Code of conduct: IBBI move on COCs raises questions on jurisdiction

The step has added to the growing concern around the role of the insolvency regulator and whether it has delivered the goods

The five-year-old Insolvency and Bankruptcy Board of India (IBBI) recently created a flutter with its proposed code of conduct for committees of creditors (CoCs) under the Insolvency and Bankruptcy Code (IBC).

While many, including government officials, feel that the IBBI acted out of its remit, the regulator is hopeful of issuing guidelines for CoCs by next month.

This move has added to the growing concern around the role of the insolvency regulator and whether it has delivered the goods. Experts say while the regulator started with promise, the IBBI needs to get its focus back on implementing the law and making the IBC a success.

The IBBI has said other regulators had been involved at the drafting stage itself, though it is yet to receive the feedback on its draft proposal. Its plan, however, is not to enforce its guidelines directly but to alert the regulator concerned if they find any lapses, according to a senior member.

“Coordination mechanisms for enforcing the code of conduct need to be worked out and will be challenging,” a senior IBBI member told Business Standard while defending the need for such a code to restore the balance of power and accountability of CoCs.

A senior government official said the regulator should not be making a code of conduct for CoCs because that was the mandate of the Reserve Bank of India. Rather, it should focus on improving the ecosystem for resolution professionals, he said.

“It is losing the trust of stakeholders. The IBBI cannot become the administrative set-up for all intermediaries. Its focus has been on changing the law more than working on its mandate,” another senior government official said.

The IBBI has defended its move by stressing that CoCs enjoy almost unfettered powers but with virtually no accountability.

“Creditors impose undue influence on the IP (insolvency professional), encroach on his role, interfere with his duties, and collude with people with questionable antecedents. This has been repeatedly noted by the adjudicating authority in several matters,” the IBBI member added.

Arrests of a few resolution professionals (RPs) by enforcement agencies have also cast a shadow on the IBBI’s performance as the regulator, experts said.

“Insolvency professional agencies are frontline regulators and the IBBI monitors and supervises their activities. Monitoring and regulating their conduct is being continually strengthened and is a top priority,” the IBBI member said.

The regulatory body has started the process of setting up an IBC21 portal, which will increase reporting by the resolution professionals and is expected to bring transparency to the IBC process.

“The IBBI has become more of a post office than a regulator. Most banks now directly talk to the (finance) ministry because they do not expect solutions from the IBBI,” a senior IBC lawyer said.

The IBBI has regulatory oversight over IPs, insolvency professional entities, and information utilities. IBC watchers point out that courts in India have noted that the regulations passed by the IBBI are not consistent with the provisions of the parent legislation.

“It is the need of the hour that courts in India adjust the current approach of the IBBI and ensure that regulations complement with the parent legislation,” said Nitish Sharma, counsel, AnantLaw.

What IBBI could do

IBC experts point out the IBBI needs to take steps to ensure that other regulators such as Sebi and the RBI are in line with its approach. An IBC lawyer said it was naive of the IBBI to bring in rules for liquidating listed companies without taking into account that it would have an impact on Sebi rules as well.

“Its biggest challenge is to enforce regulations and keep a check on insolvency professionals and agencies, along with the information utilities who keep the data. The power bestowed on the IBBI should be at par with Sebi enforcements,” said Ankita Singh, partner, A&P Partners.

Some of the mandates that the IBBI has not delivered on include ramping up information utilities. Experts also say while the IBC regulator came up with a code of conduct for CoCs after Parliament’s standing committee pointed out the gaps, it has not addressed their concerns on resolution professionals. Legal experts say the quality of RPs coming into the profession is going down. “One of the fundamental issues is the lack of serious action against resolution professionals,” Singh added.

IBC lawyers also feel that given the low credibility of the borrowers, coupled with the moratorium that was offered by the government, strictly checking the credit status of the debtors and high vigilance are needed.

“The IBBI should commit itself to the stringent work code, incorporating accountability to incorporate efficiency and strategy” said Sonam Chandwani, managing partner, KS Legal & Associates.