Committee of Creditors (CoC)

What is Committee of Creditors and what is the role of CoC in IBC?

The Committee of Creditors (CoC) is a group of creditors (and other representatives), that is responsible for facilitating the insolvency process. Usually, it comprises of the Financial Creditors and other stakeholders, to whom the defaulting borrower owes money. So, any resolution plan that is submitted, has to be first approved by the committee, and then by the Adjudicating Authority (AA).

With the introduction of Insolvency and Bankruptcy Code (IBC), 2016, first priority is given to save the business from failing. Therefore, the concept of such a committee was introduced in IBC, so that financial restructuring can be done to revive the business. The Committee votes on different resolution proposals, and if a proposal is accepted by a majority of the creditors, then the restructuring plan is accepted.

However, if no resolution plan can be finalized in a pre-defined time frame, then the Liquidation of the company is ordered. The CoC has the responsibility to analyze the financial situation of the debtor, and then decide the best way to resolve the insolvency. The members of the committee also help the Resolution Professional (RP) to maximize the value of the assets of the debtor.

Formation of the Committee of Creditors

The Interim Resolution Professional (IRP) is responsible to constitute the CoC, after analyzing all the claims that have been received against the debtor. The data stored with Information Utilities (IUs) can be used to decide which creditors should join the CoC.

The creditor committee should include all the secured and unsecured Financial Creditors of the borrower. If money has been lent through a consortium of two or more Creditors, then all the parties of the consortium are included in the committee.

Only the Operational Creditors are included in the committee, if there are no eligible Financial Creditors, or if there is no financial debt. Since the number of Operational Creditors could be large, only the 18 biggest such creditors (by value of credit) are included in the proceedings. In addition, one representative for Workers and another one for employees are also included.

It is possible for any creditor to assign an Insolvency Professional (IP), to represent and vote on their behalf in the committee meetings. These Authorized Representatives (ARs) are the trustees of the creditors, and they must act as per the instruction of the creditor.

Related Parties

The Creditors who are Related Parties of the debtor are not allowed to join or vote in the resolution process. This step is taken to stop the borrower from having any direct or indirect influence on the Committee of Creditors. The related parties could be shareholders, subsidiaries, relatives, associate companies etc.

However, it could be possible that the debt of a creditor was converted to equity shares, before the commencement of the insolvency process.

Example: Suppose that a bank gave a loan of INR 100 crore (INR 100,00,00,000) to a company. The company ran into financial trouble and cannot pay the amount. Let us assume that the bank waives INR 40 crore debt in return for 11% shares of the company. In this scenario, the bank has become a shareholder and by definition, a Related Party. But the bank is still a creditor as well, because it has yet to receive INR 60 crore debt.

Note: Under IBC, it has been clarified that if the creditor (Bank in our example) is regulated by a financial regulator (RBI regulates banks), and they do not have any other relation with the borrower besides the conversion to equity, then the creditor will not be treated as a Related Party.

Voting by Committee of Creditors

Any actions taken during the Corporate Insolvency Resolution Process (CIRP) should be acceptable to a majority of the creditors. For taking different decisions, a certain percentage of the committee has to vote in favor. The voting share of the members is in proportion to the amount of debt that is owed to them.

Here are some of the issues that require 66% favorable votes from the Committee of Creditors, during the resolution process:

  1. Appointment of the Interim Resolution Professional (IRP) as the Resolution Professional (RP), or for choosing a new RP
  2. Replacing the Resolution Professional
  3. Selling the assets of the borrower, outside regular course of business
  4. Changing the Capital Structure of the debtor (Example: Issuance or redemption of preference shares etc.)
  5. Changing the management of the company
  6. Raising any excess finance amount
  7. To create a security interest over the assets of the borrower
  8. Recording any change in ownership interest of the debtor
  9. To give debit instructions (for excess amount) to the financial institutions that are maintaining the accounts of the debtor
  10. Execution of Related Party transactions
  11. Changing any documents of the borrower
  12. Changes in appointments or contracts of personnel
  13. Making changes in the appointments or contracts of statutory auditors and internal auditors
  14. Delegation of authority to another person
  15. Disposal of shares by the debtor
  16. Transferring financial debts, operational debts, or rights, outside of normal business
  17. Approval or rejection of plans submitted by Resolution Applicants (Refer: How does approval of resolution plan happen under IBC?)
  18. Extension of the CIRP duration from 180 days to 270 days
  19. Directly initiating the liquidation and skipping the CIRP

Withdrawal of any application under section 12A of IBC needs at least 90% approval of the committee. Besides the above listed action items, other items require a voting share of 51 %, to be passed.

Meetings of the CoC

The Interim Resolution Professional (IRP) has to submit a report about the constitution of the Committee of Creditors, within two days of receiving the verification of claims. The first meeting of the committee has to be done within seven days after this report.

Once the insolvency proceedings have started, the Resolution Professional (RP) can then convene a meeting of the committee, when it is required. Meetings can also be convened if members representing 33 % of the voting rights, call for a meeting. A notice of at least 5 days has to be given to all the participants, when a meeting has been called. (Notice period can also be reduced by the CoC)

To have a proper quorum for the meeting, at least 33 % of the voting rights should be present. The percentage of voting rights for the quorum can also be modified by the creditors committee. The meetings can take place in person or electronically.

Disclaimer

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  • Some information could be outdated / inaccurate
  • Investors should always consult with certified advisors and experts before taking final decision
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