in the light of the latest Supreme Court Judgments. (By-Rajnandini & Ratnesh Kumar)
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Analysis of the role of Committee of Creditors in IBC in the light of the latest Supreme
Court Judgments.
Authored By- Rajnandini
1. Need
of Enactment of IBC, 2016
·
The Insolvency and Bankruptcy
Code, 2016 was enacted to remedy the serious
flaws in India's existing staggered insolvency laws and unite them under one umbrella. The code has made
a significant impact on India's
insolvency and bankruptcy laws. The primary goals of this code are to maximize the value of a corporate
person's assets, to improve the condition
of a company in financial distress, to check and control fraud committed
by a corporate person who has been defaulting on payments, by establishing the Insolvency and
Bankruptcy Board of India. It has resulted in improved debtors'
discipline, a doubling
of recovery amounts,
and a reduction in the country's nonperforming assets (NPAs). Understanding the need that occurred so as to create a separate code to deal with insolvency i.e. code of IBC is as explained
below:
1.
On the topic of "which act
has precedence over the other?" the RDDBFI Act, the SICA Act, and the SARFAESI
Act were found
to be in a power struggle.
2.
Multiple statutes giving birth to
diverse intersecting rights and duties,
as well as multiple adjudication forums that may or may not have legal knowledge in insolvency and bankruptcy, are the reasons
for this.
3.
There were numerous statutes
covering various areas of debt or insolvency
resolution prior to the IBC's enactment namely, Sick I0ndustrial
Companies (special provision) Act, 1985 (“SICA”), The Companies (Second Amendment), Act
2002, Recovery of Debts due to Banks and financial
institutions Act, 1993 (“RDDBFI Act”), The Securitization and
Reconstruction of Financial Assets and enforcement of the Security Interest
Act, 2002 (SARFAESI Act)
4.
Therefore, the necessity for a consolidated and sound
bankruptcy legislation arose from the fragmented statutes,
conflicts of jurisdiction, and unusual timelines.
2.
Committee Of Creditors
·
The Code focuses on providing relief to the creditors of the company
(financial as well as operational creditors), and stakeholders. The creditors who are members of the Committee of
Creditors are given priority in the Corporate Insolvency Resolution Process, and the resolution plan of a firm is carried out on the guidance of the
creditors who are members of the Committee
of Creditors. Under the Insolvency and Bankruptcy Code, any financial
creditor or operational creditor can commence
a corporate insolvency action against a corporate
debtor when the corporate debtor commits a default in debt repayment.
·
This committee of creditors is the final decision-making body in the Corporate
Insolvency Resolution Process, and its decision will have an impact on the corporate debtor's insolvency resolution.
·
Under chapter II Corporate
Insolvency Resolution Process, section 21 of
IBC, 2016 clearly states the composition of committee of creditors.
Under section 21(2):
“(2) The committee
of creditors shall
comprise all financial
creditors of
the corporate debtor…….”
That is the committee of creditors comprises of
financial creditors of the corporate
debtors and not operational creditors. That the Committee of Creditors includes all creditors who have
financed the corporate debtor on the
basis of time value of money. If there are no financial creditors, the COC will be made up of the eighteen
largest operational creditors, as well as one representative from each of the workers
and employees. The operational
creditors are interested in the recovery of debt but not in the resolution of insolvency of the corporate
person as like of financial
creditors, this is the reason to exclude
the operational creditors from being the member of the committee of creditors. However,
if the operational
creditors owe more than 10% of the total debt, the COC will be attended by a representative of the operational creditors.
·
Further the proviso of section 21(2) states:
“provided that a financial creditor
or the authorized representative of the financial
creditor referred to in sub-section 6 or sub –section (6A)or
sub-section 5 of section 24, if it 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…”
That the pertinent issue in the code is that
Section 21(2) provides the CoC shall
comprise all financial creditors. However, if a financial creditor is a related party of the corporate debtor, the
proviso to Section 21(2) says, inter alia, that a financial creditor
shall not have the right of representation, participation, or voting in a CoC meeting.
This pertinent
issue was decided
by
the
Supreme
Court
of
India in Phoenix Arc Private Limited
v. Spade Financial
Services Limited. The Court relied on the purposive reading of the proviso to
get over this problem rather than
literal interpretation of the proviso. And stated that the exclusion under the first provision of Section 21(2) of the
Code is not only related
to the debt but also the existing
relationship between a related party
financial creditor and the corporate debtor. It is important to observe that the default rule states that only
those financial creditors that are the related
parties in the present would be disqualified from being included in the CoC. In the facts of this case, the
relationship between the parties did not
attract the prohibition as mentioned in the provision but the Court affirmed
the decision of the NCLAT wherein it excluded financial creditors from the
CoC due to their unfair means to enter the CoC. As a result, the first proviso to Section 21(2) will apply if the related party financial creditor
divests itself of its shares or ceases to be a related party in a
commercial capacity with the sole
goal of participating in the CoC and sabotaging the CIRP.
3. Analysis Of The Role Of Committee Of Creditors
·
The company's important decisions
are made with the permission of the committee of creditors. It is evidenced
by the following provisions:
a.
After debate on any item scheduled
for voting, the Resolution professional shall take a vote of the members
of the committee present in the meeting under Regulation 25 (3).
b. The Resolution professional shall announce the decision taken on items, along with the names of the members
of the committee who voted for or
against the decision, or
abstained from voting, at the completion of a vote at the meeting, as required by Regulation 25(4).
c. As per Regulation 26(4) which provides that the Resolution Professional at the conclusion of a vote held under the
regulation, the resolution professional shall announce
and make a written record of the summary of the decision
taken on a relevant agenda item along
with the names of the members of the committee who voted for or against the decision or abstained from voting.
·
The Committee
of creditors (COC) are
placed at a influential position by the code in the Resolution process
as unless all the members
of the Committee are present,
the voting cannot be conducted
to start the Insolvency
Resolution Process. On reading of the two Regulations referred above, it seems that in IBC – there are
effectively two quorum – (a) 33 % of the total voting rights of the CoC – for the meeting to hold good for discussion;
(b) 100 % of the total members
of the CoC – for allowing
voting at the meeting.
This rule prescribed in Insolvency and Bankruptcy
Code, 2016 is quiet contrary to the rules prescribed in Companies Act 2013. That as per Companies
Act, 2013 if the minimum quorum is present, discussion can takes place and voting can be conducted.
·
The interim resolution professional is confirmed as a resolution professional by the committee of creditor n s (COC), or the
insolvency professional can be replaced
as a resolution professional.
·
The committee of creditors (COC)
meets on a regular basis to debate the rules governing the operation of the interim
resolution expert and to assess
the corporate debtor's
fate.
·
By refusing to approve any
resolution plan, the committee of creditors has the authority to proceed with the liquidation of the corporate
Debtor.
3.1
Commercial Wisdom Of The COC Elaborated In The Case Essar Steel
India Limited Committee
Of Creditors Vs. Satish Kumar Gupta
(2020) 8 Supreme Court Cases 531
·
That the role of the Committee of
Creditors is limited to considering the feasibility
and viability of the resolution plan, which does not include the manner of distribution of the amount
payable by the resolution Applicant to the erstwhile creditors of the corporate debtor. In any event, the decision of the Committee of Creditors on the
manner of distribution in the facts of this case is illegal
and arbitrary, as once a creditor is classified as a financial
creditor, such creditor
is entitled to equal treatment with all other
financial creditors, irrespective of whether it is secured or unsecured.
The Supreme Court observed in relation to the role of the Committee of Creditors in the Corporate
Resolution Process that:
“31. Since it
is the commercial wisdom of the Committee of Creditors that is to decide on whether or not to rehabilitate the
corporate debtor by means of
acceptance of a particular resolution plan, the provisions of the Code and the Regulations outline
in detail the importance of setting
up of such Committee, and
leaving decisions to be made by the requisite majority
of the members of the aforesaid Committee in its discretion ”
3.2 K. Sashidhar V. Indian Overseas
Bank
MANU/SC/0189/2019
·
The court had made it clear in
this case that there is a judicial hands-off
when it comes to the commercial wisdom of the Committee of Creditors, which has been directly infracted by the
impugned judgment, which has held that the Committee
of Creditors has nothing to do with the distribution of amounts which are infused
by the resolution Applicant for payment of the corporate
debtor’s erstwhile debts.
·
Therefore, the Committee of
creditors in IBC have been empowered with complete
control over the operation of the corporate debtor, with the right to make major decisions and negotiate
resolution plans. The creditors' committee
will also reduce the company's
financial risk. However, the Committee of Creditors is also entrusted
with commercial knowledge, allowing them to make the most important
decisions affecting the company's future.
Also, the judgments of the Supreme
Court in Essar Steel India Limited Committee of Creditors vs. Satish Kumar Gupta and K. Sashidhar
v. Indian Overtseas
Bank has restrained the Committee of Creditors
by observing the limitation of their power or in simpler words, the power of COC may extent to a particular limit. Therefore, the impact of creditor-in-control model management
promises a stronger bankruptcy regime by delegating such rights to the company's
creditors.
4.
Primary Focus Of The Legislation Elaborated In Swiss Ribbons
Pvt. Ltd. And Anr. V. Union Of India And Ors..
·
The constitutionality of different
provisions of the Code was the issue herein.
The most important issue in this case was that members of the National
Company Law Tribunal
[NCLT] and certain
members of the National Company
Law Appellate Tribunal
[NCLAT], aside from the President, had been appointed in violation
of this Court's judgement in Madras
Bar Association v. Union of India, [Madras Bar Association (III)], and that, as a result,
all orders made by such members were invalid.
·
It had criticised Section 7 of the
Code's legislative system, claiming that there was no actual distinction between
financial and operational creditors. Both types of creditors, he claims, would give money in the form of loans or money's worth in the form of products
and services. It was asserted that
there was hostile discrimination against operational credit, even if there was a valid separation
between financial and operational creditors.
Inter alia, vested right was taken away by application of Section 29A( Resolution applicant)
·
The Court while disposing this
appeal stated the following in relation to the above issues:
“16. The
learned Attorney General has assured us that this judgment will be followed and Circuit
Benches will be established as soon as it is practicable. In this view of the
matter, we record this submission and
direct the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months from today.”
Regarding the distinction between financial and
operational creditors, the Court stated
that there was an
intelligible difference between
the two types of creditors
as long as there was some rational relationship between the two types of creditors.
“20. The tests
for violation of Article 14 of the Constitution of India, on is challenged as being violative of the
principle of equality, have been settled
by this Court time and again. Since equality is only among equals, no discrimination results if the
Court can be shown that there is an
intelligible differentia which separates two kinds of creditors so long as there is some rational relation
between the creditors
so differentiated, with the
object sought to be achieved by the legislation. This aspect of Article 14 has been laid down in judgments
too numerous to cite, from the very inception.
The application of Section 29A did not take away
any vested rights. A resolution applicant
who applied under Section 29A(c)
did not have a
vested right to be considered for a resolution application. In other words, a resolution applicant had no vested
right for consideration or approval of its resolution
plan. Section 29 A of the Act is read as under:
“A person
shall not be eligible to submit a resolution plan,
if such
person, or any other person acting jointly or in concert
with such person
–
(a)
…
(b)
…
(c)
[at the time of submission of the resolution plan][9] has an account, or an account of a corporate debtor under
the management or control of such person or of
whom such person is a promoter, classified as non- performing asset in accordance with the guidelines of the Reserve Bank
of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial
sector regulator issued under any other
law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency
resolution process of the corporate debtor:
Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue
amounts with interest
thereon and charges
relating to nonperforming
asset accounts before submission of resolution plan:
Provided further that nothing in
this clause shall apply to a resolution applicant
where such applicant is a financial entity and is not a related party to the corporate debtor.
Explanation I.- For the purposes of this proviso,
the expression "related party" shall not include a financial entity, regulated by
a financial sector regulator, if it
is a financial creditor of the corporate debtor and 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,
prior to the insolvency commencement date.
Explanation II.— For the purposes
of this clause, where a resolution applicant
has an account, or an account of a corporate debtor under the management or control of such person
or of whom such person is a promoter,
classified as non-performing asset and such account was acquired pursuant to a prior resolution plan approved under this Code,
then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from
the date of approval of such resolution plan by the Adjudicating Authority
under this Code;
(d)
…”
To this the Supreme Court has stated the following
in the judgment as:
“65…….However, in our judgment in ArcelorMittal (supra), we have already held that resolution applicants have no vested right to be considered as such in the resolution process. Shri Mukul Rohatgi,
however, argued that this judgment is distinguishable as no question of constitutional validity arose in this
case, and no issue as to the vested
right of a promoter fell for consideration. We are of the view that the observations made in
ArcelorMittal (supra) directly arose on the
facts of the case in order to oust the Ruias as promoters from the pale of consideration of their resolution
plan, in which context, this Court
held that they had no vested right to be considered as resolution applicants. Accordingly, we follow the
aforesaid judgment. Since a resolution
applicant who applies Under Section 29A(c) has no vested right to apply
for being considered as a resolution applicant, this point is of no avail.”
5.
Operational Creditors powers
elaborated in K. Kishan vs. Vijay Nirman Company Pvt. Ltd. (14.08.2018 - SC) : MANU/SC/0872/2018
The question brought herein was whether operational
creditors could use the Insolvency
Code either prematurely or for extraneous considerations. The Court observed that the Code's object, at
least in terms of operational creditors, was to use the bankruptcy procedure against a corporate debtor only in
unambiguous circumstances where there was
no genuine dispute between the
parties about the debt owed.
“13. Following
this judgment, it becomes clear that operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. The alarming result of an operational debt
contained in an arbitral award for a small
amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several
crores of rupees. Such a company would
be well within its rights to state that it is challenging the Arbitral Award passed against
it, and the mere factum of challenge
would be sufficient to state that it disputes the
Award. Such a case would clearly come within para 38 of Mobilox Innovations
(supra), being a case of a pre- existing
ongoing dispute between the parties. The Code cannot be used in terrorem to extract this sum of money of
Rs. two lakhs even though it may not
be finally payable as adjudication proceedings in respect thereto are still pending.
We repeat that the object of the Code, at least insofar
as operational creditors are
concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute
between the parties as to the debt owed does not exist.”
6.
Suspended Board of Directors and their responsibilities elaborated in Vijay Kumar Jain vs. Standard
Chartered Bank and Ors. (31.01.2019 - SC)
: MANU/SC/0111/
The question of whether the resolution professional
should submit all papers to the suspended
board of directors
of the corporate debtor, including
the insolvency resolution
plans. However, the Court went on to say that a resolution plan that has been authorised or
rejected by an Adjudicating Authority decision
must be given to "participants," which would include former
Board of Directors members. Inter alia held that members
of the erstwhile Board of Directors, being
vitally interested in resolution plans that may be discussed at meetings
of the CoC, must be given a copy of
such plans as part of "documents" that have to be furnished along with the notice of such
meetings. This is stated in the following extract from the judgment
of the Supreme Court in the matter :
“9. This
statutory scheme, therefore, makes it clear that though the erstwhile Board of Directors are not members of the
committee of creditors, yet, they have
a right to participate in each and every meeting held by the committee of creditors, and also have a right to
discuss along with members of the committee of creditors all resolution plans that are presented at such meetings
Under Section 25(2)(i).
It cannot be gainsaid that operational creditors, who may participate in such
meetings but have no right to vote, are
vitally interested in such resolution plans, and must be furnished copies of such plans beforehand if they are to
participate effectively in the meeting of the committee of creditors.
This is for the reason that
Under Section 30(2)(b), repayment
of their debts is an important part of the resolution plan qua them on which they must comment. So the first important thing to notice
is that even though persons such as operational creditors have no right
to vote but are only participants in meetings
of the committee of creditors, yet, they
would certainly have a right to be given a copy of the resolution plans before such meetings are held so that they
may effectively comment on the same to safeguard their interest.”
The suspended directors are handed over the
responsibility to obligate with the strategy
that contributes to reduce to reduce their personal indebtedness. Being well- versed with the company's
activities, they may be able to assist the COC in deciding whether the resolution plan meets the company's cause of default
(a
mandatory requirement for resolution plans). Also,
the Supreme Court stated that the
resolution professional can obtain a confidentiality agreement that can take the form of a non-disclosure
agreement, that will contributing in protecting the resolution professional and its confidentiality.
“15. As a result of the aforesaid discussion, the arguments of the Respondents that "committee" and
"participant" are used differently, which would lead to the result that resolution plans need not be
furnished to the erstwhile members of
the Board of Directors, must be rejected. Equally, the Regulations, far from going beyond the Code, flesh out the true
intention of the Code that is
achieved by reading the plain language of the Sections that have already been adverted to. So far as confidential information is concerned, it is clear that the resolution professional can take an undertaking
from members of the erstwhile Board of Directors, as has been taken in the facts of the present case, to
maintain confidentiality. The source of
this power is Regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals)
Regulations, 2016, read with paragraph 21
of the First Schedule thereto. This can be in the form of a non-disclosure agreement in which the resolution
professional can be indemnified in case information is not kept strictly confidential.”
7.
Ineligible promoters under Section 29A and their
entitlement to file for application and compromise elaborated in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Anr.
Using its precedents, derived
from Supreme Court’s Judgment in Chitra
Sharma
v. Union of India and Arcelormittal India Private Limited
v. Satish Kumar Gupta &
Ors the Supreme Court held that courts should apply a purposeful interpretation of Section
29A of the IBC, which serves as a critical
link in ensuring that the IBC's objectives are
not defeated by allowing the company's management (who have run it aground)
to return to the corporate
debtor as resolution applicants. It was noted that Section
35(1)(f) of the IBC is comparable to
Section 29A of the IBC, but only applies when the corporate debtor is in the process of liquidation. That The IBC's
Section 29A was enacted in the public interest
and to allow for sound company governance. Section 29A eliminates a loophole
in the IBC that formerly
permitted former corporate
debtors' management to have backdoor
access to the bankruptcy resolution
process.
The Judgment stated the following:
“69. The IBC has made a provision
for ineligibility Under Section 29A which operates
during the course of the CIRP. A similar provision is engrafted
in Section 35(1)(f) which forms a
part of the liquidation provisions contained in Chapter III as well. In
the context of the statutory
linkage provided by the provisions of Section 230 of the Act of 2013 with Chapter III of the IBC, where a
scheme is proposed of a company which is in liquidation under the IBC, it would be far-fetched to hold that
the ineligibilities which attach Under Section
35(1)(f) read with Section 29A would not apply when Section 230 is sought to be invoked. Such an interpretation would result in defeating the provisions of the IBC and must be eschewed.”
7.2 Constitutional Validity
of Regulation 2B- Liquidation Process Regulations
The Court observed
that the scheme to compromise and arrangement is to revive
the company. Given this, there can be no
doubt that the proviso to Regulation 2B
was intended to clarify something. A person who was disqualified under Section 29A would not be allowed to offer
a compromise or arrangement under Section
230 of the Act of 2013, even if the proviso was removed. As a result, the challenge
to the legitimacy of Regulation 2B was without substance.
“84. The principal ground of challenge
to Regulation 2B is that the Regulation the authority of IBBI by introducing a disqualification or ineligibility
in regard to the presentation of an application for a scheme of compromise or arrangement Under Section
230 of the Act of 2013. It has been urged that IBBI, as an entity constituted by the IBC, had no statutory jurisdiction to
amend the provisions of Section 230 of the Act of 2013 or to impose a restriction which operates under
the purview of Section 230. The position
in our view can be considered from two perspectives, independent
of the provisions of
Regulation 2B. We have indicated
in the discussion earlier
that even in the absence of the Regulation 2B, a person ineligible Under Section 29A read with Section
35(1)(f) is not permitted to propose a scheme
for revival Under Section 230, in the case of a company which is undergoing a liquidation under the IBC. We
have come to the conclusion, as noted
for the reasons indicated earlier, that in the case of a company which is undergoing liquidation pursuant to the provisions of Chapter III of the IBC, a scheme of compromise or arrangement
proposed Under Section 230 is a facet
of the liquidation process. The object of the scheme of compromise or arrangement is to revive the company. The
principle was enunciated in the decision in Meghal Homes (supra) while construing the provisions of erstwhile
Section 391. The same rationale which permeates the resolution process
under Chapter II (by virtue of the provisions of Section 29A) permeates the liquidation process
under Chapter III (by virtue of the provisions of Section 35(1)(f)). That being the position, there can be no manner of doubt that the proviso to
Regulation 2B is clarificatory in nature. Even
absent the proviso, a person who is ineligible Under Section 29A would not be permitted to propose a
compromise or arrangement Under Section 230 of the Act of 2013. We therefore do not find any
merit in the challenge to the validity of Regulation 2B.”
Article Information
Analysis of the role of Committee of Creditors in IBC in the light of the latest Supreme Court Judgments. (By-Rajnandini & Ratnesh Kumar)
Authors: Rajnandini, Ratnesh Kumar
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/07/16
- Volume 2
- Issue 7
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International Journal for Legal Research and Analysis
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