The power of the Committee of Creditors (CoC) has often been questioned, especially in cases where banks have taken a huge haircut. Now the Parliamentary Standing Committee on Finance has openly advocated for a professional code of conduct for the committee of creditors.

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The Committee in its observation said: “Keeping in mind the experience gathered so far, 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 code.”

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The adjudicating authorities in many cases have questioned the power and the authority of the Committee of Creditors and even asked if the Committee of Creditors is authorised by their respective boards to take a decision on a huge haircut.  

The idea of the legislature to empower CoC was mainly due to their higher stakes, so the financial creditors can take the decisions that suit them best. But this power is now being questioned as instances of huge haircuts and arbitrary decisions have invited attention in the recent past.  

The Secretary, Ministry of Corporate Affairs during the course of evidence before the Parliamentary Standing Committee on Finance stated: “The Code of Conduct for the Committee of Creditors, the capacity building of the Committee of Creditors, the quality of decision making for the Committee of Creditors, and their professionalism we have to work out. So, we are working with banks association also.” 

The standing committee added that a benchmark is required for haircuts, and said: “Greater clarity in purpose is needed with regard to strengthening creditor rights through the mechanism devised in code, particularly considering the disproportionately large and unsustainable haircuts taken by the financial creditors over the years. As the insolvency process has fairly matured now, there may be an imperative to have a benchmark for the quantum of haircut, comparable to global standards.”

Experts believed that practically it may be difficult to quantify the appropriate haircut in each and every case, and it may not be prudent to alter the settled position of the supremacy of commercial wisdom of the Committee of Creditors. 

Divyanshu Pandey, Partner, S&R Associates, mentioned: “As IBC being economic legislation. The Supreme Court has rightly stayed away from interfering with the business decisions of the CoC. The legislature should also exercise similar restraint.”

He further added: “The law provides for balancing the interests of stakeholders and has necessary provisions, which further this objective. Therefore, the need of the hour is to continue with the efforts to sensitise the CoC about its role and responsibility and emphasising that the IBC is not a recovery tool. Any further attempt to prescribe decision making of the CoC may lead to further digression from the objective of the code.” 

Vinod Kothari, Founder of Vinod Kothari Consultants, believed that delay is also a big concern as observed by the Standing Committee.

He said: “The Committee has made some strong observations to the extent of saying that the implementation of the Code has shifted from its original design, and with 77 per cent of cases pending for over 6 months and haircuts to the tune of 95 per cent, the Committee has recommended a complete revisit of the implementation of the Code.”  

The Standing Committee also suggested transparency in the process, the Committee’s latest report observed, “During the CIRP process, the CoC decide whether to continue with the interim Resolution Professional or to replace the interim resolution professional with another without any guidelines.” 

The Committee expects that the insolvency regulator IBBI should come up with the guidelines for the selection of the Resolution Professionals by the committee of creditors in a more transparent manner.  

The power of the CoC has been questioned before forums due to the high quantum of haircuts and on the issue of Commercial Wisdom. It is expected that the government in consultation with banks may come up with some mechanism to discourage huge haircuts, as it's seen, as foregoing huge taxpayers’ money.