Insolvency And Bankruptcy Code: RBI Deputy Governor Calls For Enforceable Code - What Does It Mean?

The Deputy Governor of the Reserve Bank of India, M Rajeshwar Rao pitched for an enforceable code of conduct for the Committee of Creditors (CoC)  Saturday, under the insolvency resolution process.

Introduced in 2016, the Insolvency and Bankruptcy Code (IBC) has gained significant traction as a recovery and resolution mechanism, but according to Rao, significant improvements are needed in the area of CoC.

The Committee of Creditors or CoC has a key role in implementing the corporate insolvency resolution process under the IBC.

According to the Deputy Governor, there have been instances where the performance of the CoC has been lacking in several aspects.

"This includes disproportionate prioritisation of individual creditors' interests over the collective interests of the group, disagreements among the CoC members on approving the resolution plan due to concerns about undervaluation and perceived lack of viability, disagreement over the distribution of the proceeds," he said.

Rao said that even when a resolution plan is agreed upon, there have been instances of non-participation in the CoC meetings and a lack of effective engagement, coordination or information exchange among the members.

Nominees of financial creditors in the CoC are entrusted with responsibilities that far exceed their actual authority, he added.

"It is in the larger interest of the creditors that issues related to the conduct are addressed by the members themselves without waiting for the regulatory prescription…," he said.

According to him, in an ideal situation the power to enforce norms for the conduct of all stakeholders should lie with the Insolvency and Bankruptcy Board of India.

The RBI Deputy Governor suggested that when incentives are not perfectly aligned, deviations from best practices become the norm, adding that an enforceable code of conduct is needed for the CoC.

He further emphasised on the importance of insolvency resolution professionals who have a lot of operational responsibilities and in most cases do not have the cooperation of other stakeholders to discharge their duties.

How Can Incentives Help?

While mentioning incentives for resolution professionals, Rao said that compensation should be determined by the market based on commercial considerations.

What Improvements Can Be Made?

Rao also suggested various improvements in the insolvency resolution process, including addressing delaying tactics used by corporate debtors and having a better understanding of reasons behind such faults.

IBBI Chairperson Ravi Mittal said that the Board will be introducing certain things related to mediation regarding the insolvency resolution process.