THE ROLE OF COMMITTEE OF CREDITORS (COC) IN (CIRP) CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

THE ROLE OF COMMITTEE OF CREDITORS (COC) IN (CIRP) CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

COMMITTEE OF CREDITORS (COC)

The Insolvency and Bankruptcy Code, 2016 (Code), however, envisages that if they fail to service the debt, the corporate in default undergoes corporate insolvency resolution process (CIRP). An Insolvency Professional (IP) carries on the business operations of the corporate as a going concern until the Committee of Creditors (CoC) draws up a resolution plan that would keep the business of the corporate going on for ever.

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

The Code, as stated in the long title, requires a CIRP to (a) maximise value of assets of the corporate, and (b) while doing so, balance the interests of all the stakeholders, and assigns this responsibility primarily to the IP, and the CoC comprising non-related financial creditors. The Code maximizes the value by striking a balance between resolution and liquidation. It encourages and facilitates resolution in most cases where creditors would receive at least as much as they would in liquidation. This would happen where enterprise value is ‘sufficiently’ higher than the liquidation value. In such cases, resolution preserves and maximizes the enterprise value as a going concern. In the remaining cases, the Code facilitates liquidation as that maximizes the value for stakeholders.

RESOLUTION VS LIQUIDATION

The Code enables initiation of CIRP at the earliest, even at the very first default, when enterprise value is usually higher than the liquidation value and hence the CoC has the motivation to resolve insolvency of the corporate rather than liquidate it. It mandates resolution in a time bound manner to prevent decline in enterprise value with time, reducing motivation of the CoC to opt for liquidation. It facilitates resolution; makes a cadre of professionals available to run the corporate as a going concern; prohibits suspension or termination of supply of essential services; enables raising interim finances required for running the corporate; etc.

In contrast, the Code prohibits any action to foreclose, recover or enforce any security interest during CIRP and thereby prevents a creditor(s) from maximising his interests. It expects the creditors to recover their default amounts collectively from future earnings of the corporate rather than from sale of its assets.

PROWESS INTERNATIONAL PVT. LTD. VS. PARKER HANNIFIN INDIA PVT. LTD

In the matter of Prowess International Pvt. Ltd. Vs. Parker Hannifin India Pvt. Ltd., the NCLAT reiterated: “It is made clear that Insolvency Resolution Process is not a recovery proceeding to recover the dues of the creditors.” Further, the Code enables a financial creditor to trigger CIRP even when the corporate has defaulted to another creditor and thereby prevents any preferential treatment to a creditor over others.

PARKER HANNIFIN INDIA PVT. LTD. VS. PROWESS INTERNATIONAL PVT. LTD

In the matter of Parker Hannifin India Pvt. Ltd. Vs. Prowess International Pvt. Ltd., the NCLT observed: “The nature of insolvency petition changes to representative suit and the list does not remain only between a creditor and the corporate debtor.” Resolution maximizes the value of assets of the corporate and enables every stakeholder to continue with the corporate to share its fate. All of them stand to gain or lose from resolution, while stakeholders in a category receive similar treatment. In contrast, liquidation allows satisfaction of their claims one after another. If there is any surplus after satisfying the claims of one set of stakeholders fully, the claim of the next set of stakeholders is considered.

THE ROLE OF CIRP

On both counts, maximization of value of assets and balancing the interests, resolution triumphs over recovery as well as liquidation in most cases. Balancing interests under CIRP assumes significance as every corporate may not have enough resources at the commencement of CIRP to satisfy the claims of all stakeholders fully, while resolution provides an opportunity to the CoC to consider and balance their interests. In fact, the Code prescribes several balances in resolution process: repayment of at least liquidation value to operational creditors; repayment of interim finance in priority; approval of resolution plan by 75% voting power; etc.

The CIRP regulations also provide for several balances. They allow a dissenting financial creditor to exit at the liquidation value and thereby protect its interests. Many creditors, however, may not like to exit at the liquidation value. And those who exit, leave the enterprise value behind. This balances the interests of financial creditors’ inter-se while tilting the balance in favour of resolution.

A STATEMENT TO TAKE CARE OF THE INTERESTS OF ALL STAKEHOLDERS

The regulations also require a resolution plan to include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor. The judicial pronouncements require consideration of the interests of all stakeholders in a resolution.

PROWESS INTERNATIONAL PVT. LTD. VS. PARKER HANNIFIN INDIA PVT. LTD.,

In the matter of Prowess International Pvt. Ltd. vs. Parker Hannifin India Pvt. Ltd., the NCLAT held: “In the circumstances, instead of interfering with the impugned order, we remit the case to the Adjudicating Authority for its satisfaction whether the interest of all stakeholders have been satisfied ...”

PRABODH KUMAR GUPTA VS. JAYPEE INFRATECH LIMITED AND OTHERS

In the matter of Prabodh Kumar Gupta vs. Jaypee Infratech Limited and others, the NCLT observed: “..the position of present petitioner is undisputedly of stakeholders. Therefore, the IRP appointed by this Court in respect of the corporate debtor company is equally expected to consider and take care of the interests of the petitioner….”

Courtesy : IBBI Upadates July-September 2017