Relevance: Mains: G.S paper II: Governance
Context:
- The stand taken by the Committee of Creditors of Reliance Communications in rejecting the resignation of Anil Ambani and four other directors of the company is right.
Background:
- It ensures that the people who were at the helm while the company was run to the ground are around to ensure the completion of the resolution process.
- Until the dues of the creditors are, at least partly, paid. The beleaguered company had to shut down its mobile operations after being unable to pay dues exceeding ₹33,000 crore.
- Asking Ambani and other directors to continue with their duties and responsibilities and provide full cooperation in the insolvency resolution is only justified as they would be the most well-equipped to provide information regarding the assets and liabilities of the company.
Significance behind the ruling:
- The rules on handling the resignation of the managing director and members on the board of the corporate borrower are not explicitly spelt out in the Insolvency and Bankruptcy Code.
- The adjudicating authority accepts the suspension of powers of the board of directors and their transfer to the resolution professional, once the insolvency resolution process begins;
- The board members and the managing director are expected to continue discharging their duties pertaining to the running of the business.
- The main difference is that while the chief executive functioned under the supervision of the board of directors earlier, he would function under the supervision of the resolution professional once insolvency proceedings commence.
- This is justifiable, as the administrator is not expected to possess the skills required to run the company and ensure that the creditors get back as much of their dues as possible.
- The Code can also hold the directors accountable for their actions taken in the ‘twilight period’, which can be up to two years preceding the commencement of the insolvency proceedings.
- If the directors are found negligent in containing the potential loss to the creditors, then they are liable to make such contributions to the assets of the corporate debtor as asked by the adjudicating authority.
- Enforcement of such actions becomes easier if they remain in the organisation.
- The action of the creditors of Reliance Communications sends a signal that those responsible for the state of affairs at the company cannot just walk away, absolving themselves of all responsibilities.
- It is doubtful if this action will help the resolution process in a material way.
Way forward:
- The directors of the corporate debtor can choose to remain taciturn and not cooperate with the resolution professional.
- It is only when the creditors have exhausted all avenues of making the corporate debtor pay his dues, will they drag the company to insolvency proceedings.
- It is doubtful if the board can be made to help the administrator.
- With the IBC still a work in progress, it is hoped that the role of key management personnel can be better elucidated in the future.