Committee of Creditors under IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to create a unified and time-bound framework for resolving insolvency and bankruptcy cases in India. It replaced multiple outdated and fragmented laws that caused delays and confusion in the insolvency process. One of the most important features of the IBC is the establishment of the Committee of Creditors (CoC) — a body of financial creditors who play a central role in the Corporate Insolvency Resolution Process (CIRP).

The CoC functions as the main decision-making authority once a company, known as the corporate debtor, enters insolvency. It is empowered to make crucial commercial and financial decisions, including the evaluation and approval of a resolution plan or deciding whether the company should go into liquidation.

The IBC recognises that creditors are in the best position to decide how a company’s financial distress should be managed. Therefore, the CoC was created to protect creditors’ interests, ensure fair decision-making, and help in the revival or resolution of distressed companies.

Who is a Creditor under IBC

Before understanding the Committee of Creditors, it is essential to understand who a creditor is.

A creditor is a person or entity to whom a company owes money. Under the IBC, creditors are mainly divided into two types — financial creditors and operational creditors.

Financial Creditor

As defined in Section 5(7) of the IBC, a financial creditor is a person to whom a financial debt is owed, including a person to whom such debt has been legally assigned or transferred. These are generally banks, financial institutions, debenture holders, and bondholders who provide funds to a company for interest or repayment over time.

Operational Creditor

Defined under Section 5(20), an operational creditor is a person to whom an operational debt is owed. This includes suppliers, vendors, employees, and government authorities to whom payments are due for goods, services, salaries, or statutory dues.

While both categories are recognised under the IBC, only financial creditors form part of the Committee of Creditors, as they are considered to have the expertise and stake necessary to make informed financial decisions during insolvency.

Composition and Formation of the Committee of Creditors

The composition and formation of the CoC are governed by Section 21 of the IBC.

Once the National Company Law Tribunal (NCLT) admits an insolvency application, an Interim Resolution Professional (IRP) is appointed. The IRP’s duty includes collecting and verifying all claims from creditors and determining the financial position of the corporate debtor. After completing this process, the IRP constitutes the Committee of Creditors.

Members of the CoC

The Committee of Creditors consists of all financial creditors of the corporate debtor. Examples include banks, financial institutions, debenture holders, and even home-buyers (who are recognised as financial creditors under the Code).

However, related parties of the corporate debtor are not allowed to be part of the CoC. This ensures independence and fairness in decision-making. If a related party happens to be a financial creditor, such party has no right of representation, participation, or voting in the meetings of the CoC.

If there are no financial creditors, the Code provides that the CoC shall consist of operational creditors, as per the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Functions of the Committee of Creditors

The CoC plays a vital role in guiding and controlling the resolution process of an insolvent company. Once constituted, the CoC holds its first meeting within seven days of formation. During this meeting, it may confirm the appointment of the IRP as the Resolution Professional (RP) or replace him/her with another person, based on the consent of creditors holding at least 66% of voting shares.

The CoC performs several key functions during the CIRP, which include:

Approval of Resolution Plan

The most important duty of the CoC is to evaluate and approve a resolution plan submitted by a resolution applicant (a potential investor or acquirer). The plan must be in line with Section 30(2) of the IBC and must ensure fair distribution among creditors.

The CoC assesses the feasibility, viability, and commercial soundness of the resolution plan and may negotiate modifications with the applicant. The plan is approved when at least 66% of the voting share of financial creditors agree. Once approved, it is submitted to the NCLT for final confirmation.

The Supreme Court in K. Sashidhar v. Indian Overseas Bank (2019) held that the commercial decision of the CoC is final and cannot be interfered with by the NCLT or NCLAT. This established the principle of the commercial wisdom of the CoC, which gives it complete autonomy in deciding whether to accept or reject a resolution plan.

Decision-Making in CIRP

The CoC is responsible for all key business and financial decisions during the insolvency process. It decides whether the business should continue operations or be shut down temporarily.

All decisions of the CoC must be taken through voting, with each financial creditor’s vote weighted according to the amount of financial debt owed to them.

Maximisation of Asset Value

A central objective of the CoC is to ensure value maximisation of the corporate debtor’s assets. This ensures the best possible recovery for all creditors and supports the revival of the company, wherever feasible.

Approval of Major Transactions

During the insolvency process, certain business decisions, such as sale of assets, raising interim finance, or entering into new contracts, require prior approval of the CoC. This ensures that no decision is taken that could reduce the asset value or harm creditors’ interests.

Supervision of the Resolution Professional

While the Resolution Professional manages the day-to-day affairs of the corporate debtor, the CoC supervises the RP’s work. It ensures that the RP performs duties in accordance with the law, maintains transparency, and protects the interests of all stakeholders.

Liquidation Decisions

If no resolution plan is approved within the maximum period of 330 days (including extensions and litigation delays), or if the CoC finds the revival plan unviable, it may decide to initiate liquidation of the corporate debtor. The decision to liquidate must be supported by 66% voting shares.

Voting Rights and Quorum

The decision-making power in the CoC is exercised through voting.

• Voting Share: Each member’s voting power is directly linked to the proportion of financial debt owed to that creditor.
• Quorum: A meeting of the CoC requires a minimum quorum of members representing 33% of the total voting share, either in person or through video conferencing.
• Threshold for Approval:
  • 66% voting share is needed for key matters such as approval of a resolution plan or replacement of the Resolution Professional.
  • 51% voting share is sufficient for routine matters.

Voting ensures that decisions are democratic and reflect the majority view of creditors based on their financial stake.

Judicial Interpretations and Key Case Laws

Several judicial pronouncements have clarified the powers and responsibilities of the Committee of Creditors under the IBC.

K. Sashidhar v. Indian Overseas Bank & Ors. (2019)

In this landmark case, the Supreme Court held that the CoC has complete autonomy to decide whether a resolution plan should be approved or rejected. The NCLT or NCLAT cannot interfere with the commercial wisdom of the CoC, as there is no provision under the IBC allowing such intervention. This decision strengthened the position of creditors and made the resolution process more efficient.

Shaji Purushothaman v. Union Bank of India & Ors.

The NCLAT in this case ruled that the CoC must compare a settlement proposal with a resolution plan before deciding which option offers a better outcome for all stakeholders. The decision highlighted the CoC’s duty to act prudently and ensure the best possible recovery for creditors.

Ms. Rama Subramaniam v. M/s Sixth Dimensions Project Solutions Ltd.

In this case, the NCLT clarified that while the CoC has the authority to replace the Insolvency Resolution Professional, such power must be exercised for valid reasons. Arbitrary or unjustified removal is not allowed. The ruling ensured that CoC’s decisions remain fair and transparent.

Challenges Faced by the CoC

While the CoC has vast powers, it also faces several challenges:

• Lack of coordination among creditors with diverse interests.
• Delays in decision-making due to disagreements.
• Limited participation of smaller creditors or home-buyers in meetings.
• Dependence on the Resolution Professional for technical and operational insights.

These issues underline the need for greater training, digital integration, and adherence to best practices in insolvency governance.

Conclusion

The Committee of Creditors plays a decisive and transformative role in India’s insolvency framework. By giving financial creditors the power to steer the resolution process, the IBC ensures that commercial decisions are made by those most affected by a company’s financial distress.

The CoC’s authority to approve resolution plans, supervise professionals, and decide on liquidation makes it the cornerstone of the Corporate Insolvency Resolution Process. Judicial recognition of its commercial wisdom has further strengthened its position, ensuring that insolvency proceedings remain creditor-driven and efficient.