On several occasions, questions have been raised in various fora about the action of the committee of creditors (CoC) being detrimental to objectives of the Insolvency and Bankruptcy Code (IBC). Due to this, there is an urgent need to devise an appropriate mechanism to effectively guide the CoC in its day-to-day functioning, says the Insolvency and Bankruptcy Board of India (IBBI) in its discussion paper.
The discussion paper published by IBBI last month seeks comments on a code of conduct for CoC, restrictions on requests for resolution plans and the use of Swiss challenge in corporate insolvency resolution process (CIRP) and treatment of live bank guarantees and line of credit as claims in a CIRP.
The IBC envisages market-led solutions in the insolvency space driven by professionals and a CoC. For the realisation of optimum results, IBBI says all the stakeholders driving the process must be regulated and follow the rules of the game threadbare.
“While other stakeholders like insolvency professionals (IPs), valuers and information utilities (IU) are regulated entities, the CoC functions in an unregulated environment. Creditors of a corporate debtor (CD) act collectively to form a committee, which acts in the best interest of all stakeholders. Hence, the CoC is the custodian of public trust during the resolution process,” the discussion paper says.
According to IBBI, the CoC has a statutory role, and it discharges a sort of public function. It says, “The pain and gain emanating from the resolution of the CD are to be shared by all stakeholders with fairness and equity.
“Therefore, it must apply the highest standard, duty of care, follow due process, be fair to all stakeholders, and act transparently to discharge its responsibilities. The IP, who conducts the process, also performs his duties under the guidance and supervision of the CoC. The role of CoC is vital for timely completion of activities and successful resolution.”
While CoC as a body is a new institution and is still evolving, to understand its role in the context of value maximisation and balancing the interest of all the creditors in the market-driven insolvency resolution process, concerns have been raised in some cases by the adjudicating authority (AA) regarding the capacity and conduct of the CoC.
In the Andhra Bank vs Sterling Biotech Ltd case, absconding and Section 29A ineligible promoters attempted to take over the company in the guise of a one-time settlement (OTS) with the approval of a 90.32% vote share of the CoC. In this case, the National Company Law Tribunal (NCLT) observed, “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.”
In another case, the AA rejected the resolution plan approved by the CoC because the resolution plan of the resolution applicant was only used as a ploy to gain control of the CD by the very same person who had pushed the CD into insolvency. In the case of Bank of Baroda vs Sisir Kumar Appikatla, the National Company Law Appellate Tribunal (NCLAT) rejected the appeal filed by a financial creditor saying, “This in itself raises eyebrows. This is further compounded by the approval of the restructuring plan camouflaged as a resolution plan emanating from an ineligible person, which renders the role of the CoC questionable. Such circumstances justify raising of inference of complicity.”
Even in the case of Bhushan Power & Steel Ltd, the IBBI points out that the RP paid Rs12 crore as a fee to the lender’s legal counsel for the services rendered before and during CIRP. The CoC even recorded in its minutes that if IBBI objects to these expenses, the amount would be reimbursed by the financial creditor (FC) on a pro-rata basis.
“Such an arrangement was clearly in contravention of the IBBI’s circular, dated 12 June 2018, which clearly states that IRPC shall not include any legal fee paid to legal counsel of the lenders or creditors. Clearly, the resolution professional (RP) and CoC deliberately planned for contravening a law,” the discussion paper says.
At present, the conduct and decision making of the CoC is not subject to any regulations, instructions, and guidelines. Many stakeholders have expressed the need for a code of conduct for the CoC. Even the report of the parliamentary standing committee on finance recommended 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 IBC.”
The discussion paper of IBBI also seeks comments on the request for revision of resolution plans (RFRPs) and the use of Swiss challenge in CIRP.
Since the coming into force of the provisions of CIRP, 4,541 CIRPs have been initiated till 30 June 2021. Of these, 653 have been closed on appeal or review or settled or others; 461 have been withdrawn under section 12A; 1,349 have ended in liquidation, and 396 have culminated in the approval of resolution plans. Section 12 of the IBC provides that the CIRP should be completed within 180 days from the date of admission, with a one-time extension of 90 days permitted by the AA, in some instances.
IBBI says, “As can be seen, from the table above, about 1,264 CIRPs have breached the IBC mandated timeline of 270 days. Further, the average time taken in the resolution of 396 CIRPs is 482 days, while the average time taken for passing orders for commencement of liquidation in 1,349 CIRPs is 362 days. It is evident that there are challenges to adhering to the prescribed timeline.”
According to the Board, there are several reasons for delays in the CIRP, including the repeated requests for expression of interest, continued extension of time for submission of resolution plans, unsolicited revision of submitted plans, repeated negotiations with the resolution applicants, and receipt of unsolicited plans.
While regulation 36B of the CIRP Regulations provides for a minimum of 30 days for prospective resolution applicants to submit the plans and allows for revision or modification of the request for resolution plan (RFRP) subject to the 30-day timeline, there is no cap on the number of revisions that may be allowed in a resolution plan.
“These have the effect of delaying resolution. There are also cases where the resolution applicants revise the resolution plans multiple times, with or without the consent of the CoC, leading to delays in completing the process,” the discussion paper says.
To consider the issues in RFRP and provide an option for the Swiss challenge to the CoC, IBBI proposed to amend some regulations like limiting the revision to two, not allowing CoC to entertain unsolicited revision to resolution plans and allowing CoC to consider the Swiss challenge method.
IBBI says, “The proposed amendment would help by allowing additional options to the CoC for resolution of a firm while under CIRP. The cap on the number of extensions in RFRP would ensure that the sacrosanct timelines envisaged under the code are practicable. Further, such an amendment would help instil faith amongst stakeholders in the corporate insolvency resolution process and prevent potential misuse in the absence of any specifications. This would also ensure that the CIRP remains timebound and the value obtained is a competitive one and the maximum achievable given the market condition.”
This IBBI paper also discusses the treatment of live bank guarantees and line of credit as claims in a CIRP and solicits comments on it. The Board proposes to provide in the regulations that if the letter of credit (LC) or bank guarantee (BG) is invoked by the beneficiary during the CIRP, the issuer shall be eligible to submit its claim to the resolution professional.
“The proposed amendment would help by removing ambiguity regarding the rejection of claims about bank guarantee and letter of credit. This would help enhance faith amongst stakeholders in the CIRP,” IBBI says.
Comments on the discussion paper can be submitted electronically by 17 September 2021 on the IBBI website, www.ibbi.gov.in