Committee of Creditors with Only Operational Creditors under IBC

The Insolvency and Bankruptcy Code (IBC), 2016 introduced a structured system to resolve insolvency and bankruptcy cases of companies and individuals in a time-bound manner. One of the most important features of the Code is the formation of a Committee of Creditors (CoC). This committee plays a central role in the Corporate Insolvency Resolution Process (CIRP) and is primarily responsible for making major decisions regarding the fate of the corporate debtor.

Generally, the CoC is formed by financial creditors. However, in some cases, a company may not have any financial creditors, or all its financial creditors may be related parties. In such situations, the Code provides for a special type of committee called the “Committee with Only Operational Creditors.” This special provision ensures that the insolvency process continues smoothly and that the interests of other stakeholders, such as suppliers, employees, and workmen, are represented fairly.

This concept is governed by Regulation 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Legal Basis for the Committee with Only Operational Creditors

Section 21 of the Insolvency and Bankruptcy Code generally provides for the formation of a Committee of Creditors consisting of financial creditors. However, when there are no financial creditors, or when all financial creditors are related parties of the corporate debtor, the Code authorises the formation of a special committee in line with Regulation 16 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

The regulation ensures that even in the absence of financial creditors, the insolvency process does not come to a halt. Instead, the decision-making power is given to operational creditors, who are often those supplying goods and services, as well as employees and workmen owed salaries or dues.

This ensures that every stakeholder with a financial stake in the company is represented fairly during the Corporate Insolvency Resolution Process.

When is Such a Committee of Creditors with Only Operational Creditors Formed?

A Committee with Only Operational Creditors is formed under the following circumstances:

1. When the corporate debtor has no financial debt – This may happen in smaller companies or new enterprises that operate primarily on trade credit rather than loans.
2. When all financial creditors are related parties of the corporate debtor – In such cases, the related parties cannot form part of the CoC due to potential conflicts of interest. Therefore, a new committee is formed to ensure fairness and transparency.

This committee effectively steps into the role normally played by financial creditors and takes part in key decisions related to the company’s resolution.

Composition of the Committee of Creditors with Only Operational Creditors

The composition of this special committee is specifically defined under Regulation 16(2). It ensures representation of various categories of operational creditors within the company.

The committee includes:

1. Eighteen largest operational creditors by value If the number of operational creditors is fewer than eighteen, then all of them are included in the committee. This ensures that those who have the most financial exposure or are most affected by the insolvency are represented.
2. One representative elected by all workmen (other than those already included as operational creditors). This ensures that the collective interests of the workmen are represented fairly during decision-making.
3. One representative elected by all employees (other than those already included as operational creditors). Employees play an important role in the company, and this provision ensures that their dues and rights are also safeguarded.

The Interim Resolution Professional (IRP) or Resolution Professional (RP) is responsible for forming this committee based on the available data regarding creditors and claims.

Voting Rights and Total Debt Calculation

One of the key features of the CoC structure is the voting mechanism. Decisions in the committee are taken based on voting shares, which are linked to the amount of debt owed to each creditor.

Voting Rights

As per Regulation 16(3), each member of the committee has voting rights in proportion to the debt owed to that creditor or represented by the creditor’s representative, as the case may be.

This means that creditors with higher outstanding dues have a larger voting share in the decision-making process.

Calculation of Total Debt

The regulation also defines how total debt is calculated for this purpose. The “total debt” includes:

• The sum of the debts owed to all the operational creditors included in the committee;
• The aggregate debt due to workmen; and
• The aggregate debt due to employees.

This method ensures that the voting power is distributed fairly among all creditors based on their legitimate financial stake in the company.

Rights, Powers, and Duties of the Committee of Creditors with Only Operational Creditors

Even though the committee consists only of operational creditors, it has the same powers and responsibilities as a regular Committee of Creditors made up of financial creditors.

Under Regulation 16(4), this special committee and its members have the same rights, powers, duties, and obligations as a standard CoC.

Key Powers and Functions Include:

1. Approval of the Resolution Plan: The committee has the authority to examine and approve a resolution plan submitted by a prospective resolution applicant.
2. Decision-Making in the CIRP: The committee plays a decisive role in determining whether the corporate debtor should be revived through a resolution plan or sent into liquidation.
3. Monitoring the RP’s Work: The committee oversees the actions of the Resolution Professional, including verification of claims, management of operations during CIRP, and preparation of the resolution plan.
4. Ensuring Fair Representation of Stakeholders: The committee ensures that the interests of all stakeholders—particularly workmen, employees, and small operational creditors—are not overlooked in the resolution process.

Thus, despite being composed of operational creditors, this committee performs all the essential functions necessary to achieve a fair and efficient insolvency resolution.

Role of the Interim Resolution Professional (IRP) or Resolution Professional (RP)

The IRP or RP plays a central role in forming and assisting the committee. When the CIRP begins, the IRP collects all claims from creditors and determines who qualifies as operational creditors.

Based on the verified claims, the IRP forms the committee as per Regulation 16.

Once the committee is formed, the RP conducts meetings, issues notices, and ensures that all decisions are made as per the voting shares. The RP also guides the committee throughout the insolvency process by presenting reports, resolution plans, and compliance updates.

Importance of Including Workmen and Employees

The inclusion of representatives for workmen and employees ensures that the interests of the human workforce are protected. In many insolvency cases, employees and workmen are among the most affected groups. They often depend on pending wages or dues for their livelihood.

By giving them representation, the Code ensures social justice and fairness in the insolvency process. Their representatives can raise concerns related to pending salaries, retrenchment, or rehabilitation plans proposed under the resolution process.

Challenges Faced by Committees of Operational Creditors

While the framework is inclusive, there are certain challenges associated with such committees:

1. Lack of Financial Expertise: Operational creditors, such as suppliers and employees, may not always have the financial expertise to assess complex resolution plans or restructuring strategies.
2. Diverse Interests: The committee may include multiple operational creditors with differing interests. For instance, a supplier and an employee representative may have different priorities, making consensus difficult.
3. Information Asymmetry: Operational creditors may have limited access to financial data or valuation details, affecting their ability to make fully informed decisions.
4. Coordination Issues: Managing communication among various operational creditors can be challenging, especially in large companies with many stakeholders.

Despite these challenges, the presence of the Resolution Professional and the regulatory structure ensures that decisions are taken within a legally supervised and transparent framework.

Conclusion

The Committee of Creditors with Only Operational Creditors is an important safeguard under the Insolvency and Bankruptcy framework. It ensures that the resolution process does not come to a standstill merely because a company lacks financial creditors.

Despite certain practical challenges, the framework under Regulation 16 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 plays a crucial role in maintaining the integrity and continuity of the insolvency process in India.