Why controlling CoC conduct could be a challenging task for IBBI

Experts say such a code could lead to litigation, which may affect the decision-making ability of the committee

While the Insolvency and Bankruptcy Board of India (IBBI) has proposed a code of conduct for the committee of creditors (CoC), industry experts feel the move is not required since most entities under CoC are well regulated already. Such a code could lead to litigation which may affect the decision-making ability of the committee, experts have cautioned.

Last week, the insolvency regulator invited suggestions on its discussion paper suggesting a code of conduct for CoC whose actions sometimes, as IBBI puts it, have been detrimental to objectives of the Code. IBBI has said that the CoC functions in an unregulated environment. It has also proposed restrictions on request for resolution plans and use of Swiss challenge in corporate insolvency resolution process.

“Given that CoCs typically consist of well-regulated entities such as banks, NBFCs, mutual funds, there doesn’t appear to be a need for a code of conduct. The job vested with the CoC requires a high level of analysis where they have to balance interest of stakeholders, value maximise and work towards a resolution. Such tasks don’t adhere to prescriptive solutions,” Bikash Jhawar, Partner, Saraf & Partners.

However, since the CoC is a creature of IBC, a code of conduct and an established process for the Committee is not an unusual idea.

Legal experts also point out that Section 240(2)(r), read with Section 24(8), empowers the IBBI to prescribe the manner in which the meetings of CoC shall be conducted. Therefore the Board is empowered to prescribe the manner of conducting the meeting which can include code of conduct for the CoC members.

“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 CoC meeting,” Anoop Rawat, Partner, Insolvency & Bankruptcy at Shardul Amarchand Mangaldas & Co said.

The 32nd report of the Parliamentary Standing Committee on finance had recommended the same stating that, “there is an urgent need to have a professional code of conduct for the CoC, which will define and circumscribe their decisions, as these have larger implications for the efficacy of the Code.”

Many experts feel that a code of conduct would open the CoC decisions to multiple claims and counterclaims from different persons whether their grievance is genuine or otherwise, and hamper decision making significantly. “CoC has been given commercial freedom by the Supreme Court itself and that is where the buck should stop,” Jhawar said.

IBC practitioners are also awaiting clarity on the working of swiss challenge under CIRP. Swiss Challenge is a bidding process under which the original bidder makes an unsolicited bid to the auctioneer. Once approved, the auctioneer then seeks counter proposals against the original bidder’s proposal and chooses the best among all options, including the original bid. The original bidder in most cases is granted the “right to first refusal”.

Running a Swiss challenge after a corporate insolvency resolution process, experts feel, could lead to wastage of time and uncertainty. IBBI has proposed that no more than two revisions to the request for resolution plan shall be allowed and CoC would decide whether a Swiss challenge is an appropriate option.

“The Swiss challenge should be allowed to operate in a mechanism where an initial plan is known at the start of CIRP and then a Swiss challenge is run on the base plan,” Rawat added.

Industry has, however, welcomed the proposal to allow letters of credit and bank guarantees to be eligible to be submitted as claims to the resolution professional as it would provide a clean slate by resolving all claims.

Status of CIRPs as on June 2021:

• Admitted 4,541

• Closed on Appeal / Review / Settled 653

• Closed by Withdrawal under section 12A 461

• Closed by Resolution 396

• Closed by Liquidation 1,349

• Ongoing CIRP 1,682

Source: Insolvency and Bankruptcy Board of India