CoCs need best practices code

'The delay in insolvency case resolution is another problem area where CoCs need to play a more proactive role', says the author

The recent proposal of a Parliamentary Standing Committee to frame a professional code of conduct for the Committee of Creditors (CoC) is worth a closer look as it can go a long way in defining and circumscribing their decisions in corporate insolvency resolution cases. This is important in the context of many valid questions that have been raised in the recent past about the poor commercial wisdom the lenders have displayed in many cases.  

In the context of some other arbitrary decisions by the CoCs, it would be good if the insolvency regulator framed a code of best practices for them to prevent arbitrary changes in resolution professionals, misrepresentation of data and other such discrepancies. It’s an open secret that often resolution professionals are changed by CoCs giving reasons based on doubts or assumptions. A study by the Indian Institute of Insolvency Professional, quoted by The Economic Times, has also recommended that CoCs should obtain a “no objection” certificate on the lines provided for the replacement of statutory auditors while changing resolution professionals. “The role of the CoC is one of a fiduciary duty with an implied covenant of good faith and fair dealing with all stakeholders. So it is imperative that adequate safeguards are in place with respect to the conduct of such members of the CoC,” the institute wrote in the report submitted to the regulator. That’s similar to the point made by the Parliamentary Standing Committee.

This is definitely required as, in general, the CoCs seem to have been extremely generous with haircuts. According to data from the Insolvency and Bankruptcy Board of India (IBBI), in over 363 major National Company Law Tribunal (NCLT) resolutions since 2017, banks have taken an average haircut of 80 per cent, prompting the standing committee to have a benchmark for the quantum of haircut, comparable to global standards.

The matter became almost absurd in the cases of Siva Industries and Videocon. The proposed one-time settlement in the case of Siva Industries was not even a tenth of the Rs 5,000 crore owed to the banks. On top of that, lenders led by IDBI Bank wanted to withdraw the insolvency resolution process against the company and hand it back to the promoters for an upfront payment of just Rs 5 crore. In return, the CoC agreed that the existing board of directors of Siva would be restated and full control over the company would vest with the promoters.

The CoCs have been inconsistent in their approach. For example, in the Videocon Industries case, CoC was not in favour of the former promoters who had submitted a proposal under Section 12A. But for reasons unknown, the CoC had no such problem with the promoters of Siva.  No one is arguing that the CoC should have allowed the Dhoots to take back Videocon. But the point is even the promoters of Siva had no legitimate claim to get back their company after defaulting and keeping the lenders waiting, which severely impacted the valuations.

The NCLT was absolutely right in questioning the haircut that creditors were willing to take in the Videocon resolution plan. The resolution applicant was paying close to the liquidation value to acquire the company and the CoC had no problems with that. Registered valuers had valued the assets of the 13 companies under Videocon at a fair value of Rs 4,069 crore and at a liquidation value of Rs 2,568 crore. The consolidated resolution amount offered by the buyer was Rs 2,962 crore against the admitted claims of Rs 64,838 crore. This accounted for only 4.15 per cent of the total outstanding claim and a total haircut of 95.85 per cent for all the creditors.
 

These two cases also bring into sharp focus the larger question on the need to review Section 12A, which allows acceptance of a one-time settlement offered by the erstwhile promoters. It does dilute the spirit of Section 29A, which bars former promoters from bidding for the same assets. Basically, Section 12A allows promoters to get back the control of their companies from Insolvency and Bankruptcy Code courts at throwaway prices. Rewarding the same promoters who refused to pay off their dues and drove down the valuations is unfair, to say the least.

The report of the Parliamentary Committee also pointed to the “significant discretion’’ enjoyed by CoC in accepting late and unsolicited resolution plans, which create tremendous procedural uncertainty. As a result, genuine bidders are discouraged from bidding at the right time. This weakens the debt resolution exercise and results in considerable delays, which erodes value.

The delay in insolvency case resolution is another problem area where CoCs need to play a more proactive role. The representatives sent by banks or financial institutions to meetings held by resolution professionals are often nothing more than note-makers or listeners and have no authority to deliberate as well as decide and vote on important matters. Though the IBBI has issued a circular requiring that CoC members must be represented by persons who are competent and are authorised to take decisions on the spot, the situation still continues in many cases. This also needs to be looked into.

A code of conduct for CoCs is just what the doctor ordered. Over to the regulator.