Regulating Creditors

In August 2021, the Insolvency and Bankruptcy Board of India (IBBI) iss­ued a discussion paper delineating a proposal for code of ethics and conduct for creditors having a seat on the committee of creditors.¹ The discussion paper sought appropriate governance and regulation of the creditors’ committee in light of ­recent instances of massive creditor hair­cuts and tremendous delays in adjudicating insolvency. The Lok Sabha Stan­ding Committee on Finance, 2021 pointed out that over the quinquennial of the ins­olvency and bankruptcy code (IBC), creditors have had to bear on an average 80% haircut and in more than 70% cases, there have been delays in completing the resolution process beyond the statutory time limit.² The
underlying proposition behind such a regulation is that the creditors’ committee occupies a significant position among existing market intermediaries and ser­ves as a custodian of public trust, considering their role in resolution or liquidation of the debtor. The ethical code while deciding on resolutions expects the committee members to maintain integrity, objecti­vity, transparency, confidentiality, avoid conflict of interests, any unfair gains, and concealment of material information.

While the idea behind governing market intermediaries is not novel, the proposed code of conduct suffers from infirmities that can frustrate the basic structure of insolvency regulation as envi­saged under the IBC, 2016. This article argues that mere ethical standards will not result in fostering expedient resolution and reduce losses to creditors and suggests appropriate changes to the core insolvency process under the IBC. This can also foster the objectives as envisaged in the IBC while proposing a new code of conduct.