IBBI Update: Introduction of new guidelines for the COC

The major breakthrough from the erstwhile insolvency law regime to the IBC regime was the shift from a debtor-in-possession to a creditor-in-control scheme. Under IBC, as and when the CIRP of a company is triggered, the erstwhile management of the company loses the entire control over its management to its financial creditors. This significant change was brought in with the objective to ensure value maximization, balancing interests of all stakeholders, ensuring availability of credit, and promote entrepreneurship as the management tends to act cautiously and diligently by avoiding unnecessary risks under the fear of losing control over the company. 

When a company is admitted into CIRP, the Committee of Creditors is constituted by the interim resolution professional. Thereafter, the COC is empowered to take all major decisions of the corporate debtor including the decision regarding the revival or liquidation of the corporate debtor. The concept of commercial wisdom of the COC has been widely discussed in a plethora of cases and has given a paramount treatment under the Code in matters relating to commercial aspects regarding the insolvency resolution of the corporate debtor. 

The most celebrated decision of the Hon’ble apex court in K Sasidharan vs Indian Overseas Bank AIR 2019 SC 1329 made the following observations as to the determinative status of COC in a CIRP process. 

“From the legislative history and the background in which the I & B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given Under Section 22 of Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of the CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I & B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject matter expressed by them after due deliberations in the CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made non justiciable.”

This being, to foster more effective and time bound decision making by the CoC members, the IBBI has introduced new guidelines to stem the value erosion, through curtailment of procedural delays and enhancement of transparency and coordinated approach of decision making by the members of the CoC.

Under the new guidelines, each member of COC shall follow the 25 guidelines prescribed under the following heads:

1. Objectivity and Integrity
   1. Follow provisions of the Code and the Regulations thereunder
   2. Maintain integrity in discharging their functions under the Code
   3. Maintain objectivity in decision making
   4. Foster informed decision making
2. Independence and impartiality
   1. Disclose the details pf existing and potential conflict of interest 
3. Professional competence and participation
   1. keep themselves updated with the provisions of the Code, Rules and Regulations thereunder
   2. nominate representative with competent authority to participate in COC meetings
   3. participate actively, constructively and effectively in deliberations and decision making of the CoC
4. Co-operation, supervision and timelines
   1. supervise and facilitate the RP/IRP
   2. facilitate expeditious appointment of various professionals within the prescribed timelines
   3. endeavour to amicably resolve any inter-se disputes between the members 
5. Confidentiality
   1. ensure at all times complete adherence to the undertaking regarding confidentiality of information
6. Costs
   1. take necessary measures to ensure that the CIRP cost is reasonable
   2. expeditiously decide on all the expenses to be incurred by IRP/RP including his fee
   3. prudently fix the fee payable to the liquidator while deciding to liquidate the corporate debtor
7. COC meetings
   1. regularly monitor the activities of RP/ IRP and seek rationale of decisions/actions taken by him
   2. diligently recommend for the inclusion or otherwise of the belated claims
   3. actively participate in the presentation of valuation methodologies made by the Registered Valuers
   4. ensure the conduct of the meeting at regular intervals as specified
8. Sharing of information
   1. proactively share the latest financial statements, relevant extract from the audits of the corporate debtor, conducted by the creditors such as stock audit, transaction audit, forensic audit, etc. and other relevant information available with IRP/RP
   2. seek details of all litigation filed against or by the corporate debtor from IRP/RP and recommend necessary actions
9. Feasibility and viability of corporate debtor
   1. carefully review and assess the information memorandum prepared by RP and offer additional insights
   2. duly contribute to the preparation of the marketing strategy by the RP and may also take measures for marketing of the assets of the corporate debtor
   3. ensure that all resolution plans as received by RP are placed before CoC
   4. suitably consider the requirement of a monitoring committee for the implementation of the resolution plan

The new guidelines will provide sufficient clarity and guidance to the COC members regarding their roles and responsibilities in CIRP process to uphold the objects of the Code i.e., maximisation of value of assets, promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.