IBC experts push for creditors’ standards

The ‘statement of standards in conduct and performance for creditors,’ prepared by bankruptcy experts and brought out by a think tank called the Insolvency Law Academy proposes broad principles to be followed by creditors and specific suggestions aimed at unlocking the value of the distressed company’s assets that could contribute to the overall economy.

The standards say that creditors must respect and abide by the moratorium passed by tribunals on recovery of dues, implying that individual lenders should not go for unilateral recovery efforts. It also prescribes that disputes among creditors should be amicably resolved through negotiations as insolvency process is not adversarial and litigation can prolong the process, create uncertainty and add to costs.

“Mediation can be used to arrive at a resolution if direct negotiations do not bear fruit,” says the code.

Members of the committee of creditors must disclose any conflict of interest arising from any financial or personal relationship with any of the stakeholders or other members, as soon as they become aware of it, suggest the standards. The standards also deal with independence and objectivity of the members of the creditors’ committee.

It is the creditors who drive the administration of a company undergoing bankruptcy process, through the insolvency resolution professional appointed by them. Policy makers regard the committee of creditors as an institution by itself given the impact of their decisions in dealing with industrial sickness in the country. “IBBI can undertake regular audits and independent assessents of the compliance of the code of conduct by the committee of creditors and suggest improvement,” said the set of standards.

Abizer Diwanji, Head, Financial Services, Ernst & Young India, who chaired a working group on the subject that led to the preparation of best practices, said that the standards are principle-based rather than prescriptive.

However, the document does not prescribe a benchmark for haircuts taken by lenders. The Parliamentary standing committee on finance led by Jayant Sinha had expressed concern over the steep haircuts taken by creditors in certain cases. Instead, the standards proposes ways in which creditors should aid the efforts of resolution professional in marketing the asset and get maximum resolution plans including by using creditors’ own organisational strengths and resources.

“Unsustainable haircuts in legacy cases can be attributed to the fact that value assets in those cases had already eroded. In addition to assessing value at the onset, marketing of the assets by the resolution professional and adopting strategies for best outcome (including day one liquidation where required) are vital,” said Diwanji.

“The standards in conduct and performance will guide the committee of creditors and resolution professionals to follow the best practices that will help in exercising commercial wisdom and in maximising value,” said Diwanji.

“The standards are designed to serve as an influence to achieve an ‘ideal committee of creditors (CoC) behaviour’ in making commercial decisions. They establish broad principles which can be applied to every situation,” said Sumant Batra, insolvency lawyer and founder, Insolvency Law Academy.

The code also proposes transparency in the selection of resolution professionals by the committee of creditors.