Unchecked discretion of creditors undermines insolvency code in India

Source: The post Unchecked discretion of creditors undermines insolvency code in India has been created, based on the article “Holding creditor power in IBC to account” published in “Businessline” on 18 June 2025. Unchecked discretion of creditors undermines insolvency code in India.

UPSC Syllabus Topic: GS Paper2-Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

Context: The Insolvency and Bankruptcy Code, 2016 (IBC) introduced a creditor-driven and time-bound resolution process for corporate debt. Central to this framework is the Committee of Creditors (CoC). However, concerns are now growing over the CoC’s unchecked discretion, lack of transparency, and procedural opacity in key decision-making.

For detailed information on Insolvency and Bankruptcy Code read this article here 

Unchecked Discretion of the CoC

1. Commercial Wisdom Beyond Review: The courts have established that they will not interfere with the CoC’s commercial decisions. However, this deference assumes that decisions are made through a transparent, informed process. In reality, decisions are often made without explanation, leaving stakeholders uncertain and excluded.
2. Opaque Decision-Making Practices: There is no statutory requirement for the CoC to record its reasoning or deliberations. As a result, important decisions are taken in silence, with resolution plans being rejected or accepted without justification.
3. Erosion of Confidence in the Process: Instances such as Kalyani Transco v. Bhushan Power & Steel Ltd (2025) show that courts have recognized CoC misconduct, undermining the principle that their discretion will be fair and informed.

Consequences of Procedural Opacity

1. Suboptimal Outcomes and Stakeholder Confusion: Low recovery rates and high liquidation do not automatically indicate bad faith. But without any disclosed reasoning, it is impossible to assess if these outcomes resulted from valuation issues or poor judgment.
2. Loss of Legitimacy and Fairness: Without minimal disclosure, even well-meaning decisions appear arbitrary. This affects the perceived fairness of the IBC process and weakens institutional trust.
3. Accountability Without Diluting Authority: The issue is not with creditor primacy but with unaccountable use of power. Procedural discipline, not judicial overreach, is the missing safeguard.

Regulatory Loophole and Its Impact

1. Removal of Disclosure Mandate: Until 2020, Regulation 39(3) required the CoC to record deliberations on resolution plans. Its removal through the 2020 amendment left a significant gap in transparency.
2. Opacity in Economic Decision-Making: In a process determining corporate fate, absence of recorded reasoning is indefensible. A simple return to disclosure norms would enhance fairness without reducing CoC’s authority.
3. Call for a Simple Procedural Reform: Reinstating the duty to briefly record reasons for key decisions—like liquidation or plan rejection—would restore procedural checks. Even brief notes can show that discretion was not arbitrary.

Learning from Comparative Practices

1. UK’s Structured Transparency: In the UK, insolvency processes like CVAs and pre-packs require structured disclosures. SIP 3.2 and SIP 16 mandate that stakeholders be clearly informed about processes and justifications.
2. Singapore’s Judicial Oversight: Singapore’s IRDA combines creditor control with judicial supervision to ensure procedural fairness. This ensures commercial discretion aligns with legal accountability.
3. Administrative Law Expectations: Globally, decisions affecting rights are expected to be made transparently. This shows that reasoned discretion and commercial autonomy can coexist.

Path Forward for the IBC Framework

1. Proposal for Electronic Records: CoC deliberations should be recorded as digitally signed, time-stamped documents. These need not be disclosed to all but must be available in case of legal scrutiny.
2. Ensuring Fair Use of Power: This reform would not interfere with what the CoC decides, only ensure that its decisions are taken fairly and transparently.
3. Protecting the Code’s Legitimacy: The IBC’s promise lies in efficiency and fairness. Reintroducing transparency will preserve its credibility and fulfill its foundational purpose.

Conclusion

The IBC has reshaped India’s insolvency landscape. But unchecked discretion undermines its legitimacy. To restore faith, the CoC must continue to decide—but also explain. Transparency is essential to institutional credibility and long-term sustainability.

Question for practice:

Discuss how the unchecked discretion of the Committee of Creditors affects the transparency and fairness of the IBC resolution process.