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  • Srushti S Kekre, Akshay Shrivastava

Autonomy to Accountability: Code of Conduct Setting Standards of Transparency

[Srushti and Akshay are students at Gujarat National Law University.]

The Insolvency and Bankruptcy Code 2016 (Code) was enacted against the backdrop of abolition of the Sick Industrial Companies Act 1985 with an object to promote insolvency resolution and reorganization. The Code provides for a mechanism to revive an ailing company and authorizes a corporate debtor, operational creditor or financial creditor to present an application before the National Company Law Tribunal (NCLT) for initiating the corporate insolvency resolution process (CIRP) and elude liquidation.

By dint of the process, the control of the corporate debtor is legally endowed to the Committee of Creditor (CoC), which generally consists of the financial creditors. The CoC is considered as a decisive authority in the decision-making process during the insolvency resolution and is empowered with the control of the corporate debtor. Every action of the resolution professional necessitates ratification of the CoC. Nonetheless, the paramount responsibility of the CoC is to examine and approve the most appropriate resolution plan in compliance with Section 30(4) of the Code. Once the resolution plan is approved by the CoC, it is submitted before the NCLT for its approval. Subsequently, when the NCLT approves the resolution plan, it operates as a formal order and is legally binding on all the stakeholders.

In recent times, the Adjudicating Authority has disapproved several resolution plans on the ground that the principles of fairness, objectivity and reasonableness were not observed by the CoC while approving the resolution plan. Hence, the Insolvency and Bankruptcy Board of India (IBBI) has proposed a code of conduct for the CoC to consolidate the insolvency regime and to regulate the conduct of the CoC. It consists of certain ethical norms that the CoC is expected to comply with, while carrying out its day-to-day operations. Further, the proposed code of conduct seeks to safeguard other stakeholders against the arbitrary approval of a resolution plan which may be disadvantageous to their interests.

Irregularities in Functioning of CoC

The Code is formulated on the concept of the creditor in control model, wherein the CoC is the primary decision-making authority. The Adjudicating Authority earlier considered CoC as the sovereign decision-making body, however, its commercial wisdom and conduct has been subsequently questioned in series of judgments. In Jindal Saxena Financial Services Private Limited v. Mayfair Capital Private Limited, the NCLT condemned the delay in the insolvency resolution process due to the incompetency of representatives of the financial creditor. Subsequently, the Adjudicating Authority in K Shashidhar, MD, Kamineni Steel and Power India Limited v. Kamineni Steel and Power India Limited and Others, enunciated that the deliberate delay on the part of financial creditors in approving the resolution plan is against the spirit of the Code. It further held that the conduct of the committee of creditors is unreasonable and the Reserve Bank of India should monitor the mechanism of the concerned banks with respect to non-performing assets. However, the apex court in Essar Steel case held that the time frame is merely directive and not mandatory in nature, hence, the adjudicating authority can extend the time frame under certain circumstances.

Section 12 of the Code promotes timely disposal of cases to maximize the value of assets belonging to the corporate debtor. This was introduced to rectify the loopholes in the Sick Industrial Companies Act 1985. However, due to incompetent representatives, deliberate delay by the committee of creditors and lackadaisical conduct of the financial creditors, the CIRP process becomes less favourable.

In Bank of Baroda v. Mr Sisir Kumar Appikatla and Others, the Adjudicating Authority did not grant its approval to the resolution plan proposed by the CoC. The commercial wisdom of the committee was questioned as it deliberately disguised the restructure plan as resolution plan. It condemned act of CoC for taking undue advantage of the powers vested under the Code. Further, in case of Andhra Bank v. Sterling Biotech Limited and Others, the Adjudicating Authority disapproved the resolution plan as the majority of the members of CoC misused their voting power whereby former promoters of company and certain people refrained under Section 29A attempted to take over the company camouflaged as a one-time settlement under Section 12A.

The above precedents highlight the rising irregularities in functioning of the committee. The primary reason being that the powers and conduct of CoC is not regulated. The various stakeholders tend to lose their confidence in the efficacy of the insolvency process due to mismanagement, delays, unfair advantage to the committee, conflict of interest, etc. Thus, it becomes the fiduciary responsibility of the CoC to make wise decisions in the best interest of the stakeholders.

The UNCITRAL in its legislative guide on insolvency law observed that the dilation of committee’s powers leads to greater accountability in the insolvency regime. It states that the CoC should act in a bona fide manner and refrain from taking undue advantage of its powers. Further, the guide urged the states to adopt a mechanism of removing or replacing any representative or member of the CoC in case of negligence, incompetency, conflict of interest or fraud. Many countries such as the UK and the USA have a comprehensive set of guidelines to monitor and regulate the conduct of various participants in the insolvency regime. It acts as a guiding light for the stakeholders and reinstates their faith in the resolution process. Therefore, India should also regulate the conduct of committee of creditors for promoting efficiency and timely completion of CIRP.

The Proposed Code of Conduct

At present, there exists no guidelines or regulations whereby the conduct and working of the CoC is regulated. Moreover, concerns of lack of transparency in the decision-making of the CoC and its unethical conduct were raised by a legion of stakeholders. Thus, to address the above issue and to protect the interest of the varied stakeholders, the Code of Conduct for CoC was proposed by the IBBI. The Parliamentary Standing Committee on Finance in its 32nd report has also stressed upon the need for formulating a code of conduct for CoC.

The proposed Code of Conduct primarily focuses on maintaining transparency and aims to promote principles of fairness by the CoC in furtherance of discharging various duties and functions as envisaged under the Code. It provides that the CoC must act in a non-partisan manner and should not render decisions under coercion, favour or undue influence. CoC must not make any private gain and shall provide details about a potential conflict of interests when encountered. Further, it states that the CoC shall always act in consonance with the provisions of the Code while discharging its duties and exercising various powers under the Code.

Impact and Analysis

The proposed code of conduct envisages basic principles that the CoC ought to follow regardless of them not being explicitly provided under the Code. The proposed principles revolve around the transparency and accountability of CoC in decision making which are integral in building the trust of the stakeholders. Thus, the proposed code of conduct will not result in the fall of the supremacy of the CoC as the powers vested upon the CoC shall remain intact, and merely the modus operandi in the exercise of the powers would be streamlined.

Though the form in which the code of conduct would be implemented is yet to be ascertained, it remains indisputable that the CoC will continue to command greater control in the insolvency regime.

Nevertheless, arbitrary and partisan decisions of the CoC in ratifying the resolution plan are generally set aside or revoked by the Adjudicating Authority when the resolution plan is presented before it under Section 31 of the Code for its approval as discussed in the aforesaid case laws. Thus, the Adjudicating Authority ensures that only the resolution plan which safeguards and caters to the interests of the various stakeholders sees the light of day


Since its inception in 2016, the Code has been modified frequently to eliminate impediments to smooth functioning of the Code. IBBI has made concerted efforts to strengthen the code by improving the efficacy of CIRP process. The recent proposal of IBBI regarding code of conduct for the CoC is a revolutionary measure to inculcate the fundamental ideals of transparency, fairness and ethical conduct in the insolvency procedure.

The proposed code of conduct will not compromise the supremacy of the CoC as it shall continue to retain potency even after the enactment of the guidelines. The said code will only make the process more efficient and will reinstate the trust of stakeholders in the CIRP. Nevertheless, the code of conduct is not a panacea to address the loopholes in the existing insolvency regime. Other reforms such as effective strategy to curb non-performing assets, increase in number of NCLT benches to manage the burden of cases, efficient data management, disposal of cases within the prescribed time and other procedural or infrastructural changes will be needed to consolidate the insolvency procedure in order to realize the Sustainable Development Goal 8 i.e., to stimulate economic growth in India.


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