Committee of Creditors with Only Operational Creditors in a Class

The Insolvency and Bankruptcy Code, 2016 (IBC) provides a well-structured process for the resolution of insolvent corporate entities. A major element of this process is the Committee of Creditors (CoC), which holds the power to decide the fate of the corporate debtor. Usually, the CoC consists of financial creditors. However, there can be situations where the corporate debtor has only operational creditors, or where all financial creditors are related parties and are thus ineligible to join the CoC. In such cases, the Insolvency and Bankruptcy Board of India (IBBI) has made specific provisions to ensure that the resolution process continues effectively.

This article explains the concept of a Committee of Creditors with only operational creditors in a class, the relevant legal provisions, and the role of authorised representatives in such committees.

Understanding the Committee of Creditors

Under Section 21 of the IBC, the Committee of Creditors is formed after the commencement of the Corporate Insolvency Resolution Process (CIRP). It primarily consists of financial creditors, as they are considered capable of evaluating the viability and feasibility of resolution plans. The CoC plays a decisive role in the CIRP by approving or rejecting resolution plans, replacing the Resolution Professional (RP), and determining key decisions regarding the corporate debtor.

However, in some cases, there may be no financial creditors at all, or the financial creditors may be related parties of the corporate debtor and therefore disqualified from participating in the committee. To address such situations, the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 introduces specific rules for forming a committee with operational creditors or with creditors belonging to a class.

Regulation 16 and Regulation 16B: The Framework

Regulation 16 – Committee with Only Operational Creditors

Regulation 16 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides the structure for forming a committee when there are no financial creditors. This regulation states that where the corporate debtor has no financial debt or where all financial creditors are related parties, the committee shall be constituted with operational creditors.

The composition of such a committee is as follows:

1. Eighteen largest operational creditors by value shall form part of the committee.
2. One representative of workmen, other than those included as operational creditors.
3. One representative of employees, other than those included as operational creditors.

Each member of the committee has voting rights proportional to the amount of debt owed to them in comparison to the total operational debt. This ensures that decision-making within the committee remains balanced and reflective of the overall debt exposure.

This regulation ensures that operational creditors, who otherwise do not form part of the CoC, are given a voice in the resolution process when financial creditors are absent.

Regulation 16B – Committee with Only Creditors in a Class

Regulation 16B of the same Regulations further deals with a specific situation—where the corporate debtor has only creditors in a class and no other financial creditors eligible to join the committee.

This regulation was introduced through Notification No. IBBI/2018-19/GN/REG031, dated 3rd July 2018. It provides that:

“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).”

This means that, in such cases, the CoC will not have individual creditors but will consist only of the authorised representative(s) who represent the interests of that class of creditors.

Creditors in a Class

Before understanding the working of this committee, it is important to know who are considered “creditors in a class.”

Under the IBC, creditors in a class are typically those financial creditors who have similar rights under debt agreements or similar economic interests. Examples include:

• Homebuyers in a real estate company.
• Holders of debentures or fixed deposits.
• Security holders or bondholders with similar rights.

However, Regulation 16B extends this idea to situations where such a class of creditors is the only category of creditors eligible to participate. In that case, the authorised representatives of these creditors will form the CoC.

Role of the Authorised Representative

Regulation 16A: Appointment and Responsibilities

Regulation 16A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 outlines the procedure for the appointment of an authorised representative (AR) for creditors in a class.

The Interim Resolution Professional (IRP) is responsible for selecting an insolvency professional who is chosen by the highest number of financial creditors in that class. This selected insolvency professional is then appointed as the authorised representative, subject to approval by the Adjudicating Authority (National Company Law Tribunal – NCLT).

The IRP must apply for such appointment within two days of the verification of claims. Even if there is a delay in appointing the AR, the validity of the decisions taken by the committee will not be affected.

Once appointed, the authorised representative acts as the voice of the creditors in that class in all meetings of the CoC.

Duties of the Interim Resolution Professional Towards the Authorised Representative

After the appointment of the AR, the Interim Resolution Professional must:

1. Provide the list of creditors in that class to the authorised representative.
2. Update the list whenever new claims are verified and share the updated list.
   
3. Facilitate electronic communication between the authorised representative and the creditors of that class.

These duties ensure transparency and effective coordination between the creditors and their representative.

Voting Share of Creditors in a Class

The voting share of a creditor in a class is determined in proportion to the financial debt owed to that creditor. The calculation includes interest at the rate of 8% per annum, unless a different rate has been mutually agreed upon between the parties.

This approach standardises voting rights and prevents any confusion regarding the weightage of each creditor’s vote during the resolution process.

Fee Entitlement of Authorised Representatives

The authorised representative plays a crucial role in protecting the collective interests of a large group of creditors. To compensate for their work and participation, Regulation 16A provides a fixed fee structure for every meeting of the CoC attended by the AR.

This ensures that the representative is adequately compensated depending on the size and complexity of the class being represented.

Seeking Preliminary Views from Creditors

The authorised representative must ensure that the opinions of the creditors in a class are fairly represented. Before participating in a CoC meeting, the AR circulates the meeting agenda to all creditors in the class and may seek their preliminary views on the items listed in the agenda.

The creditors are provided a minimum time window of twelve hours to submit their views. This time window opens at least twenty-four hours after the AR has sought such views.

These preliminary views help the authorised representative understand the sentiment and expectations of the creditors. However, such preliminary inputs are not treated as formal voting instructions.

This mechanism ensures participatory decision-making even in large and diverse groups of creditors who may not individually attend or vote.

Role of the Adjudicating Authority and IBBI

The Adjudicating Authority (NCLT) plays a key role in confirming the appointment of authorised representatives and ensuring that the process is conducted fairly. It ensures that the selection of the AR is in line with the creditors’ majority choice and that communication channels are open and effective.

The Insolvency and Bankruptcy Board of India (IBBI), on the other hand, issues detailed regulations and periodically updates them to ensure the CIRP remains efficient and inclusive. The insertion of Regulation 16B through the 2018 notification is a reflection of IBBI’s effort to strengthen creditor representation in diverse insolvency scenarios.

Conclusion

The concept of a Committee of Creditors with only operational creditors in a class reflects the flexibility and comprehensiveness of the Indian insolvency framework. Regulations 16, 16A, and 16B together ensure that the absence of financial creditors does not stall the resolution process.