NEW DELHI: Paying heed to the demand of several stakeholders, the insolvency regulator has finally released a code of conduct for the committee of creditors.
For a long time, it has been felt that the lenders who decide the fate of a corporate debtor under Insolvency and Bankruptcy Code (IBC) should be guided by a code of conduct.
A parliamentary panel headed by member of parliament Jayant Sinha has also stressed on the need for a set of dos and don’ts for the committee of creditors.
The code of conduct, which is part of the consultation paper floated recently by the Insolvency and Bankruptcy Board of India (IBBI), talks about basic things like nominating representative with sufficient authorisation to participate in meetings and make decisions during the process, adhering to the deadlines as prescribed by the law and disclosing the existence of any pecuniary or personal relationship with any stakeholders entitled to distribution.
It also stresses on keeping the information received during the process confidential and keeping the cost of the resolution process at a reasonable level.
So, what is the need for the CoC to have a code of Conduct?
While arguing in favour of a professional code of conduct, the parliamentary committee had noted that under IBC, commercial wisdom of CoC is supreme, and hence a code of conduct would define and circumscribe their decisions as these have larger implications for the efficacy of the code.
Other stakeholders under IBC such as insolvency professionals and lawyers have long argued that members of a CoC are often found lacking in seriousness and they overlook basic things like keeping the information confidential. Therefore, they said there was a need for having a broader set of guidelines for CoC.
Mamta Binani, a lawyer and an insolvency professional, says that most other stakeholders under IBC are bound by their own set of rules, so why not creditors, as the IBC is a creditor driven process.
Binani says many times CoC members are also wary of attending meetings on weekends or public holidays, which delays the process.
She further says that often creditors do not immediately vote and keep the process in abeyance.
An insolvency professional on the condition of anonymity points out that despite IBBI’s repeated reminders to banks that they should send a person in CoC meetings, who has the proper authority to make decisions, banks and lenders still send junior staff to these meetings just to complete the quorum.
Some others have pointed out that the need for a code was felt as in many cases banks took huge haircuts.
“The haircuts that they have taken in approving plans, sometimes even in excess of 70-80%, show that they have to work under some norms and cannot exercise their powers arbitrarily. Resolution applicants are walking away with a bonanza when the CoC does not act with proper diligence,” says Tarun Gulati, a senior Supreme Court lawyer.
The trust that the legislature and courts have reposed on the commercial wisdom of the CoC will be validated only when the CoC performs its duties in a proper manner for which a code of conduct is essential, he says.