Committee of Creditors (CoC)

A Committee of Creditors (CoC) is a formal body comprised of a company's financial creditors, formed when that company enters insolvency or bankruptcy proceedings. Think of it as an emergency board of directors, but instead of representing shareholders, it represents the lenders who are owed money. The CoC's primary mission is to steer the ship through the storm of financial distress, with the ultimate goal of maximizing the recovery of their loans. They hold immense power during a corporate restructuring, as they are responsible for evaluating and voting on proposals to either rescue the company or sell it off for parts. This committee is a central player in the high-stakes drama of corporate turnarounds and failures, making crucial decisions that determine the fate of the business, its employees, and its investors.

The CoC is far from a passive observer; it is the decision-making nucleus of the insolvency process. Its members don't run the company day-to-day—that task usually falls to an appointed insolvency professional—but they hold the ultimate authority. Their key responsibilities include:

• Approving a Rescue Plan: The CoC's most critical function is to vote on a resolution plan. This is a detailed proposal outlining how the company can be revived. It might involve a new investor taking over, restructuring debt, or selling non-essential assets. For a plan to pass, it typically needs approval from a significant majority of the CoC (e.g., 66% of the voting share by value).
• Rejecting a Plan and Pushing for Liquidation: If the CoC cannot agree on a viable rescue plan, or if they believe they can get more money back by selling everything off, they can vote to reject all proposals. This usually leads to the company's liquidation, where its assets are sold piece by piece to pay off debts.
• Overseeing the Process: The committee works closely with the insolvency professional, approving their fees and major decisions, ensuring the process is run in the best interest of the creditors.

In essence, the CoC holds the company's life in its hands. Their collective decision determines whether the business gets a second chance or is sent to the corporate graveyard.

Membership in this exclusive club is typically reserved for financial creditors—entities like banks, hedge funds, and bondholders that have lent money to the company. They are distinguished from operational creditors, who are owed money for goods or services supplied (e.g., vendors, suppliers, and sometimes employees).

The rationale for this distinction is that financial creditors are usually in the business of lending and risk assessment. Their debt is often secured by the company's assets, and they have the most to lose in a collapse. While operational creditors are also important, their claims are often smaller, unsecured, and treated differently under insolvency laws. In many jurisdictions, operational creditors don't get a vote in the CoC, though they are kept informed and are entitled to receive a minimum payout from any approved plan.

Within the CoC, democracy is not based on one-member, one-vote. Instead, voting power is proportional to the amount of debt each creditor is owed. A bank that lent $100 million will have a much more powerful voice than a fund that lent $10 million. This “money talks” approach ensures that the creditors with the most significant financial exposure have the greatest influence on the outcome.

For an ordinary investor, the formation of a CoC is a five-alarm fire. However, for a savvy value investing practitioner, it can also be a source of crucial information and, occasionally, rare opportunity.

• The Waterfall: Equity is Last in Line: When a company is in such deep trouble that a CoC is formed, the existing shareholders are at the very bottom of the priority list. The “absolute priority rule” in bankruptcy dictates that creditors must be paid before equity holders receive a penny. In most cases, the resolution plan approved by the CoC will leave the original stock worthless. For a value investor, a company undergoing a CoC-led resolution is almost always a signal to stay away from the common stock, as it's likely headed to zero.
• Distressed Debt Investing: The real game for advanced investors is not in the equity but in the debt. Understanding the CoC is the cornerstone of distressed debt investing. By analyzing the members of the CoC, the value of their claims, and their likely motivations, an investor can make educated bets by purchasing the company's debt at a steep discount on the open market. If the CoC approves a plan with a decent recovery rate, that discounted debt can turn a handsome profit.
• Reading the Tea Leaves: The dynamics within the CoC offer a window into the company's true health and prospects. A cooperative CoC that quickly agrees on a sensible plan with a strong new backer might signal a genuine turnaround. A deadlocked, bickering committee, on the other hand, often precedes a value-destroying liquidation. By observing the CoC, you can gauge the perceived value of the underlying assets and the likelihood of a successful rebirth.