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IBBI’s code against recovery of dues during moratorium

Creditors who maintain the accounts of the defaulting company shall not adjust the receipts of corporate debtor during the corporate insolvency resolution process for past due in violation of moratorium, IBBI proposed in the draft code of conduct released for public comments last Friday. (Photo: iStock)Premium
Creditors who maintain the accounts of the defaulting company shall not adjust the receipts of corporate debtor during the corporate insolvency resolution process for past due in violation of moratorium, IBBI proposed in the draft code of conduct released for public comments last Friday. (Photo: iStock)

  • The draft code of conduct says lenders must not collect dues from revenues of bankrupt cos
  • IBBI cited instances of ‘ploy’ by panel of creditors to let those causing bankruptcy to regain cos’ control

NEW DELHI : Lenders managing the accounts of bankrupt companies cannot recover their dues from the revenues of these companies while efforts are on to stitch together a rescue package, according to a set of code of conduct for the committee of creditors proposed by Insolvency and Bankruptcy Board of India (IBBI).

IBBI said the panel of creditors that stays in control of the defaulting company during the bankruptcy resolution process should respect the moratorium on recovery of dues during this period.

Creditors who maintain the accounts of the corporate debtor (the defaulting company) “shall not adjust the receipts of corporate debtor during the corporate insolvency resolution process for past due in violation of moratorium", IBBI proposed in the draft code of conduct released for public comments last Friday.

Emailed requests for comment from Varrsana Ispat Ltd (VIL), named by IBBI as a company that allegedly faced this situation, remained unanswered at the time of publishing.

The bankruptcy rule maker cited several other areas, too, where the conduct of the panel of creditors were flagged by the National Company Law Tribunal (NCLT). This includes alleged instance of the corporate rescue plan cleared by the panel of creditors being rejected by the tribunal considering it a “ploy" to let persons who pushed the company to bankruptcy to regain control over the entity. In another instance, it was alleged that the resolution professional included the lender’s legal counsel’s fee in the bankruptcy resolution process cost.

“The committee of creditors as a body is a new institution and is still evolving to understand its role in the context of value maximization and balancing the interest of all the creditors in market-driven insolvency resolution process," IBBI said in the discussion paper.

“The code of conduct will definitely help but how well will this be implemented, keeping in mind the huge capacity deficit in NCLT, is a big question. There is a huge backlog of matters at the NCLT," said Nishit Dhruv, managing partner at MDP & Partners, Advocates & Solicitors.

IBBI has also proposed changes to the auction process and suggested that the number of revisions to the request for resolution plans shall not exceed two. The suggested protocols for the auction process seek to ensure that the sacrosanct timelines envisaged under the bankruptcy code are adhered to. This would help instil faith among stakeholders in the process, the regulator said.

The plan to make further revisions to the bankruptcy code comes after the parliamentary standing committee on finance led by BJP leader Jayant Sinha called for a review of the code. Sinha’s panel earlier this month informed the Parliament that the haircuts taken by lenders as high as 95% and the fact that more than 71% of the cases remained pending for more than 180 days pointed to a deviation from the original objectives of the code intended by the Parliament.

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