IBC: Creditors' Code Of Conduct, Swiss Challenge Among Changes Proposed By IBBI
Should there be a code of conduct for the members of the Committee of Creditors? What should be the framework of such a code? Under what conditions can bank guarantees and letters of credit be considered as claims in the insolvency process?
Bankruptcy law regulator, the Insolvency and Bankruptcy Board of India, has posed these questions in a consultation paper on issues related to the corporate insolvency resolution process.
The regulator has sought comments on broadly three categories of proposed changes in the regulations that govern the insolvency process.
Code Of Conduct For Committee Of Creditors
The IBBI notes that the Insolvency and Bankruptcy Code puts the process of insolvency resolution in the control of the committee of creditors. Courts too have recognised the supremacy of the commercial wisdowm of the CoC. But, unlike other stakeholders such as insolvency resolution professionals, valuers etc, the CoC is not subject to any specific regulation. Though it is vested with a duty of trust and care.
The paper cited several cases of " questionable conduct" by the CoC or financial creditors;
The Sterling Biotech case in which creditors permitted a withdrawal of insolvency by absconding and Code-ineligible promoters to facilitate a one-time settlement. Until this was blocked by the tribunal.
Or the insolvency resolution process of Bhushan Steel, in which the resolution professional paid the lender's legal fees, in contravention to the IBBI's circular.
In the Jindal Saxena Financial Services case, the CoC was unable to confirm the appointment of the resolution professionals as some lenders needed internal approvals from the competent authorities, potentially causing delays.
In light of these and many more such cases, the IBBI's paper asks whether there should be a code of conduct for the creditors' committee and its members.
The paper cites international examples and models governing the functioning of the CoC, the economic import of their decisions and the need for accountability.
The proposed code of conduct includes, among other provisions;
Disclosure of any conflict of interest
Not acquire, directly or indirectly, any assets of the corporate debtor
Nominate representative with sufficient authorisation
Endeavor to ensure that timelines set out in the IBC are not breached.
Changes In The Bidding Process
Emphasising the ' time boundedness' feature of the IBC, the paper points out that of 4,541 insolvencies admitted between inception and Jun. 30, 2021,
1,264 cases have exceeded the mandated time limit of 270 days.
396 cases have achieved resolution but the average time taken is 482 days.
In the 1,349 insolvency cases set to liquidation, the average time taken for passing such orders is 362 days.
While the Code provides a minimum 30 days for prospective resolution applicants to submit plans and allows for revision of the request for resolution plan 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," the paper says.
The CoC, at many times keeps on entertaining these plans for value maximization. It, however, creates uncertainty about the process and rather places an incentive on the prospective resolution applicants to offer lesser at the initial stages. If sufficient competition is not achieved in the process, such practice may even lead to less than optimum value for the corporate debtor. Invariably, the delay in the process adds to the costs leads to further destruction of the value of the corporate debtor.IBBI Consultation Paper
Thus, in the paper, the regulator offers two proposals to address such delay.
1. Provide option for Swiss Challenge mechanism to the CoC
2. Other restrictions - such as
not more than two revisions to the request for resolution plan
unsolicited revision to resolution plans not to be entertained
Treatment Of Live Bank Guarantee, Letter Of Credit
The IBBI paper notes that there has been some confusion regarding the treatment of live bank guarantees and letter of credit as claims, when drawing up a list of creditors of a corporate debtor.
Bank guarantees and letters of credit are similar kinds of instruments which require the issuers to make certain payments to beneficiaries in case the applicant fails to adhere to the contract agreed upon. Hence, indirect right to payment arises only when the debtor defaults and thus they cannot be considered as claims.
The paper examines 3 scenarios while seeking comments -
1. Where the BG/LC was invoked by the beneficiary before the insolvency commencement date of the corporate debtor. (Yes, this would be a claim, the paper explains.)
2. Where the BG/LC remains live and remains uninvoked during insolvency resolution process. (This may be considered as a contingent liability.)
3. Where the BG/LC is invoked by the beneficiary during the corporate insolvency resolution process. (It qualifies as a claim, as many resolution professionals have accepted in the past.)
The insolvency regulator has asked for the comments to be submitted by Sept. 17.