IBBI clarifies on the role of Company of Creditors, calls it 'saviour' of stressed firms

The Insolvency and Bankruptcy Board of India (IBBI) today said that while it is normal for a firm or a business entity to undergo stress in a market economy, such stress needs to be addressed 'expeditiously' and in a timely fashion, and said that, as per the Insolvency and Bankruptcy Code, it is upto the Committee of Creditors (CoC) to step in and resolve the stress the firm is undergoing.

In a message on its website, the authority said that the bankruptcy code envisages the CoC to comprise of financial creditors who need to ensure the insolvency process is speedy, effective, and efficient.

"The code assigns the role of a saviour to the CoC. It recognises a wider public interest in resolving corporate insolvencies. It is a beneficial legislation which aims to put the firm back on its feet. It enables revival and continuation of the firm by protecting it from its own management and from closure by liquidation," the IBBI said.

It added that the CoC, because of its commercial wisdom, it has the foremost responsibility to ensure viable firms are rescued when under financial duress, and unviable firms are closed.

"An inappropriate decision which lets a viable firm close or an unviable firm survive is very costly
for stakeholders and the economy. The CoC needs to rescue a viable firm through a resolution plan which
(i) has been received from a credible and capable resolution applicant, (ii) complies with the applicable laws, (iii) is feasible and viable, (iv) has potential to address the stress, (v) has provision for effective implementation of the plan, and (vi) maximises the value of the assets of the firm, irrespective of realisation for creditors under the plan. This ensures sustained resolution," IBBI said.

The authority, clarifying further the powers of the CoC, pointed out that it can "decide a haircut of any magnitude to any or all stakeholders required for rescuing the firm."

"The responsibility comes with accountability. Since the decisions of the CoC impact the life of the firm and consequently its stakeholders, it needs to be fair and transparent in its decisions," IBBI said.

The Insolvency and Bankruptcy Code was enacted in 2016, against the backdrop of increasing non-performing loans, and with the aim that a clear-cut insolvency procedure could enable corporations to tackle their NPA problem.

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