![](https://static.wixstatic.com/media/d515a3_cb1ce2dbbcee494a9bcb5c3bb1542b9c~mv2.jpg/v1/fill/w_500,h_250,al_c,q_80,enc_auto/d515a3_cb1ce2dbbcee494a9bcb5c3bb1542b9c~mv2.jpg)
The Insolvency and Bankruptcy Board of India (IBBI), a bankruptcy law regulator, has asked these questions to Should the members of the Committee of Creditors follow a code of conduct, what should such a code's framework be, Bank guarantees and letters of credit can be considered claims in the insolvency process under what circumstances; in a consultation paper on concerns relating to the corporate insolvency resolution process.
The agency is seeking feedback on three major categories of suggested modifications to the insolvency procedure legislation:
1. Code of Conduct for Committee of Creditors
The IBBI points out that the Bankruptcy and Bankruptcy Code gives the committee of creditor’s jurisdiction over the insolvency resolution process. The supremacy of the CoC's business wisdom has also been recognised by the courts. But, unlike other stakeholders such as insolvency resolution professionals, valuers etc., the CoC is not subject to any specific regulation. Though it is vested with a duty of trust and care.
The paper cited several cases of “questionable conduct" by the CoC or financial creditors; In the Sterling Biotech case, creditors allowed insolvency to be withdrawn by absconding and Code-ineligible promoters in order to arrange a one-time settlement. Until the tribunal intervened and stopped it or consider Bhushan Steel's bankruptcy resolution process, in which the resolution professional paid the lender's legal fees in violation of the IBBI's circular.
The CoC was unable to confirm the selection of the resolution professionals in the Jindal Saxena Financial Services case because certain lenders required internal permissions from competent authorities, potentially incurring delays.
In light of these and other similar situations, the IBBI's paper asks whether the creditors' committee and its members should be subjected to a code of conduct.
The study uses international examples and models to explain how the CoC works, the economic significance of its choices, and the need for accountability.
Among the provisions of the proposed code of conduct are:
Any potential conflicts of interest must be disclosed.
Not to acquire any assets of the corporate debtor, either directly or indirectly.
Nominate a representative who has the necessary authority.
Make every effort to adhere to the IBC's timeframes.
2. Changes in the Bidding Process
The study emphasises the IBC's 'time boundedness,' noting that 1,264 of the 4,541 insolvencies allowed between inception and June 30, 2021, had exceeded the stipulated time limit of 270 days. Although 396 cases have been resolved, the average time to do so is 482 days. The average time it takes to pass liquidation orders in the 1,349 insolvency cases is 362 days.
While the Code gives potential resolution applicants a minimum of 30 days to submit plans and allows for amendments to the request for resolution plan within that time frame, there is no limit to the number of revisions that can be made to a resolution plan. The report claims that "These have the effect of delaying resolution.”
“The CoC, at many times keeps on entertaining these plans for value maximization. It, however, creates uncertainty about the process and rather places an incentive on the prospective resolution applicants to offer lesser at the initial stages. If sufficient competition is not achieved in the process, such practice may even lead to less than optimum value for the corporate debtor. Invariably, the delay in the process adds to the costs leads to further destruction of the value of the corporate debtor.”
-IBBI Consultation Paper
As a result, the regulator proposes two solutions in the report to resolve such delays.
1. Give the CoC the option of using the Swiss Challenge mechanism.
2. Other restrictions, such as a limit of two revisions to the request for resolution plan and the rejection of unsolicited revisions to resolution plans
3. Treatment of Live Bank Guarantee, Letter Of Credit
When compiling a list of creditors for a corporate debtor, the IBBI report observes that there has been considerable ambiguity over the handling of active bank guarantees and letters of credit as claims.
Bank guarantees and letters of credit are both comparable types of instruments that bind issuers to make certain payments to beneficiaries if the applicant fails to follow the terms of the contract. As a result, indirect rights to payment only arise when the debtor defaults and are not considered claims.
The paper considers three scenarios in order to solicit feedback: 1. the beneficiary invoked the BG/LC prior to the corporate debtor's insolvency commencement date.
During the insolvency resolution process, the BG/LC remains active and uninvoked. (This may be viewed as a potential liability.)
During the corporate insolvency resolution process, the beneficiary invokes the BG/LC. (As many resolution professionals have previously agreed, it qualifies as a claim.) The insolvency regulator has asked for the comments to be submitted by 17 September.
Kommentarer