A voice without a vote: IBBI proposes OCs as observers amongst unrelated FCs in CoC

Team Resolution | resolution@vinodkothari.com

Where the CoC has no regulated financial entity and a single unregulated financial creditor holds over 66% of the voting share, effectively dominating all decisions, IBBI in its Discussion Paper dated 17th November, 2025 proposed that the five largest operational creditors will also be brought into the CoC meeting, giving them a seat and a voice in the discussions, even though they will not have voting rights.

Such operational creditors will be entitled to receive the notice, agenda and minutes of the meeting and may participate in deliberations.  Notably, they cannot cast their vote in any of the agenda and merely attend the meeting as observers. However, the proposal suggests that the RP shall record their observations, if any, in the minutes.

The rationale behind such inclusion is that, in cases where the CoC does not have any regulated lender and an unregulated creditor effectively controls decisions with more than 66%, it raises a genuine concern about the quality and objectivity of CoC decision-making. Such a creditor may not have the financial or institutional expertise that banks and regulated entities typically bring to the process, and in some cases may even be a friendly or aligned party. This creates a risk that decisions may not withstand scrutiny and may dilute the credibility of what is otherwise treated as the CoC’s commercial wisdom.

However, the proposal does not fully take into account the following:

1. Whether possible under subordinate law: The Code already provides for exclusion of related party financial creditors from CoC. The Code does not permit further exclusions or inclusions to be specified by IBBI. The only scenario where IBBI regulations can step in is where there are NO financial creditors. Therefore, whether this proposed inclusion of operational creditors is possible by way of amendments in regulations, can be a point of discussion. Notably, the constitutionality and the “intelligibility” of the distinction between financial and operational creditors was discussed and settled in very early rulings of the SC on the Code – viz., Swiss Ribbons Pvt. Ltd. & Anr v. Union of India & Ors., Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta & Ors. In those rulings as also in the frame of the Code, the image of a CD under insolvency has been one who has multiple financial creditors, primarily banks. The structure of the Code does not realize that in practice, there are several outliers. There are situations where insolvency may be a design rather than a fait accompli. In such cases, there may be a so-called financial creditor who has been introduced to avoid the formation of a CoC with operational creditors. Hence, the concern that IBBI is trying to address is quite well appreciated, but the issue is – are these remedies possible without the main law being amended? 
2. Regulated vs. unregulated financial creditors: The proposal seeks to distinguish between “regulated” vs. “unregulated” financial entities. The concerns as to quality, objectivity may still be there, as being a regulated entity does not guarantee these features. There are some 8000-odd NBFCs which are regulated. Technically, even the non-corporate moneylenders may also have registration under State money-lending laws and may claim to be regulated. The mere fact that a financial creditor is regulated does not ensure objectivity and transparency.

In fact, assume there is a single regulated entity holding the financial debt. The very fact that one entity has 66% share (that is, the voting share required to have decisions passed) in the admitted financial claims gives the creditor the right of complete control on the proceedings. 

3. The inclusion of OCs without voting rights raises concerns about utility: Their presence adds no real decision-making power, calling into question the practical value of their participation. The only silver lining may be that as the minutes of CoCs will capture the observations of the OCs, the NCLT while approving the plan may have regard to the fairness or otherwise of the decisions of the CoC. Going by the weight of SC views that AAs do not have the right to question the commercial wisdom of the CoC, whether a solo-powered CoC’s decisions will also carry the same aura of commercial wisdom remains to be seen.
   
4. The core issue remains unaddressed: An unregulated financial creditor with over 66% voting share continues to dominate outcomes, while the OCs’ views are merely recorded without any mandatory impact on final decisions.
5. The proposal diverges from the BLRC’s foundational reasoning: The BLRC Committee reasoned that members of the creditors committee have to be creditors both with the capability to assess viability, as well as to be willing to modify terms of existing liabilities in negotiations. This proposal thereby contradicts the BLRC framework. 

In this regard, the BLRC Committee noted as follows:

“Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity. The Committee concluded that, for the process to be rapid and efficient, the Code will provide that the creditors committee should be restricted to only the financial creditors.”

Our Views: 

Even though the intent behind such a proposal is noble, it may fail its desired objective.. The intent of this provision can succeed only if the rights of OCs are clearly laid down. Securing a seat in CoC meetings and a right to put forward their views may be a welcome step for bringing OCs into the process. However, the actual influence that OCs can exert as mere observers remains uncertain. Only with time will it become clear whether their inclusion practically alters decision making in CoC meetings or merely remains a symbolic entry.

Also read our detailed article titled “Subordination of Operational Creditors Under IBC: Whether Equitable” [Published on 26th July, 2018]