The Evolution Of The Committee Of Creditors Power Without Accountability

Introduction:

The Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced as a path-breaking legislation to provide a time-bound and creditor-driven process for the resolution of corporate insolvency in India. Central to this framework is the Committee of Creditors (“CoC”), a body comprising financial creditors that decides the fate of the corporate debtor. The CoC is empowered to evaluate resolution plans, approve restructuring, or even opt for liquidation. The design of the IBC deliberately placed financial creditors at the center of insolvency resolution, in contrast to earlier debtor-driven regimes that had proved ineffective.

Over the years, the powers of the CoC have been consistently reinforced by judicial interpretation. However, with supremacy has come criticism. The exclusion of operational creditors, the opacity of decision-making, and the lack of accountability mechanisms have led to the perception that the CoC exercises “power without accountability.” This article traces the evolution of the CoC, the jurisprudence that shaped its authority, and the emerging need for reforms.

Legal Framework of the CoC under the IBC:

The IBC provides a clear statutory foundation for the CoC’s powers. Under Section 21, the CoC is constituted exclusively of financial creditors. Operational creditors, such as suppliers, employees, and government authorities, do not form part of the CoC, except in limited circumstances. The CoC’s powers extend across crucial stages of the Corporate Insolvency Resolution Process (“CIRP”). For instance, Section 28 requires the Resolution Professional (“RP”) to obtain CoC’s prior approval for significant corporate actions such as raising interim finance or creating security interests. Most importantly, Section 30(4) empowers the CoC to approve a resolution plan by a vote of not less than 66% of its voting share. Once approved, Section 31 makes such a resolution plan binding on all stakeholders, including operational creditors and government authorities. This statutory design reflects the philosophy that financial creditors, being more sophisticated and better equipped to assess risks, should drive the insolvency process. Therefore, the RP is merely a facilitator, while the Adjudicating Authority has limited scope of review.

Judicial Endorsement of CoC Supremacy:

The judiciary has played a decisive role in elevating the CoC’s primacy. In K. Sashidhar v. Indian Overseas Bank (2019) 12 SCC 150, the Supreme Court held that the CoC’s decision to approve or reject a resolution plan falls squarely within the realm of commercial wisdom, which is not subject to judicial interference, except for ensuring compliance with Section 30(2) of the IBC. This judgment set the tone by clarifying that the CoC enjoys finality in matters of viability and feasibility.

The position was further crystallized in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2020) 8 SCC 531. In this landmark judgment, the Apex Court reiterated that the CoC, consisting of financial creditors, is best placed to assess restructuring strategies, and courts cannot substitute their views for that of the CoC. The Court observed that the jurisdiction of NCLT and NCLAT is confined to reviewing whether the plan meets the requirements of the Code, not questioning the merits of the decision.

Similarly, in Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17, the Court upheld the legislative decision to differentiate between financial and operational creditors, holding that financial creditors have better expertise to evaluate revival strategies. Together, these judgments established the “commercial wisdom doctrine,” under which CoC decisions became largely insulated from judicial review.

The Problem of Power Without Accountability:

While judicial recognition of CoC supremacy was meant to ensure efficiency, it has also led to several concerns. One major issue is the exclusion of operational creditors. These stakeholders, though vital to the functioning of a company, often receive negligible recoveries under resolution plans. For instance, in several high-profile insolvency cases, operational creditors received close to zero payouts, despite their critical role in sustaining the debtor.

Another concern is the opaque nature of CoC decision-making. Creditors are not obliged to disclose detailed reasons for approving one plan over another or for opting for liquidation. This lack of transparency fuels mistrust among other stakeholders. Furthermore, the CoC often decides on massive haircuts. While such decisions may be commercially justified, the absence of clear reasoning raises questions of fairness.

The possibility of conflict of interest is another problem. Large financial creditors dominate voting power and may prioritize their individual recoveries over the long-term revival of the company or the interests of smaller creditors. This has given rise to the criticism that the CoC enjoys unfettered power without corresponding accountability.

Attempts at Judicial Balancing:

Recognizing these concerns, courts have in recent years attempted to introduce some accountability checks, albeit without diluting the commercial wisdom doctrine. In Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd. (2022) 1 SCC 401, the Supreme Court highlighted that while the CoC’s decisions are based on commercial wisdom, it must also consider the interests of all stakeholders, including homebuyers. Similarly, in Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh (2020) 11 SCC 467, the Court clarified that while the CoC has primacy, the resolution plan must still meet the twin tests of feasibility and viability, which the NCLT is competent to examine.

The Way Forward: Towards Accountability:

To address these challenges, reforms are necessary to ensure that the CoC’s primacy does not translate into unchecked power. First, there should be greater transparency in decision-making. Mandating disclosure of reasons for accepting or rejecting a resolution plan would foster confidence among stakeholders. Second, operational creditors and other vulnerable stakeholders should be given limited voting rights, ensuring their voices are not entirely excluded. Third, while judicial review must remain limited, there is scope for meaningful oversight to prevent arbitrary or discriminatory decisions.

Additionally, introducing a Code of Conduct for CoC members, as suggested by some commentators, could help establish ethical standards and prevent conflicts of interest. Lastly, the insolvency regime must balance value maximization with equity, ensuring that the pursuit of financial recovery does not come at the cost of fairness and inclusiveness.

Conclusion:

The Committee of Creditors lies at the heart of the IBC framework, and its powers have been repeatedly upheld by the Supreme Court. The doctrine of commercial wisdom, as crystallized in K. Sashidhar, Essar Steel, and Swiss Ribbons, has made CoC decisions largely immune from judicial scrutiny. However, this framework has also raised serious questions about accountability, fairness, and inclusivity.

As India’s insolvency regime matures, there is a pressing need to recalibrate the balance between creditor primacy and accountability. Introducing greater transparency, stakeholder participation, and ethical safeguards will strengthen the system and ensure that insolvency resolution serves not only creditors but the broader economy. Ultimately, the legitimacy of the IBC will rest not just on speedy resolutions but on fair and balanced outcomes for all stakeholders.

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