*****Streamline insolvency resolution with code – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/streamline-insolvency-resolution-with-code/articleshow/91970328.cms

Synopsis

A more balanced committee of creditors that includes operational creditors, giving voting rights in proportion to their due amounts, is needed.

There is a need to strengthen the insolvency resolution process. The Insolvency and Bankruptcy Board of India (IBBI) must swiftly finalise the code of conduct for the committee of creditors (CoC), mainly in banks. The code is meant to provide clarity on the scope of the responsibilities of the CoC. It adds another layer of oversight, given that banks are already regulated by the RBI and public sector bankers are also under the purview of the Prevention of Corruption Act. The draft norms that cover disclosure of any conflict of interest, not acquiring any assets of the corporate debtor and adhering to bankruptcy code timelines are fine. Robust enforcement must go hand in hand.

A more balanced CoC that includes operational creditors, giving voting rights in proportion to their due amounts, is needed. Today, banks represented on the CoC are in the driver’s seat with the power to decide whether to keep the distressed company as a ‘going concern’ or to liquidate it. The only exception is the housing sector. The priority of payments in a resolution plan that entails sale of the company as a ‘going concern’ is decided by the CoC. And the proceeds from liquidation of the company are to be distributed first to secured lenders and to pay off workmen’s dues before payments are made to unsecured and operational creditors. This has been reaffirmed by the Supreme Court.

Operational creditors include MSMEs and small entities. So, concerns that payments made to operational creditors are almost negligible under the resolution plan are not misplaced. But any change in the composition of the CoC and the legislative scheme towards the payment to the operational creditors to arrive at a fair and equitable distribution must be well-thought-through.

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