The Committee of Creditors: Composition, Voting and Commercial Wisdom

The committee of creditors is the body that decides the fate of a company in insolvency. It chooses or replaces the resolution professional, approves or rejects the resolution plans, and in a real sense controls the commercial outcome. A creditor with a claim against a company in the process should know who sits on the committee, how it votes and how much its decisions can be reviewed. This note describes the Code's provisions in outline. It is general information, not advice on a particular process.

Who is on the committee

Section 21 provides that the committee comprises all the financial creditors of the corporate debtor. Operational creditors do not vote. Financial creditors that are related parties of the debtor are excluded from the committee, and from voting, under the proviso to Section 21(2), a rule that is intended to stop connected lenders from steering the outcome. Allottees in a real estate project are represented by an authorised representative who votes on their behalf, under the 2019 amendment to Section 21, and holders of securities in a class are also represented by a representative.

Operational creditors and workers

Under Section 24(3)(c), where the operational creditors' aggregate dues are not less than ten per cent of the debt, they may attend meetings of the committee through a representative, but without a right to vote. Workmen and employees may also be represented. The representatives are entitled to notice of the meetings and may speak at them.

How decisions are taken

• Voting share. Each financial creditor votes in proportion to the financial debt owed to it (Section 21(2)).
• Approval of a plan. A resolution plan needs the vote of not less than sixty-six per cent of the voting share (Section 30(4)). The earlier threshold was seventy-five per cent, reduced by the 2019 amendment.
• Replacing the professional. Section 27 and Section 22 allow the committee to replace the professional with a vote of sixty-six per cent, subject to the Adjudicating Authority's confirmation.
• Other significant actions. Section 28 requires the committee's approval, by sixty-six per cent, for actions such as raising interim finance, creating security over assets and changing the capital structure of the debtor, which the professional may take only with that approval.

The first meeting must be held within seven days of the committee's constitution (Section 22). The professional circulates the agenda and the notice, and the minutes of each meeting are recorded.

The commercial wisdom of the committee

In K. Sashidhar v. Indian Overseas Bank (2019) and in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2019) the Supreme Court held that the commercial wisdom of the committee is not to be second-guessed by the tribunal or the appellate tribunal. A court may examine whether the plan complies with the Code, whether the process was conducted in accordance with it, and whether the plan gives the dissenting creditors and the operational creditors what the Code requires. It will not ordinarily ask whether a different plan would have been better.

Practical points for a creditor

• A financial creditor should file its claim early and with complete proof, since its voting share is fixed by the professional's verification.
• An operational creditor should check whether it qualifies for representation, and whether the aggregate dues of the class meet the ten per cent test.
• Creditors should read the information memorandum and any request for resolution plans, which fix the criteria on which plans will be compared.
• A creditor who disagrees with a decision should record the dissent in the minutes, and take advice about whether the decision can be challenged under Section 61.

Participation in the committee is a duty as well as a right. A creditor that attends, votes and records its views has more influence over the outcome than one that waits for the result.