***The resolution professional in the Bhushan Power & Steel case “colluded” with creditors to pay Rs 12 crore to a firm offering legal counsel.
***A legal entity, working with one of the lenders to fugitive Mehul Choksi’s Gitanjali Gems even before it came up for bankruptcy resolution, was paid 20 times the fee of the resolution professional because of a prior understanding.
***In the Sterling Biotech resolution, “absconding and ineligible promoters” attempted to take over the company in the guise of a one-time settlement. Over 90 percent of the members of the committee of creditors formed for this case approved the takeover.
These are some of the instances the Insolvency & Bankruptcy Board of India (IBBI) has cited in a discussion paper on the need to bring the all-powerful committee of creditors (CoC) under the regulatory ambit.
Others involved in the Insolvency & Bankruptcy Code process including resolution professionals and valuation professionals are already under regulatory oversight.
The CoC is expected to be the custodian of public trust during the resolution process. It is a panel of all financial creditors of the company brought under insolvency resolution. They are assigned voting shares based on the debt owed to them.
If a company under IBC has no financial debt or in cases where all the financial creditors are related parties, the CoC is constituted with operational creditors. Either way, the CoC is expected to act in the best interests of all stakeholders and avoid liquidation of the company.
The IBBI’s emphasis on the need to bring the CoC under a regulatory framework comes when concerns have been raised about the IBC’s middling success since its inception in 2016. The IBBI has sought public comments by September 17.
The five-year-old IBC was meant for financial creditors of stressed businesses to recover at least a part of their dues. The code has since led to the resolution of some high-profile bankruptcy cases but continues to face a fair amount of criticism for inherent flaws.
The IBBI’s discussion paper of August 27 comes soon after a parliamentary standing committee sought a professional code of conduct for the CoC. Currently, the CoC enjoys near-complete autonomy in taking decisions during the resolution process and its “commercial wisdom” cannot be questioned.
Data released by IBBI, the regulator, show the success rate of the code has been below par till now:
*** Of 4,541 companies initiated under IBC till June 30 this year, 1,349 have been liquidated till June this year. This means almost every third bankrupt company was liquidated.
*** There have been only 396 resolutions till June, which is less than 10 percent.
*** As many as 1,264 cases have dragged on for more than 270 days, the time given for concluding the resolution – almost every third ongoing case is delayed.
*** The average time taken in the resolution of 396 cases was 482 days (beyond the deadline) and for passing orders to start liquidation in 1,349 cases was 362 days.
The IBBI noted that while challenges exist in adhering to the prescribed timelines, instances of the CoC’s role and motives coming under question are also to be blamed. Some examples the board cited make for interesting reading:
1. Bhushan Power & Steel. The resolution professional paid almost Rs 12 crore for the services of the lender’s legal counsel.
“It was recorded in the minutes of the CoC that if the IBBI objects to inclusion of such expenses in insolvency resolution process cost, this amount would be reimbursed by the FCs (financial creditors) on a pro-rata basis. Such an arrangement was clearly in contravention of the IBBI’s circular… which clearly states that IRPC shall not include any legal fee paid to legal counsel of the lenders/creditors. Clearly, the RP and CoC deliberately planned for contravening a law.”
After dragging on for more than three years, Bhushan Power & Steel was acquired by JSW Steel in a Rs 19,350 crore transaction in March this year.
2. Gitanjali Gems. The IBBI said that even before the proceedings against Gitanjali Gems started, a financial creditor decided to engage the services of a legal entity. It proposed the name of a candidate as the interim resolution professional on the understanding that on his appointment, he would engage the legal entity. The legal entity was engaged as arranged and paid 20 times the fee of the resolution professional. The IBBI later fined the resolution professional.
3. Sterling Biotech. In this case, the ineligible promoters attempted to take over the company in the guise of a one-time settlement with the approval of over 90 percent of the CoC by vote share. The National Company Law Tribunal observed that “this also raises doubt about the functionality of the CoC. Such an act of CoC can never be treated as an act of commercial wisdom.”
4. Veda Biofuel. The adjudicating authority rejected the resolution plan approved by the CoC on the grounds that it was only used as a ploy to gain control of the company by the very person who had pushed it into insolvency.While rejecting an appeal by an FC in the matter, the National Company Law Appellate Tribunal observed: “This in itself raises eyebrows. This is further compounded by approval of the restructuring plan camouflaged as resolution plan emanating from an ineligible person which renders the role of the committee of creditors questionable. Such circumstances justify raising the inference of complicity.”