Financial Creditors & Committee of Creditors: What, Why and How?

By Megha Mittal (resolution@vinodkothari.com)

IBBI issues clarification w.r.t. voting powers of CoC

Brief Background:

Pursuant to the Insolvency and Bankruptcy (Amendment) Code, 2018, the crucial reduction of voting threshold from 75% to 66% for critical matters like approval of Resolution Plan, Extension of CIRP, and all matters of section 28 of the Insolvency and Bankruptcy Code, 2016 (Code), came into effect.

However, there still prevailed ambiguity as to how to determine this threshold of 66%. What shall be the fate of those financial creditors who abstained from voting?

In this background, the Insolvency and Bankruptcy Board of India (IBBI/ Board) has issued a clarification w.r.t. voting in the Committee of Creditors.

Constitution of Committee of Creditors- What, why and how?

Committee of Creditors” (Committee) is a committee consisting of the financial creditors of the Corporate Debtor. This Committee eventually forms the decision making body of the various routine tasks involved in Corporate Insolvency Resolution Process (CIRP), responsible for giving approval to the IRP/ RP to carry out actions that might affect the CIRP.

A major chunk of the dues of the Corporate Debtor is that of Financial Creditors and thus, to recognize their substantial interest, the Committee is formed. The power to ratify the managerial decisions taken by the RP vests upon the Committee; It is this Committee that approves/ rejects the Resolution Plan, extension of CIRP, decides upon liquidation of the Corporate Debtor, ratifies expenses borne by the RP etc. In short, all decisions having an impact on the Corporate Debtor shall first be approved by the Committee.

As per section 18 of the Code, it is the duty of the Interim Resolution Profession to constitute the Committee upon collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor. It shall consist all those financial creditors whose claims have been received within the time period stipulated in the public announcement.

Voting power of the Members

In the event of passing any resolution by the Committee, a minimum threshold of assent is required to be obtained. However, in light of these facts, the following questions arise w.r.t. fate of creditors who submit delayed claims or the determining the voting power of the members of the Committee

  • What happens when a financial creditor submits claims after the stipulated date as per public announcement?

Where a financial creditor submits its claim after expiry of the last date for submission, it shall form a part of the Committee for purposes after such submission. No decision taken prior to its inclusion in the Committee can be questioned later on.

  • How is it to be determined whether the requisite threshold is met?

While determining the percentage of votes received in favour, only those creditors then forming part of the Committee shall be considered as the total value of creditors and the votes of those creditors who abstain from voting shall be deemed to be dissenting votes.

These provisions can be better understood with the help of an illustration:

Illustration:

A corporate debtor, X Ltd. has 6 financial creditors having dues to the tune of Rs. 600 crores. By the time the last day for submission of claim expires, the claims of only 3 financial creditors being A, B and C having dues of Rs. 50 Crores, Rs. 75 crores and Rs. 125 crores, respectively have been submitted.

Thus, the IRP constitutes a committee of these 3 creditors.

After the last day for submission of claims expires, another financial creditor, D, having dues of Rs. 100 crores submits its claims. After the claim is verified, such financial creditor shall also form part of the Committee.

D, opposes a certain decision taken by the Committee prior to its inclusion. Such contention placed by D is non-maintainable as the previous resolutions passed by the Committee shall be held good because they were duly passed with requisite majority.

After D is admitted as a member of the Committee, there are a total of 4 members having total dues of Rs. 350 crores. Now, for a resolution requiring minimum 66% of the votes to be passed, members of the Committee having dues of atleast Rs. 231 crores must vote in favour of such resolution.

Assuming a situation where out of the 4 creditors, A chose to abstain from voting, A shall be deemed to be a dissenting creditor. Thus, even on such abstention, votes in favour of minimum 66% of Rs. 350 crores i.e. Rs. 231 crores shall be required and not that of Rs. 300 Crores.

Another point to be noticed is that dues of creditors not forming part of the Committee shall not be taken into account while determining the requisite percentage. In the illustration above, the remaining creditors of Rs. 250 crores shall not be taken into consideration while passing of resolutions.

Conclusion:

Considering the above, the following can be concluded:

  1. Financial creditors not forming part of the Committee shall not have any voting power w.r.t. decisions taken by the Committee unless they become a part of the Committee.
  2. Creditors abstaining from voting shall be deemed to be dissenting shareholders.
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