EMPLOYING AD HOC COMMITTEES IN IBC: AN EXPEDIENT MEANS TO AN ECONOMIC END

Creditors have a significant interest in the debtor’s business once insolvency proceedings are commenced. As the party with the primary economic stake in the outcome of the proceedings, creditors may lose confidence in proceedings where key decisions are made without consulting them ¹. Creditor participation is hence, increasingly regarded as an important element of insolvency law, especially as a counterbalance to the roles assigned to other participants under the law and as an important means of safeguarding creditor interests. Therefore, modern insolvency laws facilitate direct creditor involvement in the insolvency proceedings. Different insolvency laws may allow for different types of creditor participation in the insolvency process.

Almost all large debt restructurings involve a lender syndicate or creditor group made up of different organisations, potentially with conflicting motives. Creditors within a credit agreement or note indenture can be broad and diverse and include different parties with multiple views and priorities. For there to be successful restructuring of such debtors, cooperation between multiple creditors and creditor constituencies is crucial. The interests of relevant creditors are also best served by a co-coordinated response. Co-ordination is best facilitated by the selection of one or more representative committees which, in one way or the other, functions as the wheels and gears that make the collective action possible ². The committees also serve as the negotiators which harmonise the occasionally disjointed thinking of creditors, assembling what may be disparate individual points of view into a coherent expression of the business objectives and restructuring expectations of a representative body of creditors. They also serve as an important safeguard to the proper management of the business, by the debtor or the insolvency representative, as the case may be. Indeed, one of the principal statutory tasks of a creditors’ committee is to directly participate in crafting the debtor’s plan. It is, therefore, the creditors’ committees which form an essential part of the informal and formal restructuring process in any insolvency system ³.

Creditors’ Committees

There are varied mechanisms for achieving co-ordination in insolvency proceedings involving multiple creditors and stakeholders. Some insolvency laws provide for the formation of a committee on which creditors sometimes may share representation with equity holders and possibly other parties in interest. Other insolvency laws provide for full meetings of creditors to be convened at key points in the proceedings ⁴.

Where an insolvency law provides for the formation of a creditor committee, it generally also provides the types of creditors to be admitted to the committee. Some creditor committees represent only unsecured creditors, while other laws recognise separate committees of secured and unsecured creditors unsecured creditors on the rationale that the interests of the different types of creditors do not always converge. Other insolvency laws provide for both types of creditors to be represented on the same committee. A further approach may be for an insolvency law not to specify those creditors which can be represented in a given case, but to allow creditors to collectively choose their own representatives on the basis of willingness to serve and to provide for enlargement or reduction of the size of the committee as required ⁵.

The Insolvency and Bankruptcy Code, 2016 (“IBC”) provides for the appointment of Committee of Creditors comprising of all financial creditors ⁶ with the exception of related parties of the corporate debtor. The voting share is assigned to each member of the committee based on the amount of debt owed. An alternate provision provides that the committee is formed with operational creditors ⁷ when the corporate debtor has no financial debt or when all financial creditors are related parties. The committee of creditors formed under the IBC has a statutory role. Even though it is the resolution professional who is responsible for the management of the day-to-day affairs of the corporate debtor, the IBC envisages the committee as the supreme decision-making body during a corporate insolvency resolution process. Commercial decisions are left to the collective wisdom of the committee of creditor. It decides the fate of corporate debtor by approving a plan for resolution of insolvency or by opting for its liquidation. The IBC has vested the committee of creditors with the authority to pick the best feasible resolution plan for a company’s long-term survival. Distribution to be made to the creditors is decided by committee of creditors taking into consideration the relevant provisions of the IBC. The Supreme Court of India has repeatedly recognized the importance of the committee of creditors and supremacy of its commercial wisdom. This has been crucial in establishing the IBC as a credible resolution process ⁸.

Representation on Creditors’ Committees

An insolvency law may not provide every creditor or stakeholder a seat on the committee of creditors or uniform participation in the insolvency process. The choice between these different approaches may involve balancing factors such as time, cost, efficiency, transparency and democracy ⁹. The creditors’ inclusion in the committee and/or participation is determined by a consideration of the overall design of the insolvency law and the balance to be achieved between the roles of the court, the insolvency representative, the debtor and creditors, in particular in terms of oversight and supervision ¹⁰. In India, as per the IBC, the membership of the committee of creditors is confined to financial creditors. The composition of the committee in the IBC is based on the recommendations of the Bankruptcy Legislative Reforms Committee which was of the view that, “typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity.”  The Committee recommended that, “for the process to be rapid and efficient, the IBC will provide that the creditors committee should be restricted to only the financial creditors” ¹¹. There are other kinds of creditors who hold neither a financial nor an operational debt, and who also do not have a representation on the creditors’ committee irrespective of the size of their debt.  The members of suspended board of directors of the corporate debtor are entrusted by statute with the duty to participate in the meetings of committee. However, they do not have a right to vote.

In recent times, informal committees, commonly known as unofficial or ad hoc committees, have come to fill the gaps left by official committee of creditors and have been playing a critical role in advancing a restructuring. The restructuring of debtors with multiple creditor structures can involve multiple creditor groups with numerous holders and diverse interests. It is becoming common for groups of critical creditors to form an ad hoc creditors’ committee and confer with the debtor prior as part of out-of-court restructuring efforts and to continue to function as an ad hoc committee during the formal insolvency proceedings. They are rapidly becoming a norm in such cases to provide a mechanism for these creditor groups, particularly those with direct economic interests, to constructively take part in the restructuring process. These informal committees have been taking active part in restructuring proceedings outside, and sometimes within, the court-supervised process like administration proceedings in U.K. or a Chapter 11 proceeding in U.S.A. The Canadian courts have been willing to routinely recognize and accept ad hoc or informal creditors’ committees in Companies’ Creditors Arrangement Act cases. These types of ad hoc creditors’ committees have also received court-approved funding from the debtor for their professional advisors, as they can play a key role in the development of a plan of compromise or arrangement and the restructuring of the debtor ¹². Ad hoc creditors’ committees have demonstrated that they can play a key role in advancing a restructuring to maximize value for stakeholders. Ad hoc committees have become leading actors in global restructurings. These committees, often composed of aggressive and activist stakeholders, now populate and occasionally dominate restructuring negotiations. The business judgment, negotiating tactics and goals of their members, and the character and reputations of their chosen professional advisers are the engines that drive outcomes ¹³. Over a period of time, a basic legal framework governing unofficial committees has emerged.  James Peck insists that it would not be an overstatement to state that ad hoc committees now rule the restructuring world ¹⁴.

What are ad hoc committees?

Ad hoc committees are an informal self-formed group of stakeholders of the same or similar economic interests who identify themselves, either through bilateral contacts between institutions or through the outreach of financial or legal advisers, to collaborate with the debtor prior to and during formal insolvency proceedings. In other words, ad hoc committees are a “loose affiliation” of similarly situated stakeholders that jointly retain counsel to take collective action. These creditors can include groups of bondholders or noteholders, trade creditors, secured loan syndicates, holders of tort claims, landlords and other groups of investors or financial institutions, trust certificates, or even litigation claims ¹⁵. In such cases, for debtor, a proactive ad hoc committee is usually the only available representative of the broader bondholder community with whom the parameters of a restructuring can be negotiated before being more widely disseminated to the market. A related party of corporate debtor with conflict of interest may be excluded from the committee.

Motivation to form Ad hoc Committees

 The desire to profit from special situations is a strong motivation. Like-minded stakeholders who join an ad hoc committee desire to function as coherent counterparties to the debtor and other stakeholders and believe they would be far more formidable together than they would be if acting on their own. Therefore, safe to say, one of the main driving factors behind formation of ad hoc committee by stakeholders with individually minority positions, is to join forces and act as a large block ¹⁶. Multiple creditors singing together in chorus is better than a cacophony of individual creditors each singing its own tune ¹⁷. Ad hoc committees purport to speak for a group and “implicitly ask the court and other parties to give their positions a degree of credibility appropriate to a unified committee with large holdings” ¹⁸. The members also share costs as working through an ad hoc committee typically lowers each member’s individual legal and other professional expenses. Usually, members agree to share professional fees pro rata based on the interests they hold. For the debtor it may lead to more efficient negotiations and quick facilitation of settlement, in particular in out of court restructurings. Broader motivations may include increasing the overall efficiencies of the restructuring process; protecting and advancing creditor interests; and structuring and implementing a restructuring plan with the debtor.

How are Ad hoc Committees formed?

Ad hoc committees are highly variable in character, and they defy easy classification.  Given the relatively informal nature of ad hoc committees, the selection and formation process of the ad hoc committees is often similarly informal and varies with the particular situation, although there are recurring themes and general principles. In a way, they are examples of freedom of assembly. No one is compelled to join an ad hoc committee. Parties join or exit at will, working with shared professionals, often with access to confidential information. Like the institutions that are members or the professionals that are engaged to represent them, each committee has a distinctive personality ranging from combative to reasonably compliant. Ad hoc committees are created through unofficial channels, i.e., the voluntary collaboration of like-minded stakeholders. The formation of an ad hoc committee is sometimes actively encouraged by the debtor, especially in connection with out of court restructurings. The initial impetus for creditors to coalesce into a committee may be driven by a request from the debtor (whether formal or informal) or by proactive initiation by one or more creditors monitoring the situation (or a combination of the two). More frequently, however, ad hoc committees are formed by the independent, collective action of stakeholders, with or without the support of the debtor, who come together for the purpose of better pursuing their particular interests ¹⁹.

There is no uniform formation process of formation. Ad hoc creditors’ committees can be formed through the collaboration of similar creditors or through the actions and encouragement of the debtor, who is usually interested in trying to reach an agreement with a critical mass of creditors and/or solicit the support of critical creditors to their restructuring plan. In Canada, it is common for groups of critical creditors to form an ad hoc creditors’ committee and confer with the debtor prior to a CCAA filing as part of out-of-court restructuring efforts and to continue to function as an ad hoc committee during the CCAA proceedings. Moreover, if a CCAA case is particularly complex and involves multiple classes of debt with different priorities and creditor structures, a number of different ad hoc creditors’ committees may be formed to advance the common goals of such creditors²⁰. Most often, the engagement letter with counsel will confirm the existence of the committee and its initial members will confirm the joint retention and will reflect an agreement to share fees. Such engagement letters usually provide a mechanism to subsequently add more committee members, or conversely, for members to leave the committee, usually based on trading activity. Committees, however, can agree to formalize their relationship through by-laws which may provide, for instance, that decision-making is made by majority vote—either by head count, or in accordance with each member’s holdings—or perhaps that select group members forming a steering group are vested with the power to bind all members. By-laws also often provide an ability for a majority of members (or perhaps counsel) to force a member to resign in the event it becomes known that its economic interest is no longer aligned with the others (e.g., an outsized short position) ²¹. Ad hoc committees may also put in place by-laws or other corporate governance tools.
Membership in an ad hoc committee is typically at will, and, as such, the committee usually cannot bind members absent their consent. Thus, without an arrangement to the contrary, unanimous approval would be required on all decisions ²².

Legal or financial advisers, or both, may be part of the formation process or may be appointed following the coalescing of one or more creditors. Once legal and financial advisers have been selected, the ad hoc committee will typically approach the debtor or shareholder, or both, as applicable.

 IBC and Ad hoc Committees

There is a definite merit to consider formation of ad hoc committees during the out-of-court, pre-pack insolvency proceedings and insolvency resolution process under the IBC, in particular in cases where corporate insolvency resolution process is particularly complex and involves multiple classes of debt with different priorities and creditor structures, to advance the common goals of such creditors. In fact, they would be of significant benefit in the proposed creditor-led resolution process ²³.

The ad hoc committees will not be novel to the IBC as the concept of informal committees and representation of class of creditors by nominees or authorised representatives is recognised in the legal framework of the IBC ²⁴ or sanctified by the Indian courts. This happened very early in the life of the IBC. Section 21 of the IBC (in its original formal) provided that the creditors in respect of certain debts, like those extended as syndicate facilities, consortium arrangements, and issued as securities, may choose to be present in the meetings of creditors themselves or appoint a single trustee, agent, or insolvency professional to act and vote on their behalf. The number of such creditors was enormous in large companies and Section 21 did not allow all creditors who are beyond a certain number, as a class, to jointly appoint a representative to act and vote on their behalf. It often did not solve the problem of managing a large number of creditors in the committee of creditors.

A peculiar problem occurred in the insolvency of Jaypee Infratech Limited, one of the largest cases of insolvency commenced under the IBC in its early days.  The interim resolution professional of Jaypee found that there were 7465 financial creditors of the corporate debtor, out of which 7451 were fixed deposit holders who comprised 99.8% of the committee of creditors in number, but less than 2% in value of debts. That apart there were many fixed deposit holders whose claims were less than amount of Rs. 25,000/- ²⁵. Inviting them to the meeting of committee of creditors was not plausible in the practical sense since they were located all over the country, many in remote places. Inviting them through audio or video conferencing was also challenging, a huge cost on CIRP, and an immense burden on the administration of meeting in view of disproportionate percentage of debt held by them. There were other procedural difficulties as the regulations ²⁶ provide that, if all the members of the committee are not present at the meeting, a vote shall not be taken by electronic means. In absence of the e-mail addresses of depositors even taking an e-vote was an obstacle.

The interim resolution professional approached the Adjudicating Authority under the IBC to dispense with the presence of fixed deposit holders and appoint a nominee to represent them in the meetings. He sought dispensation of attendance of each fixed deposit holder and appointment of an insolvency professional to represent them in the meeting. The Adjudicating Authority permitted conduct of first statutory meeting of creditors without requirement of fixed deposit holders (less than 2% of the total debts) being present in person and directed the, “Insolvency & Bankruptcy Board of India to nominate its officer or an insolvency professional as the case may be, to attend such meeting and to take care of the adequate interest of the depositors holders in the meeting of the committee of creditors who will submit independent report/observation” to the court ²⁷.

Recognising that seeking the vote or mandate of the class of creditors pose several challenges, and it was inefficient, unmanageable and expensive to hold meetings of the committee with large creditors, the Insolvency Law Committee ²⁸in its report of March 2018 recommended that “a mechanism requires to be provided in the IBC to mandate representation in meetings of security holders and deposit holders and all classes of financial creditors which exceed a certain number, through an authorised representative, this can be done by adding a new provision to Section 21 of the IBC. Additionally, the representative shall act and attend the meetings on behalf of the respective class of financial creditors and shall vote on behalf of each of the financial creditor to the extent of voting share of each such creditor, and as per their instructions.” The Insolvency Law Committee Report submitted in February 2020, para 10.8 suggested, “that in order to maintain the efficiency of the CoC, they should be represented by an authorised representative in the same manner as provided under section 21(6A) for security holders, deposit holders and other classes of creditors”.

The Insolvency and Bankruptcy Code (Amendment Ordinance) Act, 2018 (2018 Amendment) effective from 6^th June, 2018 introduced sub-section (6A) in Section 21 Clause (b) of sub-section (6A) providing that where a financial debt is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under clause (a) or sub-section (6), the interim resolution professional shall make an application to the Adjudicating Authority along with the list of all financial creditors, containing the name of an insolvency professional, other than the interim resolution professional, to act as their authorised representative who shall be appointed by the Adjudicating Authority prior to the first meeting of the committee of creditors. The “class of creditors” was defined to mean, “a class of creditors with at least ten financial creditors under clause (b) of sub-section 6(A) of Section 21 and the expression, creditors in a class shall be construed accordingly”.  The 2018 Amendment also introduced Section 25A in the IBC and amended Section 24 to provide for appointment of authorised representative of class of creditors, voting by members of class of creditors, and the rights and duties of authorised representative.

One of the collateral outcomes of the 2018 Amendment was the introduction of informal committees of financial creditors forming class of creditors for the limited purpose of discussing the resolutions proposed by the committee of creditors and voting on such resolutions. The informal committee appoints its authorised representative who represents the class in the committee of creditors and relay the vote of class on the resolutions to the committee of creditors. The authorised representative is tasked with the responsibility of sharing the agenda notes and other material with the members of the class and take their views and vote. For example, the real estate allottees, if more than 10 in number, form a ‘class of creditors’ and the voting share of the class would be in terms of the financial debt owed to that class as a whole, and while divergence of views may exist within the class of these allottees, when it comes to the vote in the committee of creditors, their vote would be that of a class. Section 25A of the IBC provides that minorities within the ‘class’ are bound by the decisions of the majority. Creditors in the class who do not agree with the majority vote are stopped from putting up any challenge to the decision including resolution plan contrary to the decision of the requisite majority of their class ²⁹.

Other forms of ad hoc committees have also received legitimacy through courts. The Indian Supreme Court has held that sub-committees can be appointed under the IBC for the purpose of negotiating with resolution applicants, or for the purpose of performing other ministerial or administrative acts, provided such acts are in the ultimate analysis approved and ratified by the Committee of Creditors ³⁰. Besides, it is common practice to hold townhall meetings with stakeholders (where number is large) by resolution professionals or prospective resolution applicants.

The concept of ad hoc committees can be expanded by the insolvency industry in cases involving debtor with multi-layered capital structure, in insolvency cases involving business-to-consumer cases and in cases where valuation assumptions determine the key fulcrum creditors or where there is economic convergence or divergence between different creditor groups or where the proposed treatment of the different creditor group as part of any restructuring or the relative strength of the negotiating position of the various stakeholders, including the debtor, shareholders and other classes of creditors, so demands. Such ad hoc committees may last for the duration of the case, or may persist only temporarily, disbanding upon achieving its limited purpose such as settlement or supporting the plan.

Advantages

Ad hoc committees provide several strategic benefits which merit consideration by the stakeholders under the IBC.

(i) Forming a group provides a powerful voice for the particular stakeholders. Although the influence of any ad hoc committee depends upon the voting power of the committee members and their relative importance to the reorganization effort, organizing a committee to represent and advocate for a specific stakeholder interest can maximize the influence of that interest.

(ii) Reducing cost by sharing is another significant benefit. A single coordinated committee can assist in reducing fees of advisors and process. They create a public voice for the creditors.

(iii) They can significantly increase the efficiency of the insolvency process in a number of ways. Such committees can add value to the restructuring process by exchange of ideas and by developing restructuring alternatives and solutions.

(iv) They can curtail duplicative filings with Adjudicating Authority. The U.S. and Canadian courts permit co-ordinate motions and court attendances on a streamlined basis.

(v) Such committees are free from many of the constraints governing official committees. As a result, an ad hoc committee is able to organize itself in almost any way it sees fit and may be as fluid or as organized as their members and interests require.

(vi) They create a framework for the creditors to obtain information from the debtor.

(vii) They can act as an informal sounding board for the resolution applicant to discuss potential restructuring options.

(viii) In pre-pack and out of court restructurings, informal restructuring can provide substantial comfort to the debtor that a critical mass of creditors is willing to support a proposed restructuring solution before commencing the formal plan approval process.

(ix) Ad hoc committees, free of some of the fiduciary shackles binding official committees, may zealously and aggressively advocate on behalf of their members despite potential conflicts with the interests of unsecured creditors as a whole.

Limitations

There are challenges and limitations of such committees.

(i) While ad hoc committees have more freedom to maneuver than official committees, they also have less power as they do not have any specific statutory rights and powers.

(ii) The resolution professional will not be legally obliged to disclose information or to work with such committees in trying to develop a restructuring plan. Accordingly, in some cases, ad hoc creditors’ committees may find their access to information limited and may find it difficult to compel an uninterested resolution applicant or insolvency professional to constructively work with them in advancing restructuring efforts
³¹.

(iii) Ad hoc committees may suffer the instability that comes with frequent membership changes and differing levels of commitment (and possible conflicts) among committee members. Changes in membership can impact the functioning of an ad hoc creditors’ committee both internally, by changing the dynamic between members, and externally, if new members push the committee’s goals in different directions, which could also run the risk of compromising the committee’s credibility in the restructuring process
³².

(iv) Ad ho committee members do not possess fiduciary obligations. An ad hoc committee acts for itself and has no obligation to protect non-committee members. Rather, ad hoc committee members are generally free to aggressively advocate for their own interests, whether or not they conflict with those of other similarly situated creditors ³³.  However, it is expected that ad hoc committees must promote the interests of their stakeholder class as a whole, instead of exclusively privileging the interests of the members of the committee. Members of a class of creditors may owe fiduciary duties to other members of the class. Collective action by creditors in a class implies some obligation to other members of that class ³⁴.

(v) Ad hoc committee members will not have disclosure requirement. In Chapter 11 proceedings in the United States, they have significant disclosure obligations ³⁵.

(vi) It may be a challenge to bind the members of ad hoc committee to confidentiality.

(vii) The governance and management of ad hoc creditors’ committees is ad hoc or informal and may cause certain practical challenges. While some ad hoc creditors’ committees may establish formal by-laws or other processes to govern decision-making, voting, privilege and confidentiality matters, most ad hoc creditors’ committees generally conduct business on an informal basis and make collective decisions through inter-committee discussions and then direct their counsel to take the specified action.

(viii) Decision making within ad hoc creditors’ committees can also be influenced by vocal members and/or those members with the largest claims. Moreover, since membership in ad hoc creditors’ committees is generally at will, the roster of members may change over the course of a proceeding.

Conclusion

An essential part of any insolvency process is constructive dialogue and negotiation among all stakeholders involved, with a view towards building a consensus on the terms of a confirmable plan. Unofficial, or ad hoc, committees have become leading actors in global restructurings to achieve this objective. These committees, often composed of aggressive and activist stakeholders, now populate and occasionally dominate the restructuring negotiations. The business judgment, negotiating tactics and goals of their members, and the character and reputations of their chosen professional advisers are the engines that drive outcomes. As the Indian insolvency industry matures, there is need to explore this area. This paper seeks to commence a debate on the potential need and use of ad hoc committees in insolvency resolution process and an understanding of the organising principles of ad hoc committees and their role in the effective management of corporate distress. There is no bar against the use ad hoc committees in processes under the IBC. They are likely to bring more order than disruption. The flexibility of ad hoc committee, in terms of both their formation and their role, can facilitate participation of stakeholders and dealing with the range of creditor interests prevalent in multi-creditor distressed situations, strengthening the insolvency system and make the insolvency outcome more sustainable.