Need a code of conduct for the creditors committee

Valuation can be tricky at the best of times and lenders with their commercial wisdom are the best judges.

In view of the manner in which the lenders of Videocon Oil Ventures (VOVL) Limited, a subsidiary of Videocon Industries Limited (VIL), have reportedly contacted CGSB management, in order to ensure wider participation in the resolution process of the claim. insolvency, a code of conduct for the Creditors Committee is clearly needed. Indeed, the numerous instances of poor performance by creditors and protracted cross-litigation over the past two years have rightly drawn criticism.

The sanctity of the Corporate Insolvency Resolution (CIRP) process has faded into the shadows, with the courts raising questions about the business judgment of creditors in the Videocon Group’s insolvency process. Bankers ostensibly want to avoid the embarrassment they faced during the VIL resolution; at the time, the Mumbai bench of the NCLT challenged the consortium for accepting an offer for 13 entities of the Videocon group – presented by Twin Star Technologies of Anil-Agarwal – which was surprisingly close to the liquidation value. The haircut was 95%.

The Parliamentary Standing Committee on Finance noted that there was a need to develop a code of conduct for the consortium in order to facilitate better decision-making. After all, the CoC has the final say when it comes to deciding on offers. The code must ensure that any process put in place must be followed; unfortunately, creditors beat the process at their convenience. The voting process should be structured without too many turns, as happens in some cases.

Again, the process for appointing insolvency professionals is expected to change. The appointment of insolvency professionals should be overseen by the court, which should assess their qualifications. Experts point out that insolvency professionals seem to follow the line of lenders. The insolvency practitioner, they say, should not be subordinate to the lenders. There have been cases where the professional has been changed; it would be better if the person was hired independently and allowed to lead the process objectively, without any interference.

Again, lenders need to delegate experienced people – at least at the level of a chief executive officer – so that the deliberations and the voting process are more meaningful. Apparently, representatives are often not fully familiar with the case in question or sufficiently experienced to be able to make an effective contribution. Given the cases where the final price is very close to the liquidation value, it should be up to the CoC to explain why it does not accept fair value. In general, the Insolvency and Bankruptcy Code (IBC) must be amended to allow the sale of a business in part; this could earn creditors a better price.

It is a fact that lenders are disappointed with CIRP and it is no longer their first option when trying to resolve stress. Sales to Asset Reconstruction Companies (ARCs) are now strong as banks prefer to reduce cash transactions against fully provisioned assets. Single settlement cases (OTS) with defaulting promoters are also becoming common. Certainly, since many CoC members are public sector banks, management is more comfortable carrying out a resolution through a process controlled by the courts. In the VIL case, three of the dissenting creditors and three PSU lenders appealed the order, after the court flagged the winning bid as being too close to the liquidation value. This suggests that they were not comfortable with the court’s point of view.

Valuation can be tricky at the best of times and lenders with their commercial wisdom are the best judges. However, the ground rules, set by the IBC, must be duly followed; Videocon resolution ended up undermining the sanctity of the clearly defined rules-based architecture of the IBC and delaying the resolution process itself. Lenders need to improve their game.

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