New Delhi: Private players have come out with a voluntary code of conduct for creditors of insolvent businesses, setting out a comprehensive performance benchmark that can be monitored by the Insolvency and Bankruptcy Board of India (IBBI), the bankruptcy regulator.
The ‘Statement of Standards in Conduct and Performance for Creditors’ prepared by insolvency experts and brought out by a think tank called Insolvency Law Academy lays down the broad principles to be followed by creditors and to unlock the value of assets of the distressed company. Proposes purpose-specific suggestions. Which can contribute to the overall economy.
The standards say that creditors should respect and abide by the moratorium passed by tribunals on recovery of dues, which means that individual lenders should not go for unilateral recovery efforts. It also stipulates that disputes between creditors should be resolved amicably through negotiations as the insolvency process is not adversarial and litigation can prolong the process, create uncertainty and increase costs.
The Code states, ‘If direct talks do not bear fruit, mediation may be used to arrive at a solution.’
Members of the committee of creditors should disclose any conflict of interest arising out of any financial or personal relationship with any stakeholder or other members as soon as they become aware of it, suggest the standards. The standards also deal with the independence and impartiality of the members of the committee of creditors.
It is the creditors who carry out the administration of a company undergoing insolvency process through an insolvency resolution professional appointed by them. Policy makers consider the Committee of Creditors as an institution in itself, considering the impact of their decisions in dealing with industrial sickness in the country. “IBBI may conduct regular audit and independent assessment of compliance with the code of conduct by the committee of creditors and suggest improvements,” the set of standards said.
Ebizar Diwanji, head of financial services at Ernst & Young India, who chaired a working group on the subject that prepared best practices, said the standards are principle-based rather than prescriptive.
However, the document does not set a benchmark for the haircut to be taken by the lenders. The Parliamentary Standing Committee on Finance, headed by Jayant Sinha, had expressed concern over the huge deductions being taken by creditors in some cases. Instead, the Standards propose ways in which creditors should assist resolution professionals in their efforts in marketing the asset and achieving optimal resolution plans by utilizing the creditors’ own organizational strengths and resources.
“The fluctuating haircuts in inheritance cases can be attributed to the fact that the value assets in those cases had already been liquidated. In addition to assessing the value initially, marketing of the assets by the resolution professional and Adopting strategies (including day one liquidation where necessary) is important for best results.
“The standards in conduct and performance will guide the committee of creditors and resolution professionals to follow best practices that will help exercise commercial wisdom and maximize value,” Dewanji said.
“The Standards are designed to serve as an influence for achieving ‘ideal Committee of Creditors (CoC) behaviour’ in business decision-making. They establish broad principles that can be applied in every situation ,” said Sumant Batra, insolvency lawyer and founder of Insolvency Law Academy.
The Code also proposes transparency in the selection of resolution professionals by the committee of creditors.
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