Parliamentary committee recommends threshold for haircuts, code of conduct for CoCs under IBC
The parliamentary standing committee on Finance has expressed its concern over low recovery rates under the Insolvency and Bankruptcy Code (IBC) and recommended a threshold for the quantum of haircuts comparable to global standards.
In a report – Implementation of Insolvency and Bankruptcy Code: pitfalls and solutions – tables in the parliament on 3 August 2021, the committee has observed: “Low recovery rates with haircuts as high as 95%, and delay in resolution process with 71% of the cases pending for more than 180 days clearly points towards a deviation from the original objectives of the Code intended by parliament.”
The committee, therefore, feels that the design and implementation of the Code needs to be revisited particularly in the light of its original aim and objective.
“We therefore need a thorough evaluation of the extent of fulfilment of these aims and objects in the course of implementation code over the years,” reads the report.
Given the high haircuts taken by banks under IBC, the committee has even recommended a ‘benchmark’ for the quantum of the haircuts comparable to global standards.
“As the insolvency process has fairly matured now, there may be an imperative to have a benchmark for the quantum of haircuts comparable to global standards,” says the report.
Curb on creditors’ rights
Going by the tone and tenor of the report, the committee seems to have taken a note of the fact that IBC gives immense power to Committee of Creditors, and seeks to have a code of conduct for the CoC.
It noted that under IBC, commercial wisdom of CoC is supreme and hence recommended for the CoC professional code of conduct, which will define and circumscribe their decisions as these have larger implication for the efficacy of the code.
The committee also wants the Insolvency and Bankruptcy Board of India (IBBI) to frame guidelines for selection of resolution professional by the CoC in a more transparent manner.
Flexible resolution plan
The committee also recommends amendment in IBC rules to allow resolution professional flexibility to develop resolution plan across multiple bidders each taking different pieces of corporate defaulters.
“Actual experience has shown that bidders may be interested in selected business units or assets rather than the entire business,” says the committee while recommending that a combination of bidders taking different business units or assets may well be far superior to one bidder acquiring the entire business.
Strengthening Homebuyers rights
The committee feels that the requirement for at 100 homebuyers or 10% of the homebuyers for moving an insolvency petition against a builder creates practical difficulties for gathering the required numbers of homebuyers. Therefore, the committee suggests that once a homebuyer decides to file insolvency petition against the builder, the latter should be obligated by law to provide details of other homebuyers in the same project.
Also See: Pitfalls of pre-packs: How the Insolvency panel tried to address these concerns
