The Power and Responsibility of the Committee of Creditors in IBC

The Power and Responsibility of the Committee of Creditors in IBC

IBC will be nine on May 28 — a red letter day in the history of the country’s debt recovery mechanism. IBC has been a landmark legislation. Earlier, insolvency and bankruptcy legislations were fragmented; IBC consolidated and streamlined the insolvency process and defined the rights of creditors and debtors. With a focus on resolution rather than on liquidation, the IBC intends to set the corporate debtor free from the clutches of the debt trap while not causing prejudice to the interests of all other stakeholders, including financial and operational creditors. Clarity of jurisdiction of different courts has also been achieved.

With great power

The Power and Responsibility of the Committee of Creditors in IBC

There are, however, glaring loopholes. While one would expect the law to evolve over the years, in its present contour, the role and responsibility of the Committee of Creditors (CoC) need to be thoroughly revisited. Interpreting various provisions, different judgments have put them above the law, their decision sacrosanct and beyond any judicial purview. CoC is the protagonist in IBC.  

This needs a thorough relook to help many corporate debtors tide over the crisis, to ensure entrepreneurial spirit does not die down in oblivion, investment flow remains unabated, and the private sector creates enough wealth and opportunities for the country with over 1.4 billion population to help it reap its demographic dividend. 

What is wrong and needs correction? As per the law, any decision of the CoC approved by a 66% majority of its members with varied degrees of voting share is beyond dispute. Based on a collective individual judgment, the decision is binding on the corporate debtor, creditor and all other stakeholders, including the judiciary. The problem lies right here. Without any defined code of conduct, all decisions of the CoC are not expected to be based on the principle of reasonableness and proportionality. And if not, the very purpose of the IBC loses its sheen. To facilitate the effective and responsible functioning of the CoC, an elaborate, determinative, and efficient code of conduct for its functioning assumes excellent relevance.

The Power and Responsibility of the Committee of Creditors in IBC

The IBBI is aware of the extant lacuna. In a discussion paper, the IBBI said that because the CoC is the “best judge” to make commercial decisions concerning the corporate debtor, its findings cannot be discretionary. According to it, it is one of the “grey areas” that should be filled. Even for the sake of argument, considering that the commercial wisdom of the CoC is unassailable, is the constitutional court bereft of the power to issue an appropriate writ directing for framing appropriate guidelines to fill up the voids? The answer cannot be in the negative. The need for a code of conduct assumes greater importance because once the CoC takes a decision, the aggrieved party is deprived of the legal remedies, except to a limited extent. Power should always be circumscribed with adequate accountability. 

The system has already witnessed plenty of evidence of misuse or non-use of power, judgment and accountability on the part of the CoC. I am a victim. Bankers took over Su-Kam. Two valuers estimated the running company’s fair market value to be Rs 300 crore and liquidation Rs 150 crore. The RP wanted Rs 30 crore to run the company, which the CoC never approved. Hence, the company had to be closed down. The entire CIRP cost was Rs 40 crore. In the end, banks got just Rs 10 crore—a glaring example of misjudgment on the part of the CoC.

Without a set of guidelines to ensure effective monitoring and functioning of the CoC, decisions taken by the representatives can be whimsical and wrong. For other stakeholders, some measure of recourse against the CoC should be put in place. The system is committed to the rule of law. Can the functioning of the CoC be devoid of any code of conduct? It’s a policy matter and needs to be addressed by the legislature. 

Various concerned stakeholders have repeatedly demanded an extensive code of conduct for CoC members to help them discharge their duties in a manner consistent with the letter and spirit of the Code. The IBBI Law Committee has recommended a standard code of conduct for the functioning of the CoC. 

In a recent judgment, the Delhi High Court said, “There is an urgent need for an effective code of conduct for the functioning of the CoC. Even the Adjudicatory Authority is not empowered to do so, as the interference of the Adjudicatory Authority is also limited to the manner outlined in the Code. A code of conduct shall be subservient to the Code and not in excess of it. However, the decision-making process must reflect fairness, reasonableness and objectivity, irrespective of the outcome.”

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What should be there in the Code? It should be based on integrity, objectivity, professional competence, due care and confidentiality. Furthermore, the Code of Conduct must also reflect the fundamental features of the Wednesbury principles of fairness and proportionality to give true meaning to the legislative intent of the IBC. Moreover, it should also reflect the principles of natural justice to be followed by the CoC while taking any measure concerning any stakeholder during the subsistence of the entire CIRP.