India: Composition Of Committee Of Creditors Under The IBC – A Comparative Study

Last Updated: 31 August 2018
Article by Manisha Paranjape and Abhijeet Kamath

In our earlier article titled, "Homebuyers now Financial Creditors: Too many cooks spoil the resolution process?", we analysed the impact of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, ("Ordinance") on the corporate insolvency resolution process, and briefly discussed how operational creditors were adversely affected by homebuyers and their dues, now being accorded the status of financial creditors and financial debt respectively. Pursuant to the Ordinance, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 ("Amendment") came into force with effect from 6th June, 2018.

We now take a closer look at how and why operational creditors have been excluded from the committee of creditors ("CoC") by the Insolvency and Bankruptcy Code ("Code"), how it compares to global practices, and whether a relook at the constitution of the CoC is the need of the hour.

BLRC's take on Operational Creditors

The Bankruptcy Law Review Committee ("BLRC") released a report ("Report") in November 2015 commenting on the rationale and design of the then proposed Code. The BLRC deliberated on various aspects of the Code including the formation and composition of the CoC, concluding that members of the CoC have to be creditors both with the capability to assess viability, as well as be willing to modify terms of existing liabilities in negotiations. With this reasoning, operational creditors were intentionally left out of the CoC under the presumption that such creditors would neither be able to decide on matters regarding the insolvency of the entity, nor would they be willing to take the risk of postponing payments for better future prospects for the entity. The BLRC concluded that, for the resolution process to be swift and efficient, the Code should necessarily mandate that the composition of the CoC be restricted to only the financial creditors.

An International Perspective

In a broader perspective, this reasoning of the BLRC stands in stark contrast with the Legislative Guide on Insolvency Law ("LGIL") proposed by The United Nations Commission on International Trade Law ("UNCITRAL"), wherein the UNCITRAL recognised that the first key objective of a resolution process is to balance the advantages of near-term debt collection through liquidation (often the preference of secured creditors) against preserving the value of the debtor's business through reorganization (often the preference of unsecured creditors and the debtor).

The LGIL recognised that in many cases, it would not be possible or necessary to involve every creditor, especially those creditors who do not have the commercial expertise, knowledge or will to participate effectively in the process. They could not however, be ignored, as they would be important for the continued operation of the business (as suppliers of essential goods or services or as participants in essential parts of the debtor's production process).

As a general rule, secured creditors are generally not represented on a creditor committee if they are fully secured or over-secured. In such cases, their interests are significantly different from those of unsecured creditors and their ability to participate in and potentially alter the outcome of decisions by creditors may not be in the best interests of all creditors. Recognizing this divergence of interests, some insolvency laws require secured creditors to surrender their security interest before they can participate in the proceedings and vote on any matter. Where they are under-secured, however, their interests are more likely to align with those of unsecured creditors and their participation in the committee or in voting by creditors may be appropriate, at least to the extent that they are under-secured.

An example of this would be the Company Voluntary Arrangement (CVA) mechanism under UK insolvency laws, where secured creditors are entitled to vote only in specific circumstances.

The BLRC itself in its Report has correctly stated that many possibilities are envisioned on default and that liquidation is only one option of many. It has further stated if the entity is protected as a going concern, the costs imposed upon society go down, as liquidation involves the destruction of the organisational capital of the firm. The BLRC then however expounds its firm belief that there is only one correct forum for evaluating such possibilities, and making a decision: a CoC, where all financial creditors (both secured and unsecured) have votes in proportion to the magnitude of debt that they hold.

The Report does not disclose any reasoning for ignoring the valid points raised in the LGIL nor has a fiduciary duty been expressly placed on the CoC to protect the interest of other creditors and stakeholders.

What then requires a financial creditor, especially a secured financial creditor, to prefer preserving the value of the debtor's business through reorganization against debt collection through liquidation, which in any event provides priority to financial creditors? 

Classification of Creditors

While the Code has classified creditors into financial and operational creditors, it has given only one class the powers to decide the fate of the other class.

The reason for such classification is because creditors may have rights which are so dissimilar in nature so as to make it impossible for them to consult together with a common interest. This reasoning has been followed in both the Companies Act, 1956 and 2013. However, the Code by classifying such creditors and then making only one of them responsible for taking a decision that is binding on the other, renders such classification moot, thereby defeating the very purpose of classifying them.

Contrast this with the insolvency laws in the US which provide that for the purpose of a plan of reorganisation ("Plan"), similarly situated creditors are placed in the same class of creditors. For creditor classes that are impaired, such impaired class must either consent to the Plan or be subjugated to it. For a class to consent to a Plan, of the class members who vote, there must be more than 1/2 in number and 2/3 in dollar amount of creditors accepting the Plan. A debtor can force its plan on non-consenting classes if the Plan is "fair and equitable," does not "discriminate unfairly" within classes, and is in the "best interests of creditors.

Similarly, under German insolvency law, the creditors vote by groups. The consent of every group is needed. Within a group the majority of creditors (as headcount) and creditors having the majority of debt need to approve the insolvency plan. The missing consent of a creditor group can be overruled by the insolvency court, if the majority of creditor groups approve the insolvency plan and the economic situation of the opposing party does not deteriorate through the insolvency plan in comparison to a regular insolvency proceeding.

Under the Code however, the only mandatory requirement in relation to dissenting creditors as well as operational creditors is to provide them with liquidation value. There is no provision requiring NCLT approval, neither is there any duty on the CoC to act in the best interests of all stakeholders or in an equitable manner. Further, the Amendment has introduced the appointment of an authorised representative for representing a class of at least ten financial creditors. However, Section 25A of the Code provides that such authorised representative must vote for each such financial creditor separately. This would mean that the majority vote of a class is not taken as the vote of the whole class but instead is counted separately.

Homebuyers rank higher than operational creditors

The legislature was quick to amend the Code to protect the interests of homebuyers by according them the status of a financial creditor, allowing each and every homebuyer irrespective of the quantum of his financial debt to a vote on the CoC. An operational creditor however even with a debt of more than 10% of the total debt is relegated only to attending meetings of a CoC with no voting rights.

This now throws operational creditors of real estate companies at the absolute mercy of financial lenders and innumerable homebuyers who are mandated, at best, to provide liquidation value to the operational creditors. The liquidation value in any event to such operational creditors would be what is left over after providing for the debts of these very financial lenders and homebuyers.

What the Amendment has effectively done therefore, is tilt the already lopsided scales further against operational creditors, ultimately leading to frequent challenges to resolution plans by operational creditors before courts and delaying the resolution process. A comprehensive overhaul of the constitution of the CoC is thus urgently required to preserve the purpose and the actual intent of the Code. A reference could be made to Section 230 of the Companies Act, 2013, where certain provisions are made that secure the interests of all creditors. This security is however, contingent on the actual appointment of operational creditors to the CoC which is the primary need of the hour.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Link Legal India Law Services
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Link Legal India Law Services
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions