Resolution Professionals - A Case Study Under IBC
Author: LawSphereX
Category: Corporate & Insolvency
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RESOLUTION PROFESSIONALS: A CASE STUDY UNDER
IBC
Raghav Agarwal, BBA LLB (Hons.), Christ (Deemed to be University, Pune, Lavasa)
ABSTRACT
In India, there are several professions and the professionals who are adherents to these professions. A person who identifies himself with a profession having expertise in a field of activity and considers issues place before him in an objective and impartial manner subject nevertheless to a code of conduct. The Insolvency and Bankruptcy Code is transformational piece of legislation as it seeks to establish an ecosystem for handling Insolvency & Bankruptcy issues. Most importantly it offers an exit plan to all categories of persons – corporate, stakeholders, individuals and partnership firms, apart from over hauling century old legal framework. Hence it is a game changer in which the Bankers, Courts, Investors, and the initiators of insolvency proceedings will have to work in harmony for devising either a survival plan or liquidation of sick units and others facing debt default.
INTRODUCTION:
The Insolvency and Bankruptcy Code is a transformational piece of legislation as it seeks to establish an ecosystem which helps in handling Insolvency and Bankruptcy issues. Most importantly it offers and exit plan to all categories of persons – corporates, stakeholders, individuals, and partnership firms, apart from over-hauling century old legal framework. Hence it is a game changer in which the Bankers, Courts, Investors, and the initiators of insolvency proceedings will have to work in harmony for devising either a survival plan or liquidation of sick units and others facing debt default. The Securities and Exchange Board of India (SEBI) has recently released the norms for recovery of the investors’ money. The SEBI (Appointment of Administrator and Procedure for refunding to the investors) Regulations, 2018 have been notified in this regard.
These regulations have been issued by the SEBI in exercise of the powers conferred by Section 30 read along with Section 11(1) and Section 28A of SEBI Act, 1992, Section 23JB of Securities Contracts (Regulations) Act, 1956 and Section 19 of the IB of the Depositories Act, 1996. These Sections inter alia casts a duty upon the SEBI to protect the interests of investors in securities and to promote the development of and to regulate the securities market and recovery of amounts. 1 According to the Code, the insolvency procedure begins when a financial creditor, operational creditor, or corporate applicant, depending on the situation, applies to the Adjudicating Authority (AA) over the corporate debt default and provides the name of an IP who has given permission to serve as an Interim IP.
Upon accepting the application, the AA establishes a moratorium under section 14 of the Code (no institution of suits or legal processes against the debtor including the ongoing legal actions etc. ) and names an interim IP in accordance with section 16 of the Code. In the event of a corporate debtor or financial creditor, IP is automatically appointed, provided that no disciplinary actions are currently underway against IP.
If the applicant does not provide a proposal, the AA refers to the Board regarding the name of an IP and the Board's recommendation regarding it in the case of an operational creditor. The Board must suggest an IP's name in opposition to for whom there is not a pending disciplinary 1 D K Prahlada Rao, “Role & Responsibility of Insolvency Professionals under the CODE- An Analysis” [March 2017]
action. A financial creditor is distinguished from an operational creditor under the Code, and the
former is given priority during the liquidation process. A person who owes money, including any assignee, is considered a financial creditor. This includes any interest that is paid out without considering the worth of the money borrowed, etc. However, when referring to an operational debtor, it is a debt related to the provision of products and services, such as employment, or the payment of obligations to local or state governments.
REGISTRATION OF INSOLVENCY PROFESSIONAL (IP): -
Regulation 3 of IBBI (Insolvency Professionals) Regulations, 2016 provides that an individual is not eligible for registration unless he has passed the National Insolvency Examination and has passed the Limited Insolvency Exam and has 15 years of experience in management, after receiving Bachelors’ degree from a University established or recognized by law, or has passed the Limited Insolvency Exam and has experience of ten years as CA enrolled as a member of ICAI or is a CS enrolled as a member of ICSI or a cost accountant enrolled as a member of ICAW or an advocate enrolled with a Bar Council. Apart from all the above qualifications, an individual should be a fit and proper person.
In deciding this, the Board may consider any consideration as it deems fir, but not limited to integrity, reputation and character and absence of conviction and restraint orders and in competence including financial solvency and net worth. 2
POSITION OF IP IN THE CASE OF INSOLVENCY PROCEDURE RELATING TO
INDIVIDUALS & PARTNERSHIP FIRMS:
In the case of insolvency applications falling under Part III of the Code – Insolvency Resolution for individuals & Partnership firms – the procedure for appointment of an IP is on a different footing. There are two types of insolvency procedures, that is by two ways: - a) Fresh Start Process: - Under Section 80 of the IPC, a debtor cannot make an application if his gross annual income exceeds Rs. 60,000 or the qualifying debts exceeds Rs. 35,000, etc. Such restrictions are not 2 Surendra U Kanstiya, “Insolvency Resolution Professionals appointed as Administrator under the SEBI Regulations [2018] 1 IBJ (Art.) 103
there in Section 94. A debtor who is unable to pay his debts and fulfilling the conditions provided in Sec 80 (2) may make an application either personally or through an IP. Where an application is made by the debtor through an IP. Where an application is made by the debtor through an IP, the Adjudicating Authority (AA) should direct. The Insolvency and Bankruptcy Board of India (Board) within seven days of the receipt of the application, to confirm that there are no disciplinary proceedings against the IP who has submitted the application. The Board may either confirm the appointment of an IP or reject the same. In the latter case, the board should nominate another IP. 3 Such a person is appointed by AA as an IP.
However, where an application is made by the debtor directly, then the AA should direct the Board, within seven days of receipt of application, to nominate an IP for the Fresh Start Process and such a person is appointed by AA. The appointment of IP gives rise to examination of the application made and submit a report to the AA, either recommending acceptance of the application or rejection thereof. The IP can make an application under Section 91 for revocation of the debtors’ application made under Section 84 of the Code if there is a change in the financial position of the debtor or non-compliance by the debtor of the restrictions imposed on him, etc. b) Insolvency Resolution Process: - Under section 94 of the code, a debtor who commits a default may file an application to the Adjudicating Authority, either personally or through an IP for initiating the insolvency resolution process.
As defined in Section 3(12) “default” means non-payment of the debt when the whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor. This cannot include excluded debt as defined in Section 79(15) of the Code. Where the debtor is the partner of a firm, he cannot apply to the AA in respect of the firm unless all or majority of the partners make a joint application. A debtor is not eligible to make an application under Section 94 if an application in respect of
the debtor has been admitted during 12 months preceding the date of application under Section
94 of the Code.
3J. B. Heaton, Deepening Insolvency 30 J. Corp L. 465 (2004-2005)
INSOLVENCY PROFESSIONALS APPOINTED AS ADMINISTRATOR: -
An Insolvency Professional registered with the IBBI and empaneled by SEBI is eligible to be appointed as an Administrator. A person shall not be eligible if the appointment is being objected on the ground that it gives rise to justifiable doubts as to the independence or impartiality. The question involving issues of conflict of interest in the appointment shall be decided by the Recovery Officer. The Administrator shall also provide an undertaking to SEBI of absence of any conflict of interest with the defaulter, its directors, promoters, key managerial personnel, and its group entities. The terms and conditions of appointment including remuneration shall be specified by SEBI, on a case-to-case basis, after taking into consideration the quantum of work, the number of investors and the quantum of money involved.
The administrator shall maintain high standards of integrity, promptitude and fairness in the conduct of all hi business; shall act with due skill, care and diligence in the conduct of all his business; shall not misrepresent any facts or situations and shall refrain from being involved in any action that would bring disrepute to the profession; shall act with objectivity during the course of his professional dealings by ensuring that all decisions are made without any bias, conflict of interest, coercion, or undue influence of any party, whether directly or indirectly connected to sale of properties, verification of claims and refund of monies; shall not acquire, directly or indirectly, any of the assets of the defaulter; shall maintain complete independence in all professional relationships and conduct the verification and refund process.
4 As the case may be, independent of external influences; shall not conceal any material information or knowingly make a misleading statement to the Recovery Officer or SEBI; shall not act with mala fide or be negligent while performing the functions and duties under the Regulations; shall provide all information and records as may be required by the Recovery Officer within the time specified by him; shall ensure that confidentiality of the information relating to the sale of properties, verification and refund process, is maintained at all times and the Administrator may disclose any information after obtaining written authorization of the Recovery Officer or SEBI; shall disclose all costs towards the verification and refund process and endeavor to ensure that such costs are not unreasonable and shall comply with the terms and conditions of its appointment.
4 Shakti Deb and Indrajit Dube, Insolvency and Bankruptcy Code, 2016: revisiting with market reality, 2020
FUNCTIONS & OBLIGATIONS OF INSOLVENCY PROFESSIONALS:
The Code also specifies certain functions and obligations to be observed by the Insolvency professionals in Section 208. Where any insolvency resolution, fresh start, liquidation, or bankruptcy process has been initiated, it shall be the function of an insolvency professional to take such actions as may be necessary in the following matters: a) A fresh start process under Chapter 2 of the Code b) Individual insolvency process under chapter 2 of the code c) corporate insolvency resolution process under chapter 2 of part 2 of the code d) Individual bankruptcy process under chapter 4 of part 3 of the code e) Liquidation of a corporate debtor firm under chapter 3 of part 1 of the code.
The Insolvency Professional is also required to abide by the following code of conduct: (i) To take reasonable care and diligence while performing his duties (ii) To comply with all requirements and terms and conditions specified in the by-laws of the insolvency professional agency of which he is a member (iii) To allow the insolvency professional agency to inspect his records (iv) To submit a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as to the insolvency professional agency of which he is a member (v) To perform his functions in such manner and subject to such conditions as may be specified.
CHALLENGES AND OPPORTUNITIES TO INSOLVENCY PROFESSIONALS:
A perusal of what is stated above indicates that senior professionals with expertise and
experience of 10/15 years are required for the profession and it is not for ordinary mortals. In addition, high standards of integrity and probity are required of individuals desiring to join the
profession. The IP occupies a unique position and acts as an intermediary between the debtor/creditors on one hand and the AA on the other and functions under the watchful eyes of the agency and the board. This is a position of trust and confidence. In terms of work the insolvency professional must carry heavy workload-secretarial, legal, finance, management of business of the debtor, valuation, and sale of assets etc. , fall under the care of insolvency professionals. This calls for establishment of adequate and proper infrastructure facilities by the insolvency professional. In addition, adequate human resources, and experts in the field of finance, valuation of assets, security enforcement, taxation, etc. are required. Recognizing the complex nature of work to be handled by an IP, the Regulations provide for training of his staff including subject knowledge by the agency.
The agency is also entrusted with the task of developing the insolvency profession of its members by organizing educational programmers. This will keep the members updated on national and international development on a continuous basis in the field of solvency and related issues. In this task the agency is ably assisted by an advisory committee of professional members constituted by it and charged with the responsibility of advising the agency on development of insolvency profession, setting high standards for professional and ethical conduct and observance of best practices in relation to insolvency resolution, liquidation, and bankruptcy. 5 The members of the three professional bodies – ICSI, ICAI, ICWA are given a special privilege for enrolling as insolvency professionals by passing the Limited Insolvency exam with ten years of experience.
Others must pass both the National and Limited Insolvency and they should have 15 years of experience at the threshold. The Code provides a new avenue of opportunity to the CS members to enroll as members of the insolvency profession and so with this a new and emerging area of practice, CS members must imbibe a new skill and the ability to manage the tasks envisioned in the Code. A high degree of management skills, apart from the subject knowledge is required. Another aspect of the matter is handling of finance of the debtor requiring a high degree of integrity, reputation and absence of conviction and restraint orders. These qualities are kept in view by the Board while registering for the membership. There is also a need to observe the code of conduct as well. 5 Eddy Wymeersch, “Introduction: Recovery and Resolution, Future Solutions for Dealing with Insolvency
CORPORATE INSOLVENCY RESOLUTION PROCESS:
During the Resolution Period, the entire management of the debtor and custody of the assets of the debtor are placed in the hands of a resolution professional to ensure the protection of the assets of the debtor. The officers of the corporate debtor shall report to him. He is further vested with diverse powers ranging from executing contracts and documents in the name of the corporate debtor to appointing accountants, legal or other professionals for managing the operations of the corporate debtor. The resolution professional also constitutes a committee of the creditors and conducts the meetings of the creditors committee wherein all the resolution plans are laid down to bring the corporate debtor out of insolvency.
This plan needs to be approved by 75% of the voting share of the financial creditors within the prescribed time, failing which, the corporate debtor must undergo liquidation.
LIQUIDATION:
When a corporate debtor initiates liquidation, the resolution professional assumes the role of the liquidator. He verifies all the claims of the creditors and takes over and evaluates the assets of the corporate debtor against which a report is prepared by him. He shall carry on the business of the corporate debtor for its beneficial liquidation. He can obtain professional assistance from any person or appoint any professional to help him in the discharge of his duties. Moreover, he can institute and defend any suit or legal proceedings in the name of the corporate debtor. He shall take all such actions, steps, or signs, execute, and verify any paper, deed, receipt document, petition, affidavit, or any other instrument as may be necessary for liquidation, distribution of assets and in discharge of his duties.6
VOLUNTARY LIQUIDATION:
An insolvency professional shall act and assume the role of a liquidator in case of voluntary liquidation. Where the affairs of the corporate person have been completely wound up and its assets liquidated, the liquidator shall make an application to the Adjudicating Authority or AA for the dissolution of such corporate person.
6 Bart M. Lambrecht, “Liquidation, Bailout, and Bail-In: Insolvency Resolution Mechanisms and Bank
Lending”
FAST TRACK CORPORATE INSOLVENCY:
The insolvency professionals engaged in fast-track corporate insolvency shall have the same duties, powers, and role as in the case of corporate insolvency resolution process. Individual Bankruptcy: a) Fresh Start Process: A resolution professional can make an application for a fresh start on behalf of the debtor
provided that the eligibility provisions mentioned in the Code in this regard are fulfilled. The resolution professional shall examine the application and submit a report to the Adjudicating Authority or AA, either recommending acceptance or rejection of the application. He shall also provide a copy of the report to the debtor. The report shall contain details of qualifying debts and liabilities eligible for discharge. The resolution professional may call for additional information in connection with the application from the debtor. b) Insolvency Resolution Process: The resolution professional shall examine the application made under this process within 10 days of his appointment and submit a report to the Adjudicating Authority recommending acceptance or rejection of the application.
The resolution professional shall examine the application and ascertain that the application satisfies the requirements set out in the Code and that the applicant has provided information and given explanations sought by the resolution professional. Once the application is admitted, the resolution professional shall invite claims from the creditors in respect of which he shall prepare the list of creditors. He shall hold the meeting of the creditors and get the repayment plan approved by more than three-fourth in value of the creditors present in person or by proxy. He shall also submit the repayment plan along with his report on such plan to the Adjudicating Authority.
MONITORING OF INSOLVENCY PROFESSIONALS:
Monitoring of Insolvency Professionals is very important to ensure that they adhere to the prescribed standards and code of ethics while performing their duties as well as to ensure their
effectiveness in the insolvency regime. The Insolvency and Bankruptcy Board of India (IBBI) regulates and monitors the activities of the Insolvency Professionals (Ips) as well as the Insolvency Professional Agencies (IPAs) with whom the Insolvency Professional enroll themselves. The IBBI has laid down the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 that lay down the registration and eligibility procedures of the Insolvency Professionals, temporary surrender of certificate of membership, disciplinary proceedings and code of conduct relating to Insolvency Professionals.
Moreover, the Board has also provided powers to the Insolvency Professionals Agencies (IPAs) to lay down bye-laws wherein the IPAs may provide for additional requirements to be fulfilled by the members for registration, duties of the members, monitoring mechanism of members, grievance redressal mechanisms, disciplinary proceedings, surrender of professional membership etc.
ROLE OF INSOLVENCY PROFESSIONALS IN CORPORATE INSOLVENCY
RESOLUTION PROCESS UNDER THE CODE, 2016:
The Corporate Insolvency Resolution Process envisaged under the Code, 2016 is prominently a creditor-driven process, whereby the decision to let the debtor survive or to liquidate the same rests on a collective body of the creditors i. e. , the committee of creditors. Since the resolution professional (RP) is an appointee of the creditors, and the IP takes over the management and supervision of the company in insolvency, the business of the company may be said to be in creditors’ possession during the resolution process. 7 Unlike during the liquidation process, there is no vesting of assets and property in the RP, but the RP takes over the management of the business. Hence, the approach is like that under the UK Insolvency Act, 1986.
The assets of the corporate debtor are taken into custody by the RP chosen by the committee of creditors and the management of the affairs of the corporate debtor too, vested in the RP. Note that prior to appointment of a RP, an interim resolution professional (IRP) is appointed to perform the aforesaid functions till the committee of creditors is constituted and the RP is appointed. 7 Anjali Sharma, “Corporate Insolvency Resolution in India,” Economic and Political Weekly, Vol. 51, No. 15 [2016]
Management of the affairs of the Corporate Debtor: Section 17 of the Code, 2016 provides for vesting of the management of the affairs of the corporate debtor in the hands of interim resolution professional, which is natural consequence of a creditor in -possession regime. The concept of ‘debtor-possession’ implies that the debtor continues to remain in possession of the management of the entity during the resolution process. This was the approach under SICA, as SICA was evidently drawn based on the US Bankruptcy Code. The N L Mitra Committee advocated a deviation from the approach. The Code adopted the theme of “creditor in-possession” and therefore, vests the RP with the management of the affairs of the corporate debtor, starting from the date of appointment itself.
Further, the powers of the board of the directors of the corporate debtor shall stand suspended, and the same shall be exercised by the interim resolution professional. However, it is important to note that the powers of the interim resolution professional in such capacity is not unfettered – the powers of the interim resolution professional/ resolution professional are subject to the authority of the committee of creditors. It will be impractical for the RP or the administrator to start managing the day-to-day operations of the entity. Neither does the RP have the technical expertise to do so, nor is the replacement of existing management at all conducive to the idea of preserving or maximizing the going concern value of the entity. Of course, the RP has wide powers, but the issue is that the power must be exercised in the interest of the entity, and not as a matter of powerplay.
8 Sections 18, 20 and 25 of the Code talk about duties and functions of the RP. These may seem to suggest that the actual day-to-day operations of the entity will be carried out by the RP. However, the RP must deserve the existing management. The RP has powers to appoint agencies to carry out his management function. The idea behind the law is to put the RP effectively in the steering position, so that the going concern is in the creditors’ control. To facilitate the interim resolution professional/ resolution professional in fulfilling his responsibility of managing the affairs of the corporate debtor, sections 20 and 25 provide authority to interim resolution professional/ resolution professional to do necessary acts, including the following:
8 Jasper Vikas. “Resolution of Debts and Insolvency and Bankruptcy Code, 2016”
(i) To enter contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process; (ii) To raise interim finance, subject to certain conditions; (iii) To issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a “going concern” (iv) To appoint accountants, legal or other professionals as may be necessary; etc. However, section 28 acts as a limit in the authority of the interim resolution professional/ resolution professional – it lists out certain acts which shall not be undertaken without the prior approval of the committee of creditors.
The cats include – raising interim finance more than limits approved by the committee of creditors, creating security interest on the assets of the corporate debtor, undertaking related party transactions, amending constitutional documents of the corporate debtor, amongst others. Management of the entity as “going concern”: The Code emphasizes that the interim resolution professional shall manage the operations of the corporate debtor as a “going concern. ” “Going Concern” refers to an enterprise continuing in operation for the foreseeable future. It is assumed that the enterprises has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. The provision sets out the guiding principle for the interim resolution professional or the resolution professional managing the corporate debtor during the resolution process.
The interim resolution professional/ resolution professional, therefore, shall administer the company “as is” without making any material alterations in the scale of operations of the company or selling off material value of its assets which may endanger any possibility of the revival of the corporate debtor. Custody of the assets of the corporate debtor: Section 18 requires the interim resolution professional to take control and custody of any asset over which the corporate debtor has ownership rights and Section 20 obliges the interim resolution professional to make every endeavor to protect and preserve the value of the property
of the corporate debtor. Again, section 25 states that it shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor. The Code has also amended section 429(1) of the Companies Act, 2013 empowering the NCLT to pass instructions to executive authorities for taking control and custody of assets, in case the RP is facing difficulties in doing so. Conducting the Corporate Insolvency Resolution Process: Section 23 of the code states that the resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period.
During the corporate resolution resolution process period, the interim resolution professional/resolution professional must undertake the following activities: - (i) Making public announcement of the insolvency resolution process in respect of the corporate debtor; (ii) Collection of information relating to the assets, finances, and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to business operations, financial and operational payments, list of assets and liabilities; (iii) Receipt and collation of claims of creditors submitted pursuant to the public announcement; (iv) Constitution of the committee of creditors; (v) Convening and conducting the meetings of the committee of creditors; (vi) Filing necessary information with information utility; (vii) Preparation of information memorandum for facilitating the formulation of resolution plan; (viii) Inviting prospective resolution applicants to put forward their resolution plans; (ix) Examining each resolution plan received to see whether the resolution plan meets
the criteria listed under section 30(2) and presenting the eligible resolution plans at the meetings of the committee of creditors; (x) Submission of the resolution plan approved by the committee of creditors to the adjudicating authority for approval of the latter; (xi) Making applications for avoidance of preference, undervalued, fraudulent transactions, etc. Normative Expectations from the IP in CIRP:
1. Crucial Duties under the Code:
The code confers several duties on the IP, however, following are few crucial duties which the IP should perform for efficiently conducting the insolvency resolution process. (i) Once an application is admitted by NCLT, IP is required to give public announcement in two newspapers for declaring that insolvency resolution process has been initiated and on IBBI’s website and debtor’s website; (ii) One of the duties of the IP is to receive and collate all claims submitted by the creditors because of the public announcement.
To perform the said duty, IP should allocate adequate resources for managing the claims which shall include receiving the claims, comparing the claims with books of accounts of the debtor, reconciliation and update the list of claims submitted; (iii) Upon receiving the claims submitted by the creditors, IP should form the committee of creditors of all financial creditors and plan for the first meeting of the committee of creditors within 30 days of his appointment.
IP should convey the date, venue, agenda, notice for formation of committee of creditors and the convene the first meeting of the committee of creditors; (iv) The agenda for the first meeting of the committee of creditors should cover, at least, following two proposals, firstly, the proposal to ratify the expenses incurred by the applicant in filing the insolvency application and secondly, the proposal to resolve appointment of IP as resolution professional or to replace IP by another IP. Further,
IP should give a presentation to a committee of creditors on the existing business situation, total liabilities, liquidation value, high level turnaround and revival options. (v) Simultaneously, IP should also carry out physical verification of assets of the debtor and IP may take assistance from values and security personnels in carrying out the said duty. IP is required to conduct the entire corporate insolvency resolution process and simultaneously manage the operations of the debtor during the corporate insolvency resolution period, as a going concern.
2. Appointment of Consultants and Professionals:
In performing the duties under the Code, IP would need assistance from several consultants/professionals to conduct the entire corporate insolvency resolution process and manage the operations of the debtor as a going concern.
Following are the consultants whom the IP may have to appoint immediately on commencement of corporate insolvency resolution process to optimize outcomes for all stakeholders: (i) Two reputed valuation firms should be appointed, to get valuation of assets of the debtor for arriving and estimated liquidation value; (ii) Security consultants to cover integrity of physical assets, company records and personnel of IP to work at the debtor’s premises including immediate deployment of manpower, as required; (iii) Appointment of key managerial person(s) with suitable industry experience to take care of production and plant related technical matters and who can assist the IP in supervising the activities in the debtor company, as the powers of the Board of Directors are suspended; (iv) Appointment of a legal professional, auditor or any technical consultant for assisting IP in all related matters; (v) Ensure all stock exchange formalities are complied with in case of a listed company.
3. Key Contracts and pending legal disputes:
(i) IP should obtain list of all pending litigation filed by or against the debtor and serve the NCLT order of moratorium on the relevant court/tribunal/authority; (ii) IP should communicate and hold meetings with all government authorities including SEBI, Tax authorities etc. as may be required; (iii) IP should study all related party transactions and transactions where the debtor has given guarantee/ undertaking/ contractual comforts for loans taken by any other person and check whether these are on arms-length basis and IP should ensure that adequate insurance policies are in place for protecting the assets of the debtor and original insurance policies should be taken into IPs custody; IP should identify the contracts under which receivables are accruing and hold meetings with such counter-parties for continued operations of the debtor.
CHALLENGES FOR INSOLVENCY PROFESSIONAL:
Professionals in India have been operating in an environment that protects industrial undertakings and large commercial enterprises from closure despite losses and inability to pay debts, by laws such as SICA or State Relief Undertakings Act, which are still operative. From the freedom to pay the debts or other liabilities as and when you can do so, the law is changing to declare you insolvent, if you have no money to pay the debt when it falls due for payment. The focus of the professionals advising business enterprises must shift to prudent cash flow forecasting and management practices. Although the definition of IP under the Code makes no reference to chartered accountants, cost accountants, company, and lawyers, it is clear now from the regulations that only such professionals will have to undertake the tasks of insolvency resolution and liquidation of corporations.
9 The IPs need to note that the code at every stage of the appointment of an interim or final IP or approval of change of IP requires that the IBBI certify that there are no disciplinary proceedings pending against the IP and give specific approval for appointment of IP. Further, disciplinary
9 Puchakayala NVV, “Impact of Resolving Insolvency on Entrepreneurial Activity in India” [2023]
proceedings may be initiated against the liquidator or resolution professional based in an application made by a creditor in cases where undervalued transactions are not reported by them. The Code also offers a time bound resolution process aimed at maximizing the value of distressed businesses. This will benefit not just the creditor and debtor of the companies but also the overall economy because capital and productive resources will get redeployed relatively quickly. Further, to achieve maximum value of the distress business, the Code assigns duties, and responsibilities to the Insolvency Professionals and despite the lot of challenges in their way, the Insolvency professionals are trying to achieve the same in the manner as prescribed under the Code.
CONCLUSION:
IBC is a double-edged sword. One must tread very carefully. The predominant objective of IBC is to see whether there are reasonable prospects for revival of the fortunes of the business and if it is not, put the business in liquidation mode and liquidate the assets in a time bound manner. Kingfisher brand did not fetch any great value when the same was put on the mat as there was a huge delay between the time the airline had grounded its fleet of aircraft and the time when auction was announced. Ironically bankers were vying with each other to the ground. The IBBI has been doing a great job of regulating the insolvency professionals. An effective disciplinary mechanism designated by the IBBI has ensured that the professionals perform their task in a diligent manner.
The decision of SEBI to authorize the appointment of only those professionals who are registered with IBBI is a welcome move. The same would certainly result in expeditious completion of the refund process and in turn benefit the investor community. The Government has provided in the Code a mechanism for resolving Insolvency and Bankruptcy through Insolvency Professionals subject to the supervision and control of the Adjudicating Authority. IBBI and the IP Agency will regulate the activities of RP. The registered IPs can act as the RP or Trustee and Liquidators under the Companies Act, as well as under the Code. For the quality of the services required to carry on the business of the debtors on going concern basis and to maximize the value of the debtors, the entry norms for the IPs are strict, requiring professional standing for not less than 10 years for the CA, CS,
CWA, and Advocates subject to passing of the examination. Therefore, to work as the RP is a new and challenging opportunity which needs thorough experience of the legal, financial, and accounting framework as well as a commercial mind to run the business of the debtor as the going concern.