“Committee of Creditors” (CoC) is a committee consisting of the financial creditors of a Corporate Debtor. This Committee eventually becomes the decision making body for the various routine tasks involved in Corporate Insolvency Resolution Process (CIRP), responsible for giving approval to the IRP/ RP to carry out actions that might affect the outcome of the CIRP.
Insolvency & Bankruptcy Code is a welcoming legislation, which has brought about a positive perspective of improving credit culture in India by creating a 'creditor driven regime' and the role played by the CoC in achieving the same is noteworthy.
While deliberating upon who should form part of the CoC, the Bankruptcy Law Reforms Committee (BLRC) report states as under:
“Members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. The Committee (BLRC) concluded that, for the process to be rapid and efficient, the Code will provide that the creditors committee should be restricted to only the financial creditors”.
Further, in the landmark Judgment of Swiss Ribbons vs. Union of India, the Hon’ble Supreme Court of India has observed “Since the financial creditors are in the business of money lending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan.”
The importance vested in the CoC under the Code has again and again been reiterated by various Tribunals/ Courts, most notably among all by the Hon’ble Supreme Court of India in the matter of K. Shashidhar Vs. India Overseas Bank & Ors wherein the apex court addressed a critical issue in the CIRP i.e. the scope of judicial scrutiny over a commercial decision taken by the committee of creditors. This decision has put this issue beyond doubt that the commercial decision of the CoC is non-justiciable and will not be open to scrutiny by the NCLT.
It is clear from the above observation made by the highest Court of India that the Code has entrusted the CoC, which primarily comprises of financial creditors with the responsibility of driving the CIRP and taking informed decisions on behalf of all other stakeholders so that the debtor can be resolved as a going concern.
The economic value created by the Corporate Debtor undergoing CIRP has immense importance in terms of value of its core assets, employment generating capacity etc which adds to the overall development of the economy both financially and socially. Due to such inherent values, it becomes imperative that the responsibility entrusted to bring about a positive resolution & preservation of such assets in distress is entrusted to a responsible class of creditors being the CoC.
Therefore, it is incumbent upon the CoC that while performing their responsibility of overseeing the CIR process, the members of the CoC act in the interest of all the stakeholders and do not treat the CIR process as a mere sale, auction or recovery process. This will emanate in retaining the debtor in default as a going concern which is the primary objective of the Code. This will also result in value maximization as the entity will be worth more as a going concern rather than a concern which is not in operation.
In light of the above, it becomes all the more important for the members of the CoC to continuously update themselves about the dynamic business environment and the ever changing laws and regulations relating of insolvency framework in India. The members should come fully prepared with all the matters put forward for discussion during a CoC meeting so that a meaning deliberation is possible thereby resulting in a time bound resolution which is the ultimate objective of the Code.
In my experience, one of the major challenges threatening the IBC’s objective of time bound resolution of stressed assets has been the long dwelling litigations. While the CIRP of various accounts have been held up at various stages, few reasons which may be in the control of the CoC and which may translate into speedier resolution include transparency in decision making during CIRP, clearly defined and transparent process document and stressing on a well laid out resolution plan clearly spelling out steps for implementation of resolution plan post approval.
As a responsible member of the CoC, members should strive to achieve the maximum degree of transparency in the CIR process and such actions should be clearly noted by way of a well drafted process document which will help in avoiding unwanted litigations.
We have witnessed several large cases of corporate insolvencies failing to get implemented due to the inability of resolution applicants in actually implementing their respective resolution plans. While, the resolution applicants are to blame for not honoring their commitment, a healthy share of the blame also rests with the CoC which did not foresee the eminent risk which was the result of lack of proper due diligence on the resolution applicant and an effective viability and feasibility study on the resolution plans including assessment of the financial strength of the applicant.
A well thought out process document with adequate safeguards including securities like upfront performance guarantee of an amount commensurate with the bid size would have served well in realizing successful resolutions.
One other very important aspect for consideration by the CoC is to analyze the reasons why the Debtor in default was pushed for insolvency resolution and help bring to light the elements which were responsible for the downfall of the entity. This is important as every penny invested by the financial institutions is public money and such entities including the financial institutions have a greater responsibility to add value to such public resources.
In this regard, the outcome of transaction audit carried out under the code becomes a very important document which should not be written off just as a tame requirement of the Code and something which is only the responsibility of the Resolution Professional. Rather, the CoC as a representative of the public at large should invest considerable time and effort to analyze the report and persuade the Resolution Professional for to make a comprehensive application to the Adjudicating Authority covering for reversal of all such transactions which has eroded the value of the Corporate Debtor and eventually eroded the value of the enterprise as a going concern.
As the Code is relatively new, it is witnessing a plethora of changes in the form of amendments which are driven by the experience of its stakeholders including the Govt., IBBI, Tribunals, Insolvency Professionals & Creditors at large at implementing the Code. Going forward, we should anticipate further changes in the Code to incorporate provision for group insolvency, cross border insolvency, Pre packs and charting the way for individual insolvency. We should strive to keep ourselves abreast with these changes so that we can anticipate resolution strategies in advance and be able to make informed decisions.
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