Convening and Conduct of Meetings of Committee of Creditors – CS Professional Study Material

Chapter 18 Convening and Conduct of Meetings of Committee of Creditors – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.

Convening and Conduct of Meetings of Committee of Creditors – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material

Question 1.
A resolution plan has been submitted in respect of the company PQR Ltd. and the resolution plan is yet to be confirmed. The committee of creditors resolved to liquidate PQR Ltd. approved by not less than sixty-five percent of the voting share. Can liquidation be ordered? (June 2019, 5 marks)
Answer:
Section 33(2) of the Insolvency and Bankruptcy Code, 2016 provides that where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than sixty-six per cent of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order.

In the instant question the approval of the resolution to liquidate PQR Ltd. by the creditors having sixty-five percent of the voting share is not sufficient. The decision of the committee of creditors should be approved by not less than sixty-six percent of the voting share. Hence, the liquidation of PQR Ltd. cannot be ordered.

Thus, according to Section 21 (4) of the Code, Y Ltd. shall be included in the committee of creditors and shall have a voting share proportionate to the extent of financial debts owed to such creditor. In the instant case, to the extent of ₹ 100 lakh, Y Ltd. being a financial creditor.

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Question 2.
Can financial creditor who is related party to corporate debtor have any right of representation, participation or voting in a meeting of the committee of creditors.
Answer:
First proviso to section 21(2) provides that a financial creditor or the authorised representative of the financial creditor, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors.

Question 3.
Define “related party” as per The Insolvency and Bankruptcy Code?
Answer:
According to section 5(24), a “related party”, in relation to a corporate debtor, means-
(a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor;

(b) a key managerial personnel of the corporate debtor or a relative of a key managerial personnel of the corporate debtor;

(c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner;

(d) a private company in which a director, partner or manager of the corporate debtor is a director and holds along with his relatives, more than two per cent, of its share capital;

(e) a public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives, more than two per cent, of its paid- up share capital;

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

(f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;

(g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;

(h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act;

(i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;

(j) any person who controls more than twenty per cent, of voting rights in the corporate debtor on account of ownership or a voting agreement;

(k) any person in whom the corporate debtor controls more than twenty per cent, of voting rights on account of ownership or a voting agreement;

(l) any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor;
(m) any person who is associated with the corporate debtor on account of-

  1. participation in policy making processes of the corporate debtor; or
  2. having more than two directors in common between the corporate debtor and such person; or
  3. interchange of managerial personnel between the corporate debtor and such person; or
  4. provision of essential technical information to, or from, the corporate debtor.

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Question 4.
Can financial creditor who is also a operational creditor have any right of representation, participation or voting in a meeting of the committee of creditors.
Answer:
Section 21 (4) provides that where any person is a financial creditor as well as an operational creditor, then such person shall be considered a financial creditor to the extent of the financial debt owed by the corporate debtor. Such person shall be included in the committee of creditors and shall have a voting share proportionate to the extent of financial debts owed to such creditor.

Thus, financial creditors who are also operational creditors are given representation on the committee of creditors only to the extent of their financial debts.

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Question 5.
A decision is taken by the committee of creditors holding 45% of voting share. Does a decision hold good under section 21 of Insolvency and Bankruptcy Code.
Answer:
Sub-section (8) to section 21 of the Code provides that except as otherwise provided in the Code, all decisions of the committee of creditors shall be taken by a vote of not less than fifty-one per cent of voting share of the financial creditors. Does a decision taken by the committee of creditors holding 45% of voting share is not valid.

Question 6.
Section 28 of the Code lists out certain actions that may be taken by the resolution professional only with the prior approval of the committee of creditors by a vote of certain percentage of the voting shares. One such action is taken by resolution professional based on approval of the committee of creditors by a vote of 51 % percentage of the voting shares. Is it valid as per section 28 of Insolvency and Bankruptcy Code.
Answer:
Section 28 of the Code lists out certain actions that may be taken by the resolution professional only with the prior approval of the committee of creditors by a vote of 66 per cent of the voting shares. Does a decision taken by the committee of creditors holding 51% of voting share is not valid.

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Question 7.
Explain Section21(2) as per the Insolvency arid Bankruptcy Code (Amendment) Ordinance, 2019 ?
Answer:
Section 21(2): The committee of creditors shall comprise all financial creditors of the corporate debtor:
Provided that a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors.

Provided further that the first proviso shall not apply to a financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date.

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Question 8.
Explain the role of the Committee of Creditor in the CIR process by giving suitable case law?
Answer:

  • Role of the Committee of Creditor in the CIR process is explained by The Hon’ble Supreme Court of India in the matter of ‘Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & ors.
  • It had emphasized the primacy of the commercial wisdom of the CoC in the resolution process as to whether to rehabilitate the corporate debtor or not by accepting a particular resolution plan.
  • It also states that prior to approving the resolution plan, the Committee is required to assess the “feasibility and viability” of the resolution plan, which takes into account “all the aspects of the resolution plan, including the manner of distribution of funds among various class of creditors.”
  • In this regard, the Committee is free to negotiate with the resolution applicant by suggesting modifications in the commercial proposal on a case to case basis.

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Convening and Conduct of Meetings of Committee of Creditors Notes

Committee of Creditors

  • Section 21 and 24 of the Insolvency and Bankruptcy Code, 2016 make provisions relating to the committee of Creditors.
  • Section 21 deals with the constitution of committee of creditors while section 24 prescribes the modalities for the meeting of the committee of creditors.
  • The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.
  • The committee of creditors shall comprise all financial creditors of the corporate debtor
  • The Board may specify the manner of voting and the determining of the voting share in respect of financial debts
  • All decisions of the committee of creditors shall be taken by a vote of not less than fifty-one percent of voting share of the financiaf creditors
  • The committee of creditors shall have the right to require the resolution professional to furnish any financial information in relation to the corporate debtor at any time during the corporate insolvency resolution process.

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Insolvency resolution process costs

  • the fees payable to any person acting as a resolution professional
  • any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern
  • any costs incurred at the expense of the Government to facilitate the insolvency resolution process
  • any other costs as may be specified by the Board

Committee with only operational creditors

  • Where the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor, the committee shall be set up in accordance with this Regulation 16.
  • The committee formed under this Regulation shall consist of members as under:
    • eighteen largest operational creditors by value
    • one representative elected by all workmen
    • one representative elected by all employees
  • A member of the committee formed under this Regulation shall have voting rights in proportion of the debt due to such creditor or debt represented by such representative
  • A committee formed under this Regulation and its members shall have the same rights, powers, duties and obligations as a committee comprising financial creditors

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Meeting of Committee of Creditors
The members of the committee of creditors may meet in person or by such other electronic means

All meetings of the committee of creditors shall be conducted by the resolution professional

The resolution professional shall give notice of each meeting of the committee of creditors

The directors, partners and one representative of operational creditors, as referred to in sub-section (3), may attend the meetings of committee of creditors, but shall not have any right to vote in such meetings

Each creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such creditor.

Regulation 18 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that a resolution professional may convene a meeting of the committee as and when he considers necessary, and shall convene a meeting if a request to that effect is made by members of the committee representing thirty three per cent of the voting rights.

Rights and Duties of Authorised Representative of Financial Creditors

  • right to participate and vote in meetings of the committee of creditors on behalf of the financial creditor
  • to circulate the agenda and minutes of the meeting of the committee of creditors to the financial creditor he represents
  • The authorised representative shall not act against the interest of the financial creditor he represents
  • The authorised representative shall file with the committee of creditors any instructions received by way of physical or electronic means, from the financial creditor he represent

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

Approval of Committee of Creditors for Certain Actions
Section 28(1) provides that notwithstanding anything contained in any other law for the time being in force, the resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors:

(a) raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting;

(b) create any security interest over the assets of the corporate debtor;

(c) change the capital structure of the corporate debtor, including by way of issuance of additional securities, creating a new class of securities or buying back or redemption of issued securities in case the corporate debtor is a company;

(d) record any change in the ownership interest of the corporate debtor;

(e) give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the committee of creditors in their meeting;

(f) undertake any related party transaction;

(g) amend any constitutional documents of the corporate debtor;

(h) delegate its authority to any other person;

(i) dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties;

Convening and Conduct of Meetings of Committee of Creditors - CS Professional Study Material

(j) make any change in the management of the corporate debtor or its subsidiary;

(k) transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business;

(l) make changes in the appointment or terms of contract of such personnel as specified by the committee of creditors; or

(m) make changes in the appointment or terms of contract of statutory auditors or internal auditors of the corporate debtor.

Leave a Comment

Your email address will not be published. Required fields are marked *