COMMITTEE OF CREDITORS

Last Updated on 11th December, 2024
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Picture Courtesy: https://indianexpress.com/article/business/committee-of-creditors-code-of-conduct-rbi-deputy-governor-m-rajeshwar-rao-9711798/ 

Context: According to the Reserve Bank of India (RBI) Deputy Governor, the Insolvency and Bankruptcy Board of India (IBBI) should impose a code of conduct for the Committee of Creditors (CoC), as their performance in insolvency proceedings has been "lacking in several aspects".

About Committee of Creditors (CoC)  

It is a group of financial creditors formed during the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) of 2016.

It is in charge of managing the resolution process and making key decisions regarding the debtor's outstanding debts.

How is the Committee of Creditors formed?

It is formed after the Interim Resolution Professional (IRP) has verified the claims. The IRP requires creditors to submit claims within 14 days of the public announcement. Once claims have been verified, the CoC is formed, consisting solely of financial creditors, as specified in Section 21 of the IBC.

The CoC consists of all of the corporate debtor's financial creditors. Financial creditors include banks, bondholders, homebuyers, and other lenders to whom the debtor owes money.

Role and Responsibility  in the Corporate Insolvency Resolution Process (CIRP)

Approve or reject resolution plans submitted by potential resolution applicants.

Deciding whether to appoint or remove the Interim Resolution Professional (IRP).

Evaluating the debtor's financial situation and ensuring that the resolution plan addresses the issues effectively.

Approve the debtor's proposed asset restructuring or liquidation.

Ensuring that the resolution plan's terms are followed after approval.

Powers under the Insolvency and Bankruptcy Code 2016

Deciding on the functioning of the corporate debtor, including major decisions like restructuring or liquidation.

Seeking approval from the National Company Law Tribunal (NCLT) if there is any suspicion of wrongdoing or irregularities.

Replacing the Interim Resolution Professional as needed.

Approve the resolution plan with at least 66% of the CoC members' votes.

Directing the debtor's liquidation if no resolution plan is approved.

Reducing the notice period for meetings as needed.

 

RBI Deputy Governor on the performance of the CoC in insolvency proceedings

According to an RBI Deputy Governor, the Committee of Creditors (CoC) has been "lacking in several aspects" in insolvency proceedings. 

He highlighted issues such as prioritizing individual creditors' interests over collective ones, disagreements over resolution plans, low attendance at CoC meetings, and insufficient skill sets in areas such as corporate finance and legislation.

Recommendations by the RBI deputy governor to improve the performance of the CoC

He indicated that the Insolvency and Bankruptcy Board of India (IBBI) should implement a code of conduct for the CoC to enhance its performance and ensure transparency, accountability, and effective participation. He described that when incentives are not perfectly aligned then deviations from best practices become the norm. 

Current Statistics on insolvency cases under the IBC

As of September 2024, there were 8,002 insolvency cases admitted under the IBC, 2016. Of these, 1,068 resolution plans were approved (13%), 2,630 cases resulted in liquidation orders (33%), and 1,963 cases (25%) remain open. The remaining cases were either withdrawn, closed on appeal, or settled.

 

Must Read Articles: 

Insolvency and Bankruptcy Code

Source: 

Indian Express

PRACTICE QUESTION

Q. The Insolvency and Bankruptcy Code (IBC) allows which of the following parties to initiate the Corporate Insolvency Resolution Process (CIRP):

1. Financial Creditors

2. Operational Creditors

3. Corporate Debtors

Select the correct answer using the codes given below:

A) 1 and 2 only

B) 2 and 3 only

C) 1 and 3 only

D) 1, 2 and 3

Answer: D

Explanation: 

The Insolvency and Bankruptcy Code (IBC) allows the following parties to initiate the Corporate Insolvency Resolution Process (CIRP):

  • Financial creditors may initiate CIRP under Section 7 of the IBC.
  • Operational creditors may initiate CIRP under Section 9 of the IBC.
  • Corporate debtors can initiate CIRP under Section 10 of the IBC. 

To initiate the Corporate Insolvency Resolution Process (CIRP), file an application with the Adjudicating Authority, the National Company Law Tribunal (NCLT). The NCLT has jurisdiction over where the corporate debtor's registered office is located. CIRP serves as a recovery mechanism for creditors.

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