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Creditor Protection Measures.

Creditor Protection Measures

Definition:
Creditor protection measures are legal and procedural safeguards that ensure creditors’ rights are preserved when a company faces financial distress or insolvency. The goal is to prevent unfair treatment, protect recoverable assets, and ensure equitable distribution among all creditors.

These measures are embedded in Insolvency and Bankruptcy Code, 2016 (IBC), as well as in company and banking laws.

1. Key Creditor Protection Measures

Moratorium on Claims

Under Section 14 of the IBC, once insolvency proceedings are initiated, a moratorium comes into effect:

No suits or enforcement actions can be initiated against the corporate debtor.

Prevents a single creditor from seizing assets, ensuring equal treatment of all creditors.

Committee of Creditors (CoC)

Constituted under Section 21 of IBC.

Includes all financial creditors.

Powers: Approve resolution plans, monitor insolvency process, vote on major decisions.

Ensures collective decision-making rather than individual creditors acting unilaterally.

Avoidance of Fraudulent or Preferential Transactions

Sections 43–66 of IBC allow voiding:

Preferential transactions favoring one creditor.

Undervalued or fraudulent transfers.

Protects the overall asset pool for equitable distribution.

Interim Measures by Resolution Professional (RP)

RP can take possession of assets, manage operations, and protect the value of the debtor’s estate.

Ensures assets are not wasted or misused during insolvency.

Priority of Payments

Section 53 of IBC: Specifies distribution hierarchy:

Secured creditors, operational creditors, government dues, etc.

Protects creditors’ interests by defining their recovery order.

Right to Challenge Resolution Plans

Creditors can challenge unfair or non-compliant resolution plans in NCLT or NCLAT.

Ensures transparency and accountability.

Information Rights

Creditors have the right to receive regular updates about:

Debtor’s financial status

Progress of insolvency process

Enables informed decision-making.

2. Indian Case Laws on Creditor Protection

Swiss Ribbons Pvt. Ltd. v. Union of India (2019, SC)

Supreme Court upheld IBC provisions and emphasized that the process protects creditors’ rights and ensures value maximization.

K. Sashidhar v. Indian Overseas Bank (2019, SC)

Confirmed that creditors have the right to challenge transactions that unfairly deplete assets, reinforcing protection measures under Section 43.

Innoventive Industries Ltd. v. ICICI Bank (2018, NCLT Mumbai)

Highlighted the importance of moratorium under Section 14 to prevent individual creditors from seizing assets.

Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors. (2019, NCLAT)

Reiterated that CoC’s powers in approving resolution plans are central to protecting creditor interests.

ICICI Bank Ltd. v. Official Liquidator of Monnet Ispat & Energy Ltd. (2020, NCLAT)

Clarified that creditors’ claims must be verified and protected from fraudulent transfers, ensuring fair recovery.

ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (2018, NCLAT)

Emphasized that creditors’ rights are paramount and any resolution plan must safeguard financial creditor interests.

3. Practical Implications

For Creditors:

Rights to vote, challenge, and monitor resolution process ensure fair treatment.

Moratorium prevents asset seizure by aggressive creditors.

For Insolvency Professionals:

Act as custodians of assets and facilitate equitable recovery.

For Debtors:

Must cooperate to avoid challenges to resolution plans and asset transfers.

4. Summary Table of Measures

Conclusion:
Creditor protection measures are central to insolvency law, ensuring fairness, equity, and value maximization. Indian courts have consistently emphasized that these measures are not just procedural, but substantive safeguards for all financial creditors.

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