IBC: New code for CoCs to bring in discipline, say analysts

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September 07, 2021 4:30 AM

However, care must be taken to ensure that unscrupulous elements and defaulting promoters don’t get to delay resolution by resorting to frivolous litigations that question the CoC’s compliance, they added.

In a corporate insolvency resolution process (CIRP), the competitive process runs for a substantial period, following which the highest resolution applicant is discovered.In a corporate insolvency resolution process (CIRP), the competitive process runs for a substantial period, following which the highest resolution applicant is discovered.

A code of conduct for the committee of creditors (CoC), proposed by the insolvency regulator in a discussion paper, will instil much-needed discipline into the members who wield enormous power, make them more accountable and lend transparency to the resolution process under the Insolvency and Bankruptcy Code (IBC), analysts said.

However, care must be taken to ensure that unscrupulous elements and defaulting promoters don’t get to delay resolution by resorting to frivolous litigations that question the CoC’s compliance, they added.

The Insolvency and Bankruptcy Board of India (IBBI) has floated two discussion papers to seek stakeholders’ views on its prescriptions of the dos and don’ts for the CoC and an updated regulatory mechanism of liquidation process. The parliamentary standing committee on finance has also suggested a code of conduct for the CoC to “define and circumscribe their decisions”.

Anoop Rawat, partner (Insolvency & Bankruptcy) at Shardul Amarchand Mangaldas & Co, said: “Given that CoC members have tremendous powers of decision-making, it would be prudent to introduce a code of conduct which the CoC members need to follow while participating in a meeting.”

The CoC members are financial creditors who approve the resolution plan for a stressed firm with at least a 66% majority before it goes to the NCLT for clearance.

The IBBI paper suggests that CoC members maintain integrity and ensure decisions are made without any bias, favour, fear, coercion, undue influence or conflict of interest. They must not misrepresent facts or influence the CoC’s decision to benefit related parties. They have to disclose conflict of interests and they won’t acquire assets of the corporate debtor even indirectly nor will they permit their relatives to do so without disclosing it to stakeholders.

They must try to ensure that timelines, stipulated by the IBC rules and regulations, are adhered to and strive to protect the debtor as a running business or preserve it asset value.

Importantly, the CoC will be required to ensure “complete confidentiality of information that they receive or come across as part of the process at all times”. “It shall not share any information with any person who is not authorised to receive such information and without the consent of the relevant parties or as required by law,” it said. They will have to try and protect the stressed firm as a running business and preserve the value of its assets.

As for the liquidation mechanism, another discussion paper has proposed that the liquidator will consult the stakeholder creditor committee (SCC) for all significant matters, including the appointment of professionals (and their remuneration), and sale of assets (including major aspects such as fixation of reserve price, manner of sale, etc.).
Also, if the secured creditors having 60% of the value in the secured debt decide to relinquish or realize the security interest, such a decision will be binding on the other pari-passu charge holders, it suggests.

Rajiv Chandak, partner at Deloitte India, said: “The proposal by the IBBI to provide more powers to the stakeholder creditor committee (SCC) will improve oversight and enhance transparency of the liquidation process.”

Making a case for the code of conduct, the IBBI paper said while other stakeholders–insolvency professionals, valuers and information utilities–are regulated entities, “the CoC functions in an unregulated environment”. “On several occasions questions have been raised in various fora about the action of CoC being detrimental to objectives of the Code,” it added.

The need for such a professional code assumed significance after a few cases tested the spirit of the IBC in recent months. For instance, in the case of Siva Industries Holding, the lenders accepted a one-time settlement by its former promoter, who had offered just 6.5% of the total debt, and filed a withdrawal application before the NCLT. In the case of Videocon, the NCLT had highlighted that the lenders were taking an almost 96% haircut and expressed surprise that Twin Star Technologies’ offer was very close to the stressed firm’s liquidation value, which is meant to be confidential.

However, certain aspects of the recommendations need further clarity, said analysts. For instance, as Rawat said, the working of Swiss challenge is not clear at the moment. In a corporate insolvency resolution process (CIRP), the competitive process runs for a substantial period, following which the highest resolution applicant is discovered.

“Running a Swiss challenge after that would again lead to waste of time and uncertainty. The Swiss challenge should be allowed to operate in a mechanism where an initial plan is known at the start of the CIRP and then the Swiss challenge is run on the basis of the base plan,” Rawat said.

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