There was a major steel manufacturing company called 'Tough Steel Industries Limited' ('Tough Steel' or 'the Company'). For many years, Tough Steel was a leading name in the steel industry, known for producing high-quali

CS Professional · Insolvency - Law and Practice · PYQS · June 2025
There was a major steel manufacturing company called 'Tough Steel Industries Limited' ('Tough Steel' or 'the Company'). For many years, Tough Steel was a leading name in the steel industry, known for producing high-quality steel that was used in critical infrastructure projects worldwide. However, over time, Tough Steel found itself in serious financial trouble due to a mix of rising production costs, market volatility, and mismanagement. As a result, the company defaulted on its massive debt obligations, putting its future at risk. Faced with growing debt and no way to repay it, Tough Steel was forced into the insolvency resolution process under the Insolvency and Bankruptcy Code (IBC). A Resolution Professional (RP) was appointed to manage the proceedings and oversee the search for a solution. Several potential buyers came forward with offers to resolve the insolvency, but one stood out: Steel Global, an international steel conglomerate, which presented an offer that could clear all of Tough Steel's debts and inject fresh capital to restore the company. The Committee of Creditors (CoC), which included both financial and operational creditors, had to approve the resolution plan. However, a key issue emerged: who should have the final say in approving the resolution plan? Was it the financial creditors, who had the largest share of Tough Steel's debts, or should operational creditors, who provided goods and services to the company, have a more significant influence ? In the light of the above case study inputs and referring to the decisions of applicable case laws with reasons and the provisions of Insolvency and Bankruptcy Code 2016 (IBC, 2016) and the Regulations made thereunder, answer the following questions : What are the potential implications for the insolvency resolution process if operational creditors are granted equal voting rights to financial creditors in the Committee of Creditors (CoC), and how could this shift affect the approval process of resolution plans in future cases?

Answer & Explanation:

If operational creditors were granted equal voting rights to financial creditors in the Committee of Creditors (CoC), it could potentially disrupt the existing framework under the IBC. In the Essar Steel case, the Supreme Court ruled that financial creditors should have a predominant role in the decision-making process, recognizing their larger stake in the company's financial health and recovery. Allowing operational creditors to have equal voting rights could lead to several complications: Delays in Resolution: Operational creditors, who typically have smaller claims, could slow down the resolution process by opposing plans favored by financial creditors, potentially leading to protracted negotiations and delays in debt resolution. Divergent Interests: The interests of financial and operational creditors often diverge, with financial creditors primarily focused on recovering large amounts of debt and operational creditors concerned with the continuity of their business relationships. This could create conflicting priorities, complicating the approval of resolution plans. Increased Litigation: Giving operational creditors equal voting power could lead to more disputes, as smaller creditors might challenge the resolution plan in court, as seen in Essar Steel when operational creditors contested the proposed resolution. Ultimately, the Essar Steel case set a clear precedent that prioritizing financial creditors in the CoC is essential to maintaining the efficiency of the insolvency process and ensuring timely resolution. Granting operational creditors equal voting rights could undermine this efficiency.

Topics: Committee of Creditors (CoC) Voting Rights

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