Non-Compliance with Section 24(3)(c): Procedural Lapse or a Fatal Flaw?

The CoC plays a crucial role in managing the CIRP and the concept of “commercial wisdom” commands that the decision-making authority of the CoC cannot be questioned unless it goes against the framework of the Code.

Introduction

The conduct of Committee of Creditors (CoC) meetings lies at the heart of the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (Code). A bare reading of Section 21(2) of the Code illustrates the fact that the Code follows the “creditor in control” policy for the resolution of debts wherein the CoC shall comprise of financial creditors of the corporate debtor. In contrast, operational creditors have limited participation rights and no voting power, except in exceptional circumstances.

Against this backdrop, Section 24(3)(c) of the Code seeks to balance this structural asymmetry by demanding that notice of every CoC meeting be issued to operational creditors or their representatives if their aggregate dues are not less than 10 per cent of the total debt. The CoC plays a crucial role in managing the CIRP and the concept of “commercial wisdom” commands that the decision-making authority of the CoC cannot be questioned unless it goes against the framework of the Code or its objectives, therefore, it is natural for operational creditors to be wanting to be a part of the CoC meetings wherein important decisions like approval of resolution plan is deliberated upon.

However, the practical implementation of this provision has raised an important legal question: Is it mandatory or a mere formality for the resolution professional (RP) to issue notice of CoC meetings to all operational creditors whose aggregate dues crosses the statutory benchmark? The non-issuance of notice can directly impact an operational creditor’s right to participate, observe and raise concerns regarding the resolution process. The said participation is often considered to be of great importance for the holistic process as the operational creditors are the ones who are directly involved in keeping the company as going concern. The courts and tribunals have dealt with conflicting arguments, some emphasising strict compliance with procedural requirements, while others adopting a purposive interpretation to avoid derailing the CIRP due to technical lapses. The question has assumed greater relevance, particularly when the resolution plans have been challenged on the ground of violation of Section 24(3)(c). This article examines whether the issuance of notice to operational creditors is a mandatory obligation of the RP under Section 24(3)(c) and whether non-compliance affects the validity of the resolution plan approved by the CoC.

CoC meeting notices to operational creditors: Mandatory compliance or directory provision

The structure of the Code is as such that the operational creditors are often placed at an unequal footing compared to financial creditors. For instance, according to Section 21(2), the CoC shall comprise of all financial creditors of the corporate debtor, and the operational creditors are included only when the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor. It is pertinent to note that the operational creditors are usually not permitted in the CoC meeting unless their aggregate debt is more than 10 per cent of the total debt and even if they are a part of the CoC, they do not have the power to vote. According to the Joint Committee on the Insolvency and Bankruptcy Code, 2015, the rationale for constituting the CoC exclusively with financial creditors is that they possess the expertise to evaluate the commercial viability of the corporate debtor and have a vested interest in its resolution. In contrast, operational creditors typically lack the capability to assess commercial viability and are generally unwilling to undertake risks involved in restructuring their debts to help restore the corporate debtor as a going concern.¹

At this juncture, it is relevant to mention that though the operational creditors are not part of the CoC, they are still given the authority to attend the CoC meetings upon the notice issued by the RP. Section 24(3)(c) of the Code stipulates that:

24. Meeting of Committee of Creditors.— (3) The resolution professional shall give notice of each meeting of the Committee of Creditors to—

(c) operational creditors or their representatives if the amount of their aggregate dues is not less than 10 per cent of the debt.

It is important to note that although Section 24(4) of the Code provides that operational creditors or their representatives do not have voting rights in the CoC meetings they attend, they are nevertheless entitled to present their views before the CoC. In Rajputana Properties (P) Ltd. v. Ultra Tech Cement Ltd.², the National Company Law Appellate Tribunal (NCLAT), New Delhi, Principal Bench, noted that operational creditors are entitled to express their views and concerns on significant matters discussed during CoC meetings, ensuring that their inputs are duly considered by the CoC when finalising the resolution plan. The extract of the relevant para is mentioned herein below:

15. From the aforesaid provisions the intention of the legislature is clear that the Committee of Creditors while approving or rejecting one or other resolution plan should follow such procedure which is transparent. Those who will watching the proceeding such as (suspended) Board of Directors or its partners; operational creditors or its representatives and resolution applicant(s) are not mere spectator but may express their views to the Committee of Creditors for coming to conclusion in one or other way.

The NCLAT, New Delhi, Principal Bench, in ANG Industries Ltd. v. Shah Brothers Ispat (P) Ltd.³, relying on the decision in Rajputana Properties case, reaffirmed that in addition to the CoC members, the RP must issue notice of CoC meetings to the members of the suspended Board of Directors or partners of the corporate person, as well as to operational creditors or their representatives. The Tribunal also emphasised that any significant issues and the views or concerns expressed by those attending the meeting must be duly considered by the CoC while finalising the resolution plan.

Likewise, in Bhushan Shringarpure v. B.K. Mishra⁴, the NCLAT, New Delhi, Principal Bench, held that Section 24(3)(c) is mandatory in nature. It obligates the RP to serve notice of every CoC meeting to all the operational creditors or their representatives if the amount of their aggregate dues is not less than 10 per cent of the debt.

Accordingly, based on the aforementioned judgments, it is clear that Section 24(3)(c) of the Code obligates the RP to issue notice of every CoC meeting to all operational creditors or their representatives if the amount of their aggregate dues is not less than 10 per cent of the debt.

Impact of non-compliance of Section 24(3)(c) on the validity of CoC approved resolution plan

Now, the relevant question that arises is, whether non-compliance of mandatory provision, Section 24(3)(c) affects the validity of the resolution plan approved by the members of CoC in the meeting? There are certain matters wherein the RP has contended that non-compliance with Section 24(3)(c) may not be treated as material irregularity, as Section 24(4) of the Code expressly denies operational creditor the right to vote in the CoC meetings, and therefore no prejudice would be caused by not issuing the notice to them. The NCLAT, New Delhi, Principal Bench in Rahul Khilnani v. Atul Kumar Jain⁵, while affirming the order passed by National Company Law Tribunal (NCLT), New Delhi in Imperial Fastners (P) Ltd. v. Solven Power Systems (P) Ltd.⁶, observed that Section 24(3)(c) requires that operational creditors, or their representatives whose aggregate dues are at least 10 per cent of the total dues, must be given notice of every CoC meeting. It further observed that although Section 24(4) of the Code allows such representatives to attend CoC meetings, the use of the word “shall” in that provision makes it explicit that operational creditors or their representatives do not possess any voting rights, even when they are present at the meeting. Therefore, the non-issuance of such notice would not cause prejudice to the operational creditor. The appellate authority further held that there is no material irregularity in approving the resolution plan because the resolution plan was approved by 100 per cent voting right and commercial wisdom of the CoC is non-justiciable.

Similarly, the NCLAT, New Delhi, Principal Bench in Bhushan Shringarpure case⁷, had observed that though it is mandatory to issue notice to the operational creditor in terms of Section 24(3)(c) of the Code, the non-issuance of such notice will not automatically result in rejection of the resolution plan. The Tribunal further held that non-issuance of notice to the operational creditor under Section 24(3)(c) is a dereliction of duty on the part of RP and he should be burdened with costs. The extract of the relevant paras is mentioned hereinbelow:

17. Insofar as, the impugned order is concerned, we have categorically asked counsel for the appellants that in case they had the notice and were present in the meeting in which they could have advised the CoC by expressing their views then how much they would have been given. It is submitted that they would have been benefited by another 1 or 2 per cent of the amount over and above the amount which has been allocated to them in the plan.

18. Thus, looking at the fact that amount involved is too meagre to set aside the resolution plan which has been approved by the CoC by not less than 96.38 per cent voting share, we do not find it to be a fit case for setting aside the resolution plan much less the order dated 19 September 2022. The appeal is thus disposed of in the terms mentioned hereinabove.

However, there are certain matters wherein the tribunals and courts have opined that the adjudicating authority may refuse a resolution plan as approved by the CoC if it exhibits a lack of due diligence on the part of the RP, and a lack of transparency in the information to the operational creditors.

Notably, the Supreme Court in Greater Noida v. Prabhjit Singh Soni⁸, held that the resolution plan will stand vitiated if the operational creditor is not served with notice of meeting of the CoC in compliance with Section 24(3)(c).

It is evident that the courts and tribunals have expressed conflicting views upon the question, i.e., whether non-compliance of the said provision affects the validity of the resolution plan approved by the CoC. Nevertheless, it is noteworthy to highlight that the tribunals have uniformly agreed to the fact that non-adherence with the statutory mandate of Section 24(3)(c) is dereliction of duty on the part of RP.

Further, in view of the settled law, the Insolvency and Bankruptcy Board of India, through its Disciplinary Committee, in the matter of Sanjeev Ahuja⁹, insolvency professional, under Section 220 of the Code read with Regulation 13, Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017, observed that a plain reading of Section 24(3)(c) of the Code clarifies that it is mandatory to issue notice of meetings of the CoC to operational creditors or their authorised representatives where the aggregate dues of all operational creditors exceed 10 per cent of the debt. Upon observing that the RP had contravened Section 24(3)(c) of the Code by failing to issue the requisite notice, the Disciplinary Committee imposed a penalty on the RP concerned and cautioned him to strictly adhere to the provisions of the Code and the Regulations framed thereunder while discharging his duties.

Conclusion

In the light of the statutory framework under Section 24(3)(c) of the Code, and judicial precedents interpreting the same, it is now a well-settled position of law that the RP is mandatorily obligated to issue notice of each CoC meeting to the operational creditors if the amount of their aggregate dues is not less than 10 per cent of the debt. This legislative safeguard aims to promote transparency and ensure that operational creditors, though non-voting participants, are not excluded from deliberations that may significantly impact their claims under the Code.

However, the consequences of non-compliance have not been uniformly interpreted by adjudicating authorities. While several decisions hold that failure to issue notice may not, by itself, invalidate a resolution plan, particularly where no material prejudice is demonstrated or the plan is otherwise approved with overwhelming CoC majority, other rulings underscore that a resolution plan may indeed be vitiated where such non-compliance reflects a lack of transparency, due diligence, or procedural fairness. Notably, the Supreme Court’s view in Greater Noida case¹⁰ emphasises that violation of mandatory compliances as stipulated in Section 24(3)(c) can, in appropriate circumstances, challenge the commercial wisdom of CoC in approving the resolution plan owing to the dereliction of duty on the part of the RP.

In essence, while issuance of notice under Section 24(3)(c) is a mandatory statutory obligation of the RP, the impact of its breach depends on the facts of each case, particularly on whether the non-compliance has resulted in prejudice or opacity in the whole process.