IBBI guidelines for COC issued without Valuation criteria

IBBI Guidelines for Committee of Creditors: A Step Forward, But Valuation Concerns Remain Critical
The Insolvency and Bankruptcy Board of India (IBBI) has recently unveiled comprehensive guidelines for the conduct of Committee of Creditors (CoC) in insolvency proceedings. This development follows a directive from the Delhi High Court in the case of Kunwer Sachdev founder Su-kam Vs IDBI Bank and others, which mandated the IBBI to establish clear rules for CoC functioning.
The new guidelines aim to enhance transparency, accountability, and efficiency in the insolvency resolution process. They encompass a wide range of aspects, including CoC composition, meeting conduct, decision-making, and information dissemination. By providing a structured framework, the IBBI seeks to strengthen the role of CoCs in maximizing recovery for creditors and ensuring fair treatment of all stakeholders.
While these guidelines represent a significant stride in regulating the insolvency process, a crucial oversight persists: the valuation of the insolvent company. This was a focal point of the case that prompted the court’s intervention. The absence of clear and standardized valuation methodologies can undermine the effectiveness of the insolvency resolution process, potentially leading to asset undervaluation and suboptimal outcomes for creditors.
A critical element missing from the new guidelines is the emphasis on the initial valuation conducted by valuers when the Resolution Professional (RP) takes over the company. This valuation serves as a crucial benchmark to assess the entrepreneur’s intentions – whether they managed the company with fraudulent intent or otherwise. By incorporating this initial valuation as a primary consideration for CoCs, the guidelines could mitigate undue blame placed on entrepreneurs for value erosion when they were unable to maintain the original valuation.
It is imperative that the IBBI prioritize the development of robust valuation standards to complement these new CoC guidelines. This, coupled with the emphasis on the initial valuation, will ensure that the insolvency framework comprehensively addresses the challenges faced by creditors and other stakeholders, ultimately contributing to a healthier business environment.

IBBI- GUIDELINES FOR COMMITTEE OF CREDITORS- 6.8.2024

[Attach the link to the new IBBI guidelines]