Delhi High Court asks IBBI to frame code of conduct for functioning of Committee of Creditors within 3 months

The Delhi High Court has directed the Insolvency and Bankruptcy Board of India (IBBI) to frame a code of conduct or guidelines for the effective functioning of Committees of Creditors (CoC), within three months [Kunwer Sachdev v. IDBI Bank & Ors]..Justice Purushaindra Kumar Kaurav said that the CoC plays a significant role in the entire Corporate Insolvency Resolution Process (CIRP). Given the sanctity of the “commercial wisdom” of the CoC, which is protected by the legislative mandate from unnecessary interference, there is a compelling need for a code of conduct/guidelines for their effective working.“The IBBI is directed to frame/finalise a code of conduct/guidelines in accordance with its stand set out in the instant case, principles mentioned hereinabove and as per other relevant considerations, within a reasonable period of time, preferably, within three months from the date of the passing of this judgment, for the effective functioning of the CoC, without diluting the sanctity of the "commercial wisdom" of the CoC and the legislative intent of the IBC,” the Court ordered. .Justice Kaurav passed the direction while hearing a plea filed by Kunwer Sachdev, former director of Su-Kam Power Systems Limited. The company went into CIRP in 2018.It was the petitioner's case that Su Kam was valued at ₹300 crore, but the CoC diminished the value of the company to an extent that the banks only received a meagre amount of about ₹10 crore from the sale of the company.The petitioner said that this is a startling case and a glaring example of misuse of power/non-exercise of power by the CoC, causing immense prejudice to him. He, therefore, submitted that appropriate mechanisms should be made available for raising grievances against the conduct of the CoC for the effective implementation of the provisions of the Insolvency and Bankruptcy Code (IBC)..The Court held that the CoC takes the driver’s seat on the entire voyage of the CIRP and that the commercial wisdom of the CoC functions in the same way as the Global Positioning System (GPS) works for the driver in any journey.“The commercial wisdom of the CoC is placed on the highest pedestal in a sense that even the Adjudicating Authority is not empowered to lift the veil on the merits of the decision.”The Bench said that the need for a code of conduct assumes greater importance in light of the fact that once a decision is taken by the CoC, the aggrieved party is deprived of legal remedies, except to a limited extent. Therefore, “the decision-making process should itself be infused with sufficient safeguards of reasonableness, fair-play, proportionality and adherence to the principles of natural justice,” the Court held.It thus directed the IBBI to come with guidelines for the functioning of CoCs..It was made clear that the code of conduct is not intended to question the justness of the CoC's decision, shall be subservient to the IBC."The code of conduct shall be effectively based on the principles of integrity, objectivity, professional competence, due care and confidentiality. Furthermore, the code of conduct must also reflect the fundamental features of the Wednesbury principles of fairness and proportionality in order to give true meaning to the legislative intent of the IBC. Moreover, it should also reflect the principles of natural justice to be followed by the CoC while taking any measure with respect to any stakeholder during the subsistence of the entire CIRP.".Senior Advocates Sudhir Nandrajog and Siddharth Yadav along with Advocates Apoorv Agarwal, Prachi Darji, Divya Verma and Kanishka Lunia appeared for the petitioner.Advocates Siddhartha Barua and Praful Jindal appeared for IDBI Bank and State Bank of India.Advocate Ateev Mathur appeared for Axis Bank.Bank of Maharashtra was represented through Advocates VK Gupta and Kaushiki Kashyap.Advocate Dhruv Gupta appeared for HDFC Bank.Advocate Amol Sharma represented the Reserve Bank of India (RBI).Advocate Yajur Sharma appeared for Resolution Professional Rajiv Chakraborty.Advocates Puneet Jain and Lisha Bhati represented IBBI..[Read Judgment]