Role of Committee of Creditors under IBC: Power or Overreach

Written by: Leya Mariyam Benny, 4th Year B.B.A. LL.B. (Hons.), Lovely Professional University Phagwara , Punjab 

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Introduction 

The Insolvency and Bankruptcy Code, 2016 (IBC), represented a turning point in India’s insolvency regime. The objective of the IBC was simple: consolidation of fragmented laws and a creditor-driven process for speedier insolvency resolution. At the heart of that process is the  Committee of Creditors (CoC), a body primarily composed of financial creditors. Having the authority to take significant commercial decisions, the CoC decides whether a corporate debtor lives or dies. 

The Supreme Court has consistently upheld the doctrine of “commercial wisdom of the CoC.” However, concerns of arbitrariness, discrimination, and exclusion of others raised the question:  Has the CoC taken on too much power? 

Statutory Role of the CoC under IBC 

The powers and functions of the CoC arise mainly from Sections 21-30 of the IBC: 

1. Constitution of CoC (Section 21): All financial creditors, except related parties, shall be members of the CoC. 

2. Powers under CIRP: Appointment and replacement of the Resolution Professional (RP) (Section 22). Approval or rejection of resolution plans (Section 30(4)). Deciding to liquidate the corporate debtor (Section 33). Supervising the RP and monitoring compliance with the provisions of the IBC. 

3. Voting Thresholds: In respect of most decisions, never less than 75%, though this has later been reduced to 66% (Second Amendment Act, 2018). 

In effect, the CoC has been vested with the power of determination over the insolvency process.

Judicial Recognition of CoC’s Powers 

The judiciary has, time and again, restated the supremacy of the CoC through the application of the commercial wisdom doctrine. 

• K. Sashidhar v. Indian Overseas Bank (2019) 12 SCC 150: 

The Supreme Court held that the courts cannot interfere with the CoC's decision to reject a resolution plan. 

• Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019) 16 SCC 479: Reaffirmed that the CoC's decisions around distribution of proceeds are within their commercial wisdom, and a judicial review is limited only to ensuring compliance with Section 30(2). 

• Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: 

The Court restated the primacy of financial creditors with regard to operational creditors, as they themselves are in a better position to judge the viability. 

These judgments have become the great shield, protecting the CoC against extensive judicial scrutiny. 

Concerns of Overreach 

1. Marginalisation of the Operational Creditors 

Operational creditors have limited participation and are allowed no voting rights below a certain threshold. While the Pioneer Urban Land v. Union of India (2019) case granted homebuyers status as financial creditors, smaller creditors remain on the outside. 

2. Majoritarianism in Decision-Making 

The voting thresholds permit big banks or financial institutions to manipulate outcomes to the disadvantage of smaller creditors. 

3. Recovery v. Resolution 

The focus of the IBC is on resolution rather than liquidation, but CoC members largely act in the interests of maximizing their individual recovery over reviving the debtor company. The case of Essar Steel has been heavily criticized for financial creditors favouring themselves to the detriment of operational creditors. 

4. Lack of Accountability 

Judicial review being limited means CoC decisions are often shrouded in opacity. The Insolvency Law Committee Report (2018) highlighted concerns on the arbitrary rejection of viable resolution plans. 

Balancing Power with Responsibility 

1. Openness in Making Decisions: Mandating the CoC to document reasons for acceptance or rejection of plans may enhance accountability. 

2. Participation from Operational Creditors: Providing limited voting rights or representation on the board for operational creditors may ensure fairness. 

3. Judicial Safeguard: Courts should refrain from re-evaluating commercial decisions, but should ensure adherence to fairness, proportionality, and non-arbitrariness. 

4. Standards for Professionals in the CoC: Making it a requirement for CoC representatives to undergo training or be subject to the regulation may enhance decision-making quality. 

Conclusion 

The Committee of Creditors undoubtedly serves as the backbone of the IBC. The powers of the  CoC are needed for an orderly resolution process and judicial deferment is necessary to guarantee that insolvency proceedings do not fall prey to unnecessary litigation. However, unencumbered powers of the CoC can act as the platform for a creditor’s cartel that is contrary to the underlying objective of the IBC, which is the rehabilitation of distressed assets on a fair and equitable basis. 

A recalibration of powers—that is fair, inclusive, accountable, and transparent—must occur to permit the CoC to operate as a mechanism of discipline rather than a mechanism of countervailing power invoked by creditors under the provisions of the IBC in support of their own interests.

References 

1. Insolvency and Bankruptcy Code, 2016 (as amended). 

2. K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150. 

3. Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2019) 16 SCC  479. 

4. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17. 

5. Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416. 6. Insolvency Law Committee Report, March 2018.