Ibbi guidelines for CoC need monitoring mechanism, say IBC experts

Earlier this month, the insolvency regulator introduced guidelines for CoC that steer the insolvency resolution process to stem the value erosion that occurs due to delays and bring more transparency

The recently announced guidelines issued by the Insolvency and Bankruptcy Board of India (IBBI) for the Committee of Creditors (CoC) are a step in the right direction but IBC experts believe it would not be effective unless there is a monitoring mechanism in place. 

“There are no obligations for the CoC (in these guidelines). They have not been issued under any law and are self-regulatory in nature. When the idea was conceptualised for the first time, IBBI was at least trying to get the Reserve Bank of India (RBI) on board,” a senior IBC expert said. 

Earlier this month, the insolvency regulator issued guidelines for the CoC that steer the insolvency resolution to stem the value erosion that occurs due to delay in procedures and bring more transparency.

The self-regulating guidelines require the CoC to maintain integrity, confidentiality, objectivity during decision-making and disclose conflict of interest. 

In February 2024, the Delhi High Court in Kunwer Sachdev versus IDBI Bank matter noted that the value of the corporate debtor, initially estimated at Rs 300 crore was reduced to the point where the respondents received only Rs 10 crore from the company's sale.

The High Court directed the IBBI to draft a code of conduct to enhance the effectiveness of the CoC while maintaining the integrity of their commercial wisdom and the legislative intent of the IBC.

“Stakeholder concerns have seemingly not been obviated by the issued guidelines. Further safeguards through joint action of finance sector regulators such as RBI and Sebi may be explored,” Yogendra Aldak, Partner, Lakshmikumaran & Sridharan Attorneys. 

IBC law practitioners said that while these guidelines are a step towards promoting transparency and fairness, their effectiveness remains uncertain due to the reliance on self-regulation.

“Without a robust external monitoring mechanism, there is a risk that these guidelines may not be uniformly applied and powerful creditors might still dominate the process,” Sonam Chandwani, managing partner, KS Legal and Associates said. 

However, experts agree that these guidelines were necessary due to several high-profile cases where the CoC's decisions were criticised for disproportionately favouring financial creditors at the expense of operational creditors and other stakeholders. 

“Although the introduction of these guidelines is a positive step, especially in the absence of any prior framework, their effectiveness may be limited through amendments to the Code or by imposing sanctions for non-compliance. Without such enforcement, these guidelines may remain merely advisory,” said Piyush Agrawal, Partner, AQUILAW.

While the IBC allows the committee of creditors to act in their commercial wisdom, there have been instances where the adjudicating authority has not agreed with their decisions.

In the past, IBBI has raised issues concerning the conduct of the CoC in the corporate insolvency resolution process. A discussion paper issued by the IBBI in August 2021, which served as a precursor to the current guidelines, highlighted various such examples. 

For instance, In the matter of Andhra Bank versus Sterling Biotech Ltd. and Ors, absconding and section 29A (wilful defaulters) ineligible promoters attempted to take over the company in the guise of a one-time settlement with the approval of 90.32 per cent vote share of CoC.

“This also raises doubt about the functionality of the CoC. Such an act of CoC can never be treated as an act of commercial wisdom,” the NCLT observed.

As an example of delays by the CoC, IBBI cited the example of Jindal Saxena Financial Services Pvt. Ltd. vs Mayfair Capital Private Limited matter where the CoC did not approve the appointment of interim resolution professional as resolution professional since two of the four financial creditors, having aggregate voting rights of 77.97 per cent required internal approvals from their competent authorities. 

The adjudicating authority remarked: “We deprecate this practice…the wastage of time causes delay and allows depletion of value which is sought to be contained.”

The CoC guidelines said that to ensure their professional competence the CoC must keep themselves updated with the provisions of the Code, rules and regulations. 

“The IBBI guidelines could have mandated more rigorous disclosures and required the CoC to justify their decisions more clearly, potentially minimising the perception of bias and leading to a faster, more effective resolution,” Chandwani said.

 The 32nd report of the Parliamentary Standing Committee on finance 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.  

“The CoC often due to lack of coordination among themselves or consensus delays the decision to be taken. If the guidelines issued are adopted and followed in true spirit, at least the time spent in finalising decisions will speed up to some extent and disputes can be resolved,” said Daizy Chawla, managing partner, S&A Law Offices.