I. Legal Framework

India IBC:

• Sec 21(1): CoC comprises all financial creditors.
• Sec 21(2) Proviso 1: Financial creditor who is related party to corporate debtor shall not have any right of representation, participation or voting in CoC.
• Sec 21(2) Proviso 2: If related party is only financial creditor, then CoC = 18(2) - 1 operational + 1 disinterested financial creditor.
• Reg 12(3) CIRP Regs: RP cannot assign voting share - only based on verified claim.

Defect = Nullity.

Spain - Texto Refundido Ley Concursal (TRLC) 2020:

• Junta de acreedores: Art. 121 TRLC - constitution requires quorum 50% of ordinary credits.
• No formal CoC like India, but Comisión de acreedores Art. 300-303. If creditor is persona especialmente relacionada (Art.284) - insiders, cannot vote on convenio.
• Defect in lista de acreedores = impugnación under Art.96.

II. 4 Types of Constitution Defect

1. Inclusion of Related Party - Most litigated:
RP includes related party financial creditor. Purpose of excluding related party from CoC is to obviate conflicts of interest.

2. Exclusion of Genuine Financial Creditor:
RP rejects claim as operational or disputed, thus deprives voting.

3. Single Creditor CoC - No Provision:
NCLAT Chennai in V. Duraisamy v Jeyapriya Fruits (2023) held IBC does not contain any provision for constitution of CoC with single Operational Creditor when no claims received after public announcement.

4. Reconstitution by RP without Adjudicatory Power:
NCLAT Chennai Byju's Insolvency case: Resolution Professional has no adjudicatory power. Once CoC constituted, RP cannot reconstitute CoC on own accord. Any change needs NCLT order.

III. Case Laws - India (Core for your query)

1. NCLT Bengaluru - City Mall Developers Pvt Ltd [I.A. 27 & 1362/2022] - LANDMARK for defect:
Held: Constitution of CoC in violation of Section 21(2) Proviso is nullity in eyes of law, vitiates entire CIRP.
Facts: RP verified claims and assigned voting share arbitrarily. Tribunal: constitution itself violates proviso to Sec 21(2) read with Reg 12(3) and is a nullity and this action alone vitiates entire CIRP. Corporate insolvency process totally in disregard of Code.

2. Phoenix ARC Pvt Ltd vs Spade Financial Services Ltd AIR 2021 SC 776 - Supreme Court Constitution Test:
Issue: Related parties removed label just before CIRP to enter CoC.
SC held:

• Exclusion under first proviso to Sec 21(2) is related not to debt itself but to relationship existing between related party financial creditor and corporate debtor.
• Default rule: only in praesenti related party barred.
• Exception: If related party label done away to circumvent bar under Sec 21(2), then even present non-related party can be excluded.
• Even past directors can be held related parties if transaction sham.

This is binding test for all CoC defects.

3. Gstaad Hotels - NCLT Mumbai 2024:
Objection that Kanazawa Holdings and Ahuja Finance were related parties. Tribunal examined related party definition Sec 5(24) and found no defect in constitution of CoC. Objection dismissed.

4. Mahal Hotels Case - Creditor facing PMLA:
NCLAT held creditor facing PMLA investigation cannot be part of CoC. Mahal Hotel name included after 3 months of constitution when RP was going to be removed, done with intent to defeat IBC. Inclusion held unethical.

5. Essar Steel - CoC of Essar Steel vs Satish Kumar Gupta SC 2019:
SC upheld CoC commercial wisdom but clarified amendment cannot be enacted only for curing defect in NCLAT order.

6. Ashok G Rajani vs Beacon Trusteeship SC 2022:
No bar to withdraw admitted CIRP application before constitution of CoC. Settlement can be stifled before CoC in anticipation of claims.

IV. Spain - Comparable Doctrine

While Spain has no CoC, STS 2015-2023 on persona especialmente relacionada :

• STS 27/01/2020 - Art.93 LC: Creditor who is administrator in last 2 years = specially related, cannot vote on convenio.
• If such creditor votes, acuerdo is voidable under Art. 122 TRLC - impugnación del convenio por defecto en constitución de junta.
• Audiencia Provincial Madrid 2022: If list of creditors excludes 30% of credits, quorum not valid, junta null.

V. Consequences of Defect

If NCLT finds CoC constitution violation:

1. Entire CIRP vitiated - resolution plan approved by defective CoC automatically fails - liquidation order overturned.
2. RP liable under Sec 68 - fraudulent transaction.
3. Fresh CoC to be constituted.

Checklist to attack CoC:

• Get Form C claims list + related party disclosure under Sec 5(24)
• Check if voting % = financial debt admitted / total financial debt admitted - if RP assigned voting manually = defect under Reg 12(3)
• Check date of assignment deed - if debt assigned 10 days before CIRP from related to unrelated = Phoenix ARC doctrine applies