Liquidation | CIRP | Committee of Creditors under IBC—FAQs

Section 33(2) of the Insolvency & Bankruptcy Code, 2016 provides that where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than 66% of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order.

In the instant question the approval of the resolution to liquidate PQR Ltd. by the creditors having 65% of the voting share is not sufficient. The decision of the committee of creditors should be approved by not less than 66% of the voting share. Hence, the liquidation of PQR Ltd. cannot be ordered.

As per first proviso to section 21(2) of the Insolvency & Bankruptcy Code, 2016 no related party to the Corporate Debtor, even it is a financial creditor, has any right of participation, representation or voting at the meeting of Committee of Creditors.

However second proviso to section 21(2) clarifies that the restriction does not apply in case a financial creditor is governed by a financial sector regulator is not considered as a related party solely on account of conversion or substitution of debt into equity or instruments convertible in to equity shares or completion of such transactions as may be prior to the Insolvency commencement date. Clarification is inserted pursuant to amendment to IBC in 2018.

As per section 3(18), Financial Sector Regulator is defined refers to Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory
Authority (PFRA) and such other bodies as may be notified.

In the given case, the shares were allotted to Laxmi Bank Ltd. was on account of conversion of debt into equity and being a Bank regulated by RBI, Laxmi Bank Ltd. is not considered as a related party. Thus, the objection raised by ICID bank is not tenable.

Regulation 16 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 deals with provisions relating to “committee with only operational creditors”, which are discussed below.

(1) Where the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor, the committee shall be set up in accordance with this Regulation.

(2) The committee shall consist of members as under –

(a) 18 largest operational creditors by value. If the number of operational creditors is less than 18, the committee shall include all such operational creditors.

(b) One representative elected by all workmen.

(c) One representative elected by all employees

(3) A member of the committee shall have voting rights in proportion of the debt due to such creditor or debt represented by such representative, as the case may be, to the total debt.

Explanation – ‘Total Debt’ is the sum of –

(a) Amount of debt due to the creditors.

(b) Amount of the aggregate debt due to workmen.

(c) Amount of the aggregate debt due to employees.

(4) A  committee formed under this Regulation and its members shall have the same rights, powers, duties and obligations as a committee comprising financial creditors and its members, as the case may be.

Given case is governed by the provisions of Regulations 18 & 19 of the (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Meetings of the committee [Regulations 18]:

(1) A resolution professional shall convene a meeting of the committee before lapse of 30 days from the last meeting. However, the committee may decide to extend the interval between such meetings subject to the condition that there shall be at least one meeting in each quarter.

(2) A resolution professional may convene a meeting, if he considers it necessary, on a request received from members of the committee and shall convene a meeting if the same is made by members of the committee representing at least 33% of the voting rights.

(3) A resolution professional may place a proposal received from members of the committee in a meeting, if he considers it necessary and shall place the proposal if the same is made by members of the committee representing at least thirty three per cent of the voting rights.

Notice for meetings of the committee [Regulations 19]:

(1) A meeting of the committee shall be called by giving not less than 5 days notice in writing to every participant, at the address it has provided to the interim resolution professional or the resolution professional, as the case may be the resolution professional.

Such notice may be sent by hand delivery or by post but in any event, be served on every participant by electronic means.

(2) The committee may reduce the notice period from 5 days to such other period of not less than 24 hours, as it deems fit. However, the committee may reduce the period to such other period of not less than 48 hours if there is any authorised representative.

Considering the above provisions, the Resolution Professional has violated the provisions since he has called the meeting based on the request received from the CoC members holding less than 33% voting rights and the notice for the meeting is also less than 24 hours.

As per relevant applicable provisions of the Insolvency & Bankruptcy Code, 2016, status of the following resolution is as under:

The Insolvency & Bankruptcy Code, 2016 has provided the Committee of Creditors (CoC) with exclusive access to negotiations along with the ultimate authority to deal and finalise the business and commercial decisions. Thereby the Committee of creditors is also ended with the mammoth responsibility of evaluating resolution plans and thereafter voting and approving the best resolution plan. Commercial Wisdom of the CoC has been held to be sacrosanct by various judicial precedents.

In the case of Kalparaj Dharamshi and another v. Kotak Investment Advisors Ltd. & another, the Apex Court observed that the evaluation of proposals to keep the entity as a going concern, including decisions about the sale of business or units, restructuring of debt etc., are required to be taken by the Committee of the Financial Creditors. The Apex Court further observed that it has been provided, that the choice of the resolution to keep the entity as a going concern will be voted upon by the Committee and there are no constraints on the proposals that the resolution professional can present to the Committee. It was held that the NCLT or the NCLAT cannot interfere with the commercial wisdom of the Committee of Creditors, except within the limited scope under sections 30 and 31 of the Code.

It was further held that the commercial wisdom of the Committee has been given paramount status without any judicial intervention for ensuring completion of the stated processes within the timelines prescribed by the Code. The court further held that there is an intrinsic assumption that the financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan.

In another notable judgment, the Supreme Court in the matter of K. Sashidhar v. Indian Overseas Bank curtailed the jurisdiction of the NCLT by observing that the NCLT has no jurisdiction and authority to analyse or evaluate the commercial decision of the Committee of Creditors and to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. The Supreme Court in M.K. Rajagopalan v. Dr. Periasamy Palani Gounder had disregarded the technicality of non-compliance of the non-publication of Form G and instead assigned primacy to the commercial wisdom of the CoC. Hence, based on the above, NCLT or NCLAT do not have a right to interfere with the decision of CoC.

As per section 21(2) of the IBC, the committee of creditors shall comprise all financial creditors of the corporate debtor.

As per section 24(3), the resolution professional shall give notice of each meeting of the committee of creditors to operational creditors or their representatives if the amount of their aggregate dues is not less than 10% of the debt.

The Code came up with different sets of creditors – while financial creditors are to constitute the committee of creditors; the operational creditors are not a part of the committee of creditors and are thus not empowered to take decisions regarding approval or rejection of resolution plan. However, operational creditors having the amount of aggregate dues not less than 10% of the debts are allowed to attend the meetings of the committee of creditors (refer section 24) but are not members thereof and thus, are not allowed to vote.

In view of above, operational creditors of Joy Ltd. will not succeed in their petition before NCLT.