Guidelines for the Committee of Creditors, 2024: A Step Towards Structured and Responsible Commercial Decision-Making

1. Introduction

The Insolvency and Bankruptcy Code (IBC), 2016 has placed financial creditors at the heart of the corporate insolvency resolution process (CIRP), empowering them to take critical commercial decisions through the Committee of Creditors (CoC). Over time, concerns have arisen regarding the opaque functioning of the CoC, its inconsistent decision-making, and the absence of a structured behavioral code that governs its responsibilities.

Recognizing the need to infuse transparency, discipline, and accountability into the CoC's decision-making ecosystem, the Insolvency and Bankruptcy Board of India (IBBI) issued the Guidelines for the Committee of Creditors, 2024 on January 30, 2024. These Guidelines are part of IBBI’s broader initiative to promote good governance and improve the quality of resolutions under the Code.

---

2. Objectives of the Guidelines

The Guidelines aim to:

• Standardize and guide the conduct of CoC members while making commercial decisions.

• Encourage fair, transparent, and evidence-based evaluation of resolution plans.

• Establish an ethical benchmark for the functioning of financial creditors.

• Strengthen the integrity of the insolvency resolution process.

• Enhance trust among stakeholders by demonstrating responsible behavior by CoC members.

---

3. Nature and Scope

These Guidelines are non-binding and do not carry statutory penal provisions for non-compliance. However, they serve as a moral and professional code of conduct for financial creditors participating in the CoC. Though not legally enforceable, they may carry persuasive value in judicial or regulatory forums, influencing how tribunals assess the CoC's decisions in CIRP cases.

---

4. Key Principles and Provisions of the Guidelines

The Guidelines outline several core principles designed to guide the CoC’s functioning:

a. Principle of Fairness and Value Maximization

• The CoC must ensure that the evaluation of resolution plans is objective and non-discriminatory.

• The emphasis should be on maximizing the value of assets of the corporate debtor, not merely maximizing recovery for financial creditors.

• The CoC must maintain an equitable approach, considering both short-term recoveries and long-term enterprise sustainability.

b. Principle of Informed and Reasoned Decision-Making

• Every major decision of the CoC, including approval or rejection of resolution plans, should be supported by documented rationale.

• The CoC must record the basis and factors considered during deliberations, including viability, feasibility, haircut justification, and timeline of implementation.

• Where multiple plans are under consideration, the comparative evaluation must be demonstrable and transparent.

c. Principle of Independence and Conflict Disclosure

• CoC members are expected to act independently, free from external pressure or internal bias.

• Any potential conflict of interest—including related-party exposures or preferential considerations—must be disclosed and managed transparently.

d. Engagement of Domain Experts

• Recognizing that CoC members may not possess all technical expertise, the Guidelines recommend engagement of external professionals—including registered valuers, forensic auditors, legal advisors, and financial consultants—to support informed decision-making.

• These experts must be empaneled transparently and should operate independently.

e. Stakeholder Consultation

• While operational creditors and employees may not have voting rights, their interests should not be ignored.

• CoC members are advised to consider representations and feedback from other stakeholders, promoting inclusivity and holistic decision-making.

f. Time-Bound Deliberations

• Delay in decision-making has been a major cause of value erosion in CIRPs. The CoC must commit to strict adherence to IBC-prescribed timelines.

• Unnecessary adjournments or prolonged indecision must be avoided unless they serve a justifiable purpose.

g. Ethical Conduct and Transparency

• CoC members are expected to uphold the highest standards of ethical behavior, refraining from coercive tactics, collusive behavior, or abuse of voting power.

• Communication with stakeholders must be transparent, and decision-making should avoid arbitrariness.

---

5. Implications of the Guidelines

The Guidelines hold significance in the evolving insolvency ecosystem:

• Judicial Perspective: Though not legally binding, courts and tribunals may begin evaluating CoC conduct in light of these principles. Failure to follow the Guidelines may lead to adverse observations or even orders mandating reconsideration of decisions.

• Regulatory Oversight: The IBBI or RBI may use these Guidelines as a benchmark while assessing the conduct of banks and financial institutions participating in resolution processes.

• Market Confidence: Ethical and transparent conduct by the CoC can restore investor confidence and attract better resolution applicants, improving CIRP outcomes.

• Behavioral Shift: Over time, repeated invocation of these principles in judicial forums can drive a cultural shift in how financial creditors participate in insolvency processes.

---

6. Critique and Way Forward

While the Guidelines are a welcome initiative, several concerns remain:

• Non-binding nature: As the Guidelines lack legal enforceability, non-compliance may not result in immediate consequences.

• Implementation challenges: Smaller financial creditors or NBFCs may lack resources to engage experts or document decisions extensively.

• Need for training and awareness: Many CoC members may be unaware of these Guidelines, making capacity-building and sensitization necessary.

• Risk of judicial overreach: Overemphasis on judicial scrutiny of commercial decisions may inadvertently dilute the IBC’s foundational principle of creditor-driven resolution.

To address these challenges, the IBBI may consider:

• Developing a model code of conduct for CoC members with statutory backing.

• Requiring insolvency professionals (RPs) to certify compliance with key elements of the Guidelines in their reports.

• Encouraging training programs for bankers and financial creditors on ethical and legal responsibilities under IBC.

---

7. Conclusion

The Guidelines for Committee of Creditors, 2024 mark an important step towards codifying ethical and accountable decision-making within the insolvency framework. In the absence of statutory prescriptions for CoC behavior, these Guidelines provide a much-needed moral compass for financial creditors who exercise significant powers under the IBC.

By promoting fairness, transparency, and stakeholder-centric thinking, the Guidelines have the potential to strengthen the trust and efficiency of the insolvency process. As the IBC continues to evolve, the adoption and internalization of these principles by CoC members can significantly elevate the quality and legitimacy of insolvency resolutions in India.

"Unlock the Potential of Legal Expertise with LegalMantra.net - Your Trusted Legal Consultancy Partner”

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.

Print