Committee of Creditors for the Registered Company

The 1956 Act and SICA did not require holding of creditors meeting for determining the possibility of revival of the sick company. Therefore, there was no provision in the 1956 Act and SICA corresponding to section 257 of the 2013 Act. While 2013 Act empowers the secured creditors to initiate an action under section 253 and section 254 of the 2013 Act for determination of sickness and determination of measures, section 257 of the 2013 Act empowers the creditors to decide whether there are feasible means by which the sick company can be revived and rehabilitated. However, the creditors have to act collectively as a committee, as can be seen from the discussion hereafter. The interim administrator, as mentioned earlier, acts as a facilitator. The interim administrator decides on the matters relating to the meetings of the committee of creditors.

Committee of creditors

Determination of whether it is possible to revive and rehabilitate the sick company is to be taken by the creditors collectively, in the form of a committee. The committee is to be constituted by the interim administrator. The maximum strength of the committee is 7 members. As far as possible, the committee should have a representative each from every class of creditors.

Secured and unsecured creditors

The term creditors as used under clause (b) of section 256 (1) read with section 257 (1) of the 2013 Act imply both secured and unsecured creditor. It must be noted that the word creditor in section 257 of the 2013 Act has not been qualified with the word secured unlike section 253 and section 254 of the 2013 Act which clearly refer to secured creditors. This means that the creditors involved at this stage of decision making shall be both secured and unsecured creditors.

Class of creditors

While the 2013 Act stipulates that the corresponding that the committee should have at least one representative of every class of creditors, there are no guidelines for the segregation of creditors into defined and well-demarcated classes. Neither the Draft Rules provide for the manner of classification of creditors. Under the Draft Rules too, the interim administrator has to determine the particulars of the classes of creditors of the sick company. The classes may be identified on the basis of nature of security, section of lenders, etc. As such, the interim administrator has to arrive at a “reasonable classification”, keeping in view that maximum number of members of the committee can be seven. Further, the law imposes minimum limit on the number of representatives of each class of creditors to be one, there is no stipulation of maximum number of representatives that can represent a class, though the same is subject to the overall limit of 7 members in the committee.

Selection of representatives of classes or creditors

The committee of creditors should have a representative of every class of creditors. However, neither the 2013 Act nor the Draft Rules lay down the manner of selection of the representative. The question is whether the representative shall be selected by the class of creditors as identified by the interim administrator, or by the interim administrator himself. The language used by the section is “The interim administrator shall appoint a committee of creditors” which, as may be opined, implies that the representative shall be selected by the interim administrator.

Scope of Section 257 (2) of Companies Act, 2013

Procedure for meetings of committee of creditors

The procedure to be followed in the conduct of the meeting of the committee of creditors shall be decided by the interim administrator including the appointment of chairman of the meeting. The procedural aspects regarding the conduct of meeting of the committee of creditors has been left to the discretion of the interim administrator. However, most of those aspects have been covered under the Draft Rules as discussed below.

Time limits

The 2013 Act, under clause (b) of section 256(1), stipulates that a meeting of committee of creditors shall be held within 45 days of the receipt of the order of the Tribunal for the appointment of the interim administrator. This leads to the question whether it is possible to held more than one meeting of the committee of creditors. There is nothing in the 2013 Act restricting the number of meetings of the committee of creditors to one. There might be circumstances where the first meeting might get adjourned for want of quorum or for some unforeseen circumstances or in view of the prevailing circumstances, it may become necessary to call and convene another meeting of the committee of creditors as may be decided by the interim administrator. Further, use of the expression “any meeting of the committee of creditors” in section 257 (3) of the 2013 Act implies that there may be more than one meeting of the committee of creditors. At this point, it is also important to note that the 2013 Act grants a maximum time limit of 60 days, from the date of the order of appointment, to the interim administrator to submit his report to the Tribunal. As such, the committee shall reach a conclusion well before the time lapses. The view gets substantiated by the Draft Rules which state that the interim administrator shall hold such number of meetings of the committee at such intervals as he may deem fit so as to present a report to the Tribunal within 60 days from the date of the order of his appointment.

Notice of meetings of committee

The notice of the meeting shall be issued to all creditors, and there should be minimum gap of 21 clear days between the date of the issue of notice and the date of the meeting.

Quorum for meetings of committee

The quorum has been prescribed under the Draft Rules in terms of value and not in terms of creditors. According to the Draft Rules, the quorum shall be at least 51% of the value of debts owned by the sick company to the creditors (or such other percentage as may be ordered by the Tribunal). Presence in person or by proxy shall qualify for the purpose of quorum. Since the quorum does not depend on the number of creditors, even the presence of a single creditor may be sufficient to form a valid quorum as explicitly stated under the Draft Rules.

Chairman of meetings

Though the 2013 act stipulates that the procedure for appointment of the chairman of the meetings of the committee shall be decided by the interim administrator; the Draft Rules prescribe that the interim administrator shall chair the meetings of the creditors.

Decision in meetings

Value of debt owed by the sick company shall determine the number of votes of a particular creditor and decision of the interim administrator shall be final in this regard. Decision in the meeting shall be made by requisite majority of votes, as stated under the Draft Rules. The Draft Rules also provide that any accidental omission to consider, include or issue notice to one or more unsecured creditors shall not invalidate any action taken by the interim administrator or, as the case may be, by the creditors in good faith. That is, the omission to consider, include or send notice to unsecured creditors shall be accidental, and the action in respect of which such omission took place should have been taken by the creditors or the interim administrator in good faith (i.e., without any mala fides). The Draft rules do not make such provision in respect of omission in sending notice to one or more secured creditors. Therefore, in view of the specific provision of the Draft Rules for unsecured creditors and in view of the fact that the provisions Chapter 19 are basically secured creditor driven, it is opined that any bona fide action by the interim administrator shall lose its validity if the interim administrator omits to consider, include, or send notice to any secured creditor, even if such omission is accidental.

Scope of section 257 (3) of Companies Act, 2013

Any promoter, director or key managerial personnel of the sick company may be directed by the interim administrator to attend any meeting of the committee of creditors. Further, the interim administrator may direct those persons to furnish such information as he may consider necessary. As also reiterated under the Draft Rules, the promoter, director or key managerial personnel so directed by the interim administrator is under an obligation to attend the meeting and provide such information and explanation as may be required.