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Explained: Why there’s a new code for creditors under IBC; what precipitated this

What is the need for a code of conduct for the CoC, and what are key issues raised in the proposed policy?

Written by Karunjit Singh , Edited by Explained Desk | New Delhi |
Updated: September 8, 2021 11:07:22 am
The IBBI noted several cases in which certain lenders have withdrawn funds from a CD undergoing insolvency proceedings and contributed to delays in the insolvency process.(File photo)

The insolvency regulator has called for public comments on a proposal to introduce a code of conduct for Committees of Creditors (CoC), of companies undergoing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).

The Indian Express examines the need for a code of conduct for the CoC and key issues raised in the proposed policy.

Why is a code of conduct necessary for CoCs?

Under the IBC, a CoC composed of financial creditors to the Corporate Debtor (CD) — or operational creditors in the absence of unrelated financial creditors — is empowered to take key decisions, including decisions on haircuts for creditors, that are binding on all stakeholders, including those dissenting.

The CoC is also empowered to seek and choose the best resolution plan for a corporate debtor from the market, and its role is vital for a timely and successful resolution for a CD. The Insolvency and Bankruptcy Board of India (IBBI) noted that a code of conduct for CoCs would promote transparent and fair working on the part of CoCs.

What are the issues that the code of conduct is seeking to address?

The IBBI noted several cases in which certain lenders have withdrawn funds from a CD undergoing insolvency proceedings and contributed to delays in the insolvency process. Delays in resolution are seen as contributing to loss of value in corporate debtors and have become a key criticism of the IBC, with over 75 per cent of ongoing insolvency proceedings having crossed the 270-day timeline.

The IBBI highlighted cases in which representatives of lenders have had to seek approval from seniors for decisions such a appointment of resolution professionals, and recommended that a code of conduct require that members of the CoC nominate representatives with sufficient authorisation to participate in meetings and make decisions during the process.

The regulator also highlighted cases where lenders have withdrawn funds from a corporate debtor during insolvency or liquidation proceedings. The IBBI noted that in the resolution process of Bhushan Steel, the resolution professional paid a fee of Rs 12 crore to the legal counsel of a lender rendered prior to the insolvency process. During the insolvency process of Varrsana Ispat Ltd. a leading creditor recovered debt from the company and lenders pressured the resolution professional to distribute funds despite instructions to the contrary by the National Company Law Tribunal.

Further, the IBBI cited the case of Sterling Biotech, in which 90.3 per cent of creditors approved a one-time settlement offer by an “absconding and…ineligible promoter” according to the IBBI.

The proposed code of conduct requires that members of the CoC not influence the decision or the work of committee, so as to make undue gain or advantage for itself or its related parties, and that members take decisions in an unbiased manner.

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