MCA considering an oversight body for lender committee functioning

The government is evaluating the need to have an oversight committee for  better implementation of the code of conduct for the Committee of Creditors (CoC) under the Insolvency and Bankruptcy Code (IBC). The move comes after a suggestion in this regard was made by the Supreme Court in its Jet Airways liquidation matter, a senior government official said.

 

“We are discussing whether an oversight committee is required. The discussions at this stage are being done internally at the Ministry of Corporate Affairs (MCA) level,” the senior official said. 

The top court had laid into the role of all stakeholders, including creditors, applicants, and adjudicating authority, in the insolvency process, and particularly suggested the need for better enforcement of code of conduct for the CoC. 

A CoC in IBC consists of financial creditors, and can also include operational creditors with limited participation and voting rights. 

In its order on Jet Airways’ liquidation, the apex court called the case an “eye-opener” that has brought to light the deficiencies in the IBC. 

In August 2024, the Insolvency and Bankruptcy Board of India (IBBI) had brought self-regulating guidelines that require the CoC to maintain integrity, confidentiality, and objectivity during the decision-making process, and disclose any conflict of interest.  

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

The top court suggested that the central government or the IBBI explore possibilities for better enforcement of the standards and practices enumerated in the guidelines through an independent mechanism under the auspices of an oversight committee instead of making them self-regulatory. “This will enable the guidelines to achieve some level of practical and operational relevance, and also prevent any significant lapse in decision-making on the part of the CoC,” it added. 

The IBBI guidelines for the CoC had come following a Delhi High Court order in February 2024.  

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

A discussion paper issued by the IBBI in August 2021 served as a precursor to the current guidelines. The insolvency regulator in the past has raised issues concerning the conduct of the CoC in the corporate insolvency resolution process. 

For instance, in the matter of Andhra Bank vs Sterling Biotech Ltd and Others, absconding and ineligible promoters attempted to take over the company in the guise of “one-time settlement” with approval of 90.32 per cent vote share of the CoC.  

The National Company Law Tribunal (NCLT) observed, “This also raises doubt about the functionality of the CoC. Such an act of the CoC can never be treated as an act of commercial wisdom.”