COMMERCIAL WISDOM OF THE COC- TIME TO REGULATE? (PART-II)
Updated: Aug 22, 2022
This post is authored by Nikhil S. Javali, third-year student of B.B.A. LL.B. (Hons.), at National Law University, Odisha.
This is the second part of the two-part blog on regulating the commercial wisdom of CoC by imposing a Code of Conduct. The author puts forth alternative solutions to the issue and concludes the blog. The first part can be accessed here.
1. ATTEMPTS TO REGULATE THE COC - ARE THEY SUFFICIENT?
The IBBI and the government have not been completely silent on the topic of regulating the CoC; however, nothing concrete has materialized to date. In August 2021, the IBBI released a discussion paper where it proposed a code of conduct for the CoC to adhere to. A set of thirty-one points were listed down which sought to regulate the CoC by requiring them to be objective, maintain integrity, not misrepresent facts, cooperate with other stakeholders, etc. However, this discussion paper failed to materialize into anything concrete. The major criticisms against this proposed code of conduct were related to how it would be implemented, as standards such as maintaining integrity, objectivity, etc. are case specific. Hence, achieving a modus operandi that could be used in all circumstances is quite difficult.
Most recently, in June 2022, a similar recommendation was made by the Insolvency Law Committee (ILC) in its 5th Report. The committee reasoned that the CoC is the decision maker and drives the CIRP, and hence some standards of accountability are required. It was also recommended that section 196 of the IBC be amended to allow the IBBI to issue such non-binding guidelines to regulate the CoC. Section 196 deals with the powers of the IBBI, which include registering and regulating the other participants in the resolution process like the RP, Information Utilities (IU’s), IPs, etc. The ILC recommended that the code of conduct should elucidate the role and responsibilities of the CoC to make them more accountable. The ILC also cautioned that this code of conduct should not diminish the power or authority of the CoC during the CIRP and must ensure that commercial wisdom should not be restricted. The response of the government to these recommendations is yet to be seen.
While these attempts to regulate the CoC are definitely positive, its implementation is a hard nut to crack. Another concern that the government must pay heed to is whether these changes will open a pandora’s box of new litigation into the conduct of the CoC. However, the fact that this would lead to more cases being filed against the CoC should not deter the government from regulating the CoC as it is high time they do so. The rationale behind implementing a code of conduct for the CoC so far has been that because the CoC functions in an unregulated environment, it must be held accountable to some standards. While this reasoning is not fully wrong, it overlooks another major cause of concern. For instance, the apex court in the Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. case, while deliberating on the constitutional validity of the IBC and the intelligible differentia between financial creditors and operational creditors, explained that the financial creditors are secured creditors who are involved in assessing the viability of the CD from the very beginning. This viability is restricted to the financial aspects of the business and not the overall functioning. The financial creditors, who comprise the CoC are like moneylenders who lend money and expect it back at a fixed rate of interest in a particular time frame. The financial creditors, motivated by purely monetary concerns, fail to realize that they are also ‘custodians of the public trust’ as pointed out in the discussion paper released by the IBBI in August 2021. They need to balance the interests of all stakeholders involved in the resolution process.
Keeping these considerations in mind, a model non-binding code of conduct to regulate the CoC might not be the best way to go. In line with other regulations that the IBBI has released for regulating the IPs, RPs, etc., the IBBI should be empowered to mandate some responsibilities of the CoC via regulations. These regulations must mandate the CoC to conduct itself to the highest standards of professional integrity- which would mean that they should not compromise the interests of the creditors as a whole (both operational and financial), not unnecessarily delay the resolution process by recalling the resolution plan whenever it pleases, etc. The current framework of the IBC does talk about upholding the interests of stakeholders and maintaining timelines as being the objectives of the IBC, but there are no consequences for not adhering to it. This is where the government must direct its attention to and put in place provisions that would impose sanctions for breaching the objectives of the IBC on the CoC if they are responsible for it. The code of conduct mentioned in the discussion paper above can serve as a guiding light in this regard.
Apart from this, a grievance redressal mechanism can be implemented to hold the CoC responsible for breaching its obligations. For instance, similar to Part IV, Chapter VI of the IBC, provisions can be added to the IBC wherein any person aggrieved with the functioning of the CoC can file a complaint to the IBBI. An independent authority can be appointed to investigate the complaints and arrive at a decision. If the CoC is found to be in breach of its obligations, a fine can be imposed on them. However, unlike IPs, a member of the CoC cannot be replaced as the CD owes money to them. Alternatively, if there is a delay in the CIRP by the CoC, they can be mandated to compensate the CD or bear the insolvency costs.
The commercial wisdom of the CoC is a very important part of the successful resolution of the CD. However, unfettered discretion in conducting itself as it pleases has led to the CoC becoming a hindrance to the timely completion of the resolution process. By regulating the CoC, it will definitely help in improving the overall efficiency of the resolution process. The 5-year-old IBC is at a cross-section of mixed opinions on its success. Regulating the CoC will go a long way to revolutionize the resolution process and in ensuring speedy resolution while balancing the interests of all stakeholders.