When a person or an organization lends money to another party or another organization, they become the creditor as they owe a debt to be paid by the other party. It is necessary that the Creditor rights be emphasized in the modern world when financial and insolvency laws are widely used. By striking a balance between debtor protection and creditor recovery, these rights guarantee that the bankruptcy resolution process is carried out in a fair and equitable manner.
The term committee of creditors is a body which refers to such a group of financial creditors of a corporate borrower which gets formed during the Corporate Insolvency Resolution Process.
In the following article, we shall take a look at the creditors’ rights and the creditors’ committees that have been provided in the Insolvency and Bankruptcy Code.
Types of Creditors
IBC,2016 basically identifies two primary types of creditors including financial creditors and operational creditors with differentiated roles, rights, and priorities within the course of the insolvency resolution process.
Financial Creditors
A financial creditor is anyone who is either a person or institution to whom financial debt is owed by a company or an individual.
Rights and Role:
- Voting Rights in CoC: The dominant stake in the CoC belongs to financial creditors, and their voting rights are roughly dependent on the claim value against them.
- Initiation of Insolvency: The financial creditor may initiate the initiation of the Corporate Insolvency Resolution Process against a debtor on the event of default.
- Priority in Repayment: Secured financial creditors have the maximum leverage at the time of repayment of debts or liquidation of assets.
Operational Creditors
Operational creditors are any suppliers of goods and services to the debtor, which also encompass employees, vendors, and utility providers.
Rights and Role:
– Claim Consideration: Claims by operational creditors are assessed and taken care of in the resolution process.
– No Voting Rights in CoC: They do not have voting rights in the CoC unless their dues are more than 10% of the total claims.
– Priority in Liquidation: They are treated after secured creditors but before equity holders in the liquidation order.
Understanding the requirements and advantages of Creditor rights
The creditors are provided various legal provisions and acts, for the easy facilitation of the recovery of debts. These types of rights are required for the upliftment of the needs of the Creditors and to ensure that the Debtors do not violate them. These rights help in the increasing of the credit availability for the Creditor which can stimulate economic growth. They also help in the reduction of borrowing costs and provide creditors with the ability to recover what they are owed from the debtors. In cases where the Debtor has defaulted or is unable to pay back the due amount, then in such a case the Insolvency and Bankruptcy Code, 2016 acts as a medium for the Creditor rights to be uplifted and protected.
Legal provisions facilitating Creditor rights
The Insolvency and Bankruptcy Code, 2016 lays down various provisions that deal with the rights of the Creditors. These provisions include-
- SECTION 6 of the act states that in case a corporate debtor has failed in its payments of debt owed, the process of corporate insolvency resolution can be initiated by the financial creditor, operational creditor or the corporate debtor itself.
- SECTION 7 empowers the financial creditors (either by themselves or jointly with other financial creditors) to file an application for the initiation of the Corporate Insolvency Resolution Process against a defaulting corporate debtor
- SECTION 12 provides that the process of the corporate insolvency resolution should be carried out within the set time of 180 days. However, on the receipt of the resolution passed by at least more than 75% of the company’s Creditors, the adjudicating authority may extend the deadline for another 90 days.
- SECTION 30 lays out the necessary requirements for a workable resolution strategy. These requirements include the necessity of satisfying claims owed to operational creditors and guaranteeing adherence to Section 53 which describes priority orders for debt payback.
- SECTION 53 provides for the situation of liquidation of a company that is the debtor. It protects the Creditor rights by notifying the hierarchy which places the secured creditors at the top, who are then followed by the equity holders, unsecured creditors, and workers’ dues.
Committee of creditors and their relevance
The Committee of Creditors refers to an entity that is involved in the insolvency proceedings. This committee generally consists of a group of financial creditors of a company that are facing financial distress because of the common debtor. These creditors, such as banks, lenders, and debenture holders, come together with the objective of collectively representing their interests during the insolvency resolution process thus promoting Creditor rights. The Committee of Creditors plays a pivotal role in the evaluation and approval of the proposed resolution plans that are aimed at reviving the struggling company or maximizing the recovery for creditors in case of liquidation.
The committee of creditors also has the power to accept or reject the resolution plan that all the potential investors have presented, with a minimum number of votes in favour required by the Code for such requirements. Even though the restrictions and requirements vary depending on the case they are managing, the essential needs of the committee and its members are the same.
SECTION 21 of the Insolvency and Bankruptcy Code 2016 provides for the formation of the Committee of Creditors and lays down certain provisions for the effective functioning of the committee. The Committee of Creditors has been bestowed the power to decide if the corporate debtor should be allowed to carry on with the activities of their business operations during the bankruptcy settlement procedure or not. In accordance with Section 21’s subsection (8), a minimum majority of 51% of the financial creditors’ voting share must approve any such actions.
Judicial precedents discussing Creditor rights & committee of creditors
Over the recent years, the Indian judiciary has provided for certain rulings or opinions on the importance of the rights that should be provided to the creditors as well as the committee of creditors and highlighted certain important factors related to the same, like in the case of Swiss Ribbons Pvt. Ltd. v. Union of India (2019) where the Supreme Court of India was of the opinion that the Insolvency and bankruptcy code is an important legal tool in use for the timely and effective resolution of debt related issues and also in the protection of the Creditor rights. The Supreme Court also upheld the constitutional validity of the Insolvency and Bankruptcy Code and emphasized the point that financial creditors should have primacy in the resolution process, given their expertise in assessing viability and feasibility.
In the case of Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd. (2021), the Supreme Court has ruled that the court or any Adjudicating Authority cannot overrule the business decisions that have been made by the Committee of Creditors (CoC). In the case, where the court finds any issues with the proposed resolution plan, it can send the plan back to the CoC with the objective of revisions, but only after they have ensured that the plan meets the requirements of the insolvency law and does not violate any Creditor rights. However, the court itself does not have the authority to change or alter the resolution plan approved by the CoC.
Conclusion
The Insolvency and Bankruptcy Code (IBC), 2016 acts as an important tool that has been set up by the government in order to promote and uplift the Creditor’s rights and committee of creditors. These provisions ensure that they are able to resolve the defaulter’s issue and get their money back. The Committee of Creditors plays a major role in the process of debt resolution by acting as a basic mechanism in order to resolve insolvencies in India. It allows creditors to actively participate in the decision-making process, promoting accountability, efficiency, and transparency.
Frequently Asked Questions
1. What Are Creditor Rights Under the Insolvency and Bankruptcy Code, 2016?
Creditor rights under the Insolvency and Bankruptcy Code (IBC) 2016 are legal provisions that safeguard the interests of individuals and organizations (creditors) who are owed debts by debtors. These rights ensure that creditors have a fair and equitable process for recovering their dues during insolvency proceedings. Key aspects of creditor rights under IBC include:
- Initiation of Insolvency Process: Financial creditors can initiate the Corporate Insolvency Resolution Process (CIRP) if a corporate debtor defaults on payment.
- Participation in CoC: Creditors, especially financial creditors, form the Committee of Creditors (CoC), which has the authority to make critical decisions regarding the resolution process.
- Voting Rights: Creditors have voting rights based on the value of their claims, allowing them to influence the approval of resolution plans.
- Priority of Claims: The IBC outlines the priority order for debt repayment, ensuring secured creditors are paid first, followed by unsecured creditors and other stakeholders.
- Protection Against Fraudulent Practices: The code includes measures to prevent and address fraudulent activities by debtors, ensuring creditors can recover their dues effectively.
2. What Is the Committee of Creditors (CoC) and What Is Its Role?
The Committee of Creditors (CoC) is a pivotal body established under the Insolvency and Bankruptcy Code (IBC) 2016, comprising financial creditors of a corporate debtor. Its primary role is to oversee and make decisions during the Corporate Insolvency Resolution Process (CIRP). Key functions and responsibilities of the CoC include:
- Approval of Resolution Plans: The CoC evaluates and approves or rejects the resolution plans submitted by potential investors or sponsors aiming to revive the distressed company.
- Selection of Insolvency Professional: The committee selects the Interim Resolution Professional (IRP) and approves the appointment of a Resolution Professional (RP) to manage the insolvency process.
- Decision-Making Authority: The CoC has the authority to decide whether the debtor can continue its business operations during the insolvency process and can authorize or reject any proposed actions by the debtor.
- Voting Based on Claims: Each Creditor voting power in the CoC is proportional to the value of their claims, ensuring that those with larger stakes have a more significant influence on decisions.
- Final Approval of Liquidation: If no viable resolution plan is approved, the CoC can decide to liquidate the company, ensuring that creditors recover as much as possible from the liquidation proceeds.
3. How Are Financial Creditors Different from Operational Creditors?
Under the Insolvency and Bankruptcy Code (IBC) 2016, creditors are broadly categorized into two types: Financial Creditors and Operational Creditors. Understanding the distinction between them is essential for comprehending their roles and rights within the insolvency framework.
- Financial Creditors:
- Definition: Entities or individuals who have provided financial loans or credit to the debtor. This includes banks, financial institutions, bondholders, and other lenders.
- Role in CoC: Financial creditors hold the majority voting rights in the Committee of Creditors (CoC) based on the value of their claims, giving them significant influence over the resolution process.
- Initiation Rights: Financial creditors have the authority to initiate the insolvency process if the debtor defaults on their financial obligations.
- Focus: Their primary concern is the recovery of the principal amount along with interest and other financial charges.
- Operational Creditors:
- Definition: Suppliers of goods and services to the debtor in the ordinary course of business, such as vendors, utility providers, and employees owed salaries.
- Role in CoC: Operational creditors do not have voting rights in the CoC. Their claims are considered during the resolution process, but they do not influence decision-making directly.
- Rights: They are entitled to have their claims considered and are prioritized in the repayment hierarchy, but their influence is limited compared to financial creditors.
- Focus: Ensuring timely payment for goods and services provided and safeguarding their contractual rights.
In summary, while both types of creditors are crucial to the debtor’s operations and financial health, financial creditors wield more influence in the insolvency resolution process through the CoC.
