Code of conduct for Cocs may lead to litigation, say industry experts

With the Insolvency and Bankruptcy Board of India (IBBI) proposing a code of conduct for the committee of creditors (Cocs), industry experts feel that it is not required since most entities under the COC are well regulated already. Such a code could lead to litigation and may affect decision making of the committee, cautioned the experts.

Last week, the insolvency regulator invited suggestions on its discussion paper, suggesting a code of conduct for Cocs, whose actions sometimes, as IBBI puts it, have been detrimental to the objectives of the code.

IBBI has said that the COC functions in an unregulated environment. It has also proposed restrictions on requestfor-resolution plans and use of Swiss challenge in corporate insolvency resolution process (CIRP).

“Given that Cocs typically consist of well-regulated entities such as banks, NBFCS (non-banking financial companies) and mutual funds, there doesn’t appear to be a need for a code of conduct. The job vested with the COC requires a high level of analysis where it has to balance the interest of stakeholders, maximise value and work towards a resolution. Such tasks don’t adhere to prescriptive solutions,” said Bikash Jhawar, partner, Saraf & Partners.

Legal experts also point out that Section 240 (2) (r) read with Section 24 (8) empowers the IBBI to prescribe the manner in which the meetings of Cocs shall be conducted. Therefore, the board is empowered to prescribe the manner of conducting the meeting that can include code of conduct for the COC members.

“Given that COC members have tremendous power of decision making, it would be prudent to introduce a code of conduct which the COC members need to follow while participating in a meeting,” Anoop Rawat, partner, Insolvency & Bankruptcy at Shardul Amarchand Mangaldas & Co said.

The 32nd report of the Parliamentary Standing Committee on Finance had recommended the same, stating, “There is an urgent need to have a professional code of conduct for the COC, which will define and circumscribe their decisions, as these have larger implications for the efficacy of the code.”

Many experts feel that a code of conduct would open the COC decisions to multiple claims and counterclaims from different persons, whether their grievance is genuine or otherwise, and hamper decision making significantly.

“COC has been given commercial freedom by the Supreme Court itself and that is where the buck should stop,” Jhawar added.

IBC practitioners are also awaiting clarity on the working of Swiss challenge under CIRP. Swiss challenge is a bidding process where the original bidder makes an unsolicited bid to the auctioneer. Once approved, the auctioneer then seeks counter proposals against the original bidder’s proposal and chooses the best among all options. The original bidder in most cases is granted the “right to first refusal.”