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

A code of conduct for the committee of creditors (CoC), proposed by the insolvency regulator during a discussion paper, can insert much-needed discipline into the members who wield monumental power, create them a lot of responsible and lend transparency to the resolution method under the Insolvency and Bankruptcy Code (IBC), analysts said.

However, care must be taken to ensure that unscrupulous elements and defaulting promoters do not stall resolution by filing frivolous litigations that call the CoC’s compliance into question, they added.

The Insolvency and Bankruptcy Board of India (IBBI) has presented two discussion papers that solicit stakeholder views on what can and cannot be done about a CoC, as well as an updated regulatory mechanism of liquidation process. He proposed a code of conduct for the CoC to “define and circumscribe their decisions.”

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

The members of the CoC are financial creditors who must approve a stressed firm’s resolution plan with a 66 percent majority before it is sent to the NCLT for approval.

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

They must try to ensure that the timelines specified by the IBC rules and regulations are followed, as well as strive to protect the debtor as a running business or preserve its asset value.

Importantly, the CoC will be required to maintain “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 stated. They will have to try to keep the stressed firm running while preserving the value of its assets.

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

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

While other stakeholders, such as insolvency experts, valuers, and information utilities, are regulated entities, the IBBI study argues that “the CoC acts in an unregulated environment.” “On multiple times, doubts have been made in various fora concerning the CoC’s actions being harmful to the Code’s objectives,” it continued.

The need for such a professional code became apparent after a few recent cases put the IBC’s ethos to the test. In the case of Siva Industries Holding, for example, the lenders accepted a one-time settlement from the company’s previous promoter, who had only offered 6.5 percent of the entire debt, and filed a withdrawal application with the NCLT. The NCLT had noted that the lenders were taking an almost 96 percent haircut in the instance of Videocon and expressed surprise that Twin Star Technologies’ offer was so close to the stressed firm’s liquidation value, which is supposed to be kept confidential.

Certain portions of the recommendations, however, require more clarification, according to analysts. As Rawat mentioned, the workings of the Swiss challenge are now unclear. The competitive process in a corporate insolvency resolution process (CIRP) lasts for a long time, after which the highest resolution applicant is discovered.

“After that, doing a Swiss challenge would be a waste of time and uncertainty. The Swiss challenge should be allowed to work in a manner where an initial plan is known at the outset of the CIRP and the Swiss challenge is then executed on the basis of the base plan, according to Rawat.