Voluntary participation in committee of creditors for faster corporate resolution

Should a financial creditor be given the option to not be the part of the committee of creditors (CoC)?

In a paper jointly written by Pooja Singla, manager, and Ritesh Kavdia, executive director at IBBI, it has been proposed that financial creditors be allowed the choice to participate in the CoC.

Here’s the brief of their argument.

The Insolvency and Bankruptcy Code (IBC) of India was introduced in 2016 to streamline the corporate insolvency resolution process. The Code aims to reorganize distressed corporates in a time-bound manner. However, the success of the IBC depends on the active participation of all stakeholders, including creditors.

One of the key challenges in the IBC process is the mandatory participation of creditors in the Committee of Creditors (CoC). The CoC is a decision-making body responsible for overseeing the insolvency resolution process and approving the resolution plan. While mandatory participation ensures that all creditors have a voice in the process, it can also lead to delays and sub-optimal decisions, especially if key stakeholders are unwilling or unable to participate actively.

Smaller creditors, in particular, may have limited resources in terms of time, personnel, and financial capacity to actively participate in the CoC. This can hinder their ability to dedicate significant resources to attend meetings, review documents, and engage in detailed discussions. Mandatory participation may put an additional burden on such creditors, potentially impacting their active involvement.

To address this challenge, some experts have suggested allowing creditors the voluntary choice to participate in the CoC. This would expedite decision-making, resulting in faster resolutions and increased recovery rates. Moreover, when the Code of Conduct is applied to creditors who have willingly chosen to become members of the CoC, its enforcement becomes more streamlined and effective.

One possible method to facilitate voluntary participation in the CoC could be to incorporate a section in the claim forms, where creditors can indicate their willingness or otherwise for becoming a CoC member. This section can also state that wherever a creditor chooses this option in the affirmative, the Code of Conduct for members of CoC will be applicable to the creditor. This voluntary adoption would make such creditors accountable for their decisions as per the Code of Conduct.

While voluntary participation may lead to a scenario where no creditor voluntarily opts to become a CoC member, it is preferable to have decisions made by capable and interested individuals. Any potential issues can be addressed through appropriate design modifications. Furthermore, it needs to be considered that implementing a Code of Conduct while keeping participation in CoC mandatory would likely contribute to increased creditor apathy.

In all, it is worth considering to respect the individual choices of stakeholders and separate the obligation to participate in a CoC from the rights to receive due proceeds. If such a scheme is adopted, the Code of Conduct for such voluntary participants will be a logical subsequent step. This Code of Conduct would outline the expected standards of behaviour and ethical conduct for those who voluntarily choose to be part of the CoC.

Also Read: A code of conduct for CoC, finally