From UPSC perspective, the following things are important :
Prelims level : Code for Creditors (CoC)
Mains level : Various reforms under Insolvency and Bankruptcy Code (IBC)
The insolvency regulator has called for public comments on a proposal to introduce a code of conduct for Committees of Creditors (CoC), of companies undergoing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).
Before proceeding, try this PYQ first:
Q. Which of the following statements best describes the term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news? (CSP 2017)
(a) It is a procedure for considering the ecological costs of developmental schemes formulated by the Government.
(b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.
(c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.
(d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government.
Post your answers here.
- The IBC, 2016 is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
- It is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
- The code aims to protect the interests of small investors and make the process of doing business less cumbersome.
Insolvency Resolution: The Code outlines separate insolvency resolution processes for individuals, companies, and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals.
- For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree.
- For startups (other than partnership firms), small companies, and other companies (with assets less than Rs. 1 crore), the resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.
Insolvency regulator: The Code establishes the Insolvency and Bankruptcy Board of India, to oversee the insolvency proceedings in the country and regulate the entities registered under it. The Board will have 10 members, including representatives from the Ministries of Finance and Law, and the RBI.
Insolvency professionals: The insolvency process will be managed by licensed professionals. These professionals will also control the assets of the debtor during the insolvency process.
Bankruptcy and Insolvency Adjudicator: The Code proposes two separate tribunals to oversee the process of insolvency resolution, for individuals and companies:
- National Company Law Tribunal: for Companies and Limited Liability Partnership firms; and
- Debt Recovery Tribunal: for individuals and partnerships
What is the recent development?
Ans. Code of conduct for Committees of Creditors (CoC)
- A CoC is to be composed of financial creditors to the Corporate Debtor (CD) — or operational creditors in the absence of unrelated financial creditors.
- Under the IBC, CoC is empowered to take key decisions, including decisions on haircuts for creditors, that are binding on all stakeholders, including those dissenting.
- The CoC is also empowered to seek and choose the best resolution plan for a corporate debtor from the market, and its role is vital for a timely and successful resolution for a CD.
- The IBBI noted that a code of conduct for CoCs would promote transparent and fair working on the part of CoCs.
What are the issues that the code of conduct is seeking to address?
- Several cases in which certain lenders have withdrawn funds from a CD undergoing insolvency proceeding and contributed to delays in the insolvency process.
- Delays in resolution are seen as contributing to the loss of value in corporate debtors and have become a key criticism of the IBC, with over 75 percent of proceedings having crossed the 270-day timeline.
- The IBBI highlighted cases in which representatives of lenders have had to seek approval from seniors for decisions such as an appointment of resolution professionals.
- IBBI has recommended that a code of conduct require that members of the CoC nominate representatives with sufficient authorization to participate in meetings and make decisions during the process.
- The regulator also highlighted cases where lenders have withdrawn funds from a corporate debtor during insolvency or liquidation proceedings.