The insolvency regulator — IBBI (Insolvency and Bankruptcy Board of India) has requested public feedback on a proposal to establish a Code of conduct for Committees of Creditors (CoC) of companies facing insolvency under the Insolvency and Bankruptcy Code (IBC). We look at why a code of conduct for the CoC is necessary, as well as some of the significant problems presented in the proposed policy.
A CoC composed of financial creditors to the Corporate Debtor (CD) — or operational creditors in the absence of unrelated financial creditors — is empowered under the IBC to make key decisions that are binding on all stakeholders, including those who are dissenting, including decisions on creditor haircuts.
The CoC is also empowered to seek out and select from the market the best resolution plan for a corporate debtor, and its involvement is critical for a CD's timely and effective resolution. The Insolvency and Bankruptcy Board of India (IBBI) stated that a code of conduct for CoC’s will encourage them to act in a transparent and equitable manner.
The IBBI cited multiple instances in which lenders withdrew funds from a CD that was in the midst of insolvency procedures, causing delays in the insolvency process. Delays in resolution are considered as leading to the loss of value of corporate debtors, and they have been a major criticism of the IBC, with over 75% of on-going bankruptcy processes exceeding the 270-day deadline.
The IBBI cited instances where lenders' representatives had to seek senior approval for decisions such as the appointment of resolution professionals, and suggested that a code of conduct require members of the CoC to nominate representatives with sufficient authority to attend meetings and make decisions during the process.
Lenders withdrew funds from a business debtor during insolvency or liquidation procedures, according to the regulator. According to the IBBI, the resolution professional paid a fee of Rs 12 crore to the legal counsel of a lender rendered before to the insolvency procedure in the case of Bhushan Steel. During Varrsana Ispat Ltd.'s insolvency, a major creditor collected debt from the firm, and lenders pressed the resolution professional to disburse funds despite the National Company Law Tribunal's orders to the contrary.
The IBBI also mentioned the case of Sterling Biotech, in which 90.3 percent of creditors approved a one-time settlement offer from a "absent and...ineligible promoter," according to the IBBI. Members of the CoC must not influence committee decisions or activity in order to obtain undue advantage or profit for themselves or their linked parties, according to the proposed code of conduct, and members must make choices in an unbiased way.
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