Streamline insolvency resolution with code

There is a need to strengthen the insolvency resolution process. The Insolvency and Bankruptcy Board of India (IBBI) needs to quickly finalize the Code of Conduct for the Creditors’ Committee (CoC), mainly in banks. The code aims to clarify the scope of the CoC’s responsibilities. This adds another layer of oversight, as banks are already regulated by the RBI and public sector bankers also come under the Prevention of Corruption Act. Draft standards that cover disclosure of any conflict of interest, non-acquisition of debtor company assets, and compliance with bankruptcy code deadlines are acceptable. Rigorous enforcement must go hand in hand.

A more balanced CoC that includes operational creditors, giving voting rights commensurate with their amounts owed, is needed. Today, the banks represented in the CoC are in the driver’s seat with the power to decide whether to keep the troubled company as a “going concern” or liquidate it. The only exception is the housing sector. The priority of payments in a resolution plan that involves the sale of the business as a “going concern” is decided by the CoC. And proceeds from the company’s liquidation must first be distributed to secured lenders and pay workers’ dues before payments are made to unsecured and operational creditors. This was reaffirmed by the Supreme Court.

Operational creditors include MSMEs and small entities. Thus, fears that payments made to operational creditors will be almost negligible under the resolution plan are not misplaced. But any change in the composition of the CoC and the legislative regime towards payment to operational creditors to arrive at a fair and equitable distribution must be carefully considered.