Analysis on Role and Responsibilities of Insolvency Professionals in the Corporate Insolvency Resolution Process
Adv. Sahil Arora
High Court of Delhi
Introduction
The Insolvency and Bankruptcy Code, 2016 (in short ‘Code’) is a landmark legislation consolidating erstwhile SICA, 1985 and some provisions of the Companies Act. It is viewed as a ‘Game Changer’ and would have a long term impact on all stakeholders be it Banks, FIs, PSUs, Borrowers, Foreign Investors etc. The passing of the Code is an important milestone and paves the way for economic and banking reforms in the country. The Code has been fully implemented on and from 1st December 2016.
The Insolvency and Bankruptcy Code is a bold step forward for insolvency resolution in India, and has great potential to succeed. The Code is in its infancy currently, and its success will depend substantially on how well the IPs perform their functions under the Code. This is especially important in the first few years of implementation of the Code which are precedent forming with respect to any statutory enactment.
One of features of Code is that it seeks to balance the rights of all stakeholders by adopting a “professional-in-possession” model, meaning that the driving force of the insolvency resolution mechanism (including interim management of the debtor) is an independent, regulated but private insolvency professional (“IP”), working under the overall supervision of a committee of creditors. This approach seeks to reduce delays by removing the onus of supervision of the resolution process from a court/tribunal to one in favour of the IP and reducing incentive for the promoters to adopt dilatory tactics by making the IP in charge of interim management of the debtor.
Insolvency Professional is appointed to conduct the insolvency resolution process for all categories of persons including the interim Resolution Professional in accordance with the procedure laid down in the Insolvency and Bankruptcy Code.(“Code”). IP comes on the horizon when the certain persons(as mentioned under the Code) initiate insolvency proceedings against the Corporate Debtor(“CD”).
IP is a professional who is endowed with specialised knowledge and training and is recognised by the Insolvency Professional Agency(“Agency”) and the Insolvency and Bankruptcy Board of India(“Board”) for undertaking insolvency proceedings of corporate debtor.
The insolvency process under the Code is initiated when a financial creditor,(“FC”) operational creditor(“OC”) or Corporate applicant (as the case may be) makes an application to the Adjudicating Authority (“AA”) intimating the Adjudicating Authority about the default committed by the Corporate Debtor in repaying the operational debt or financial debt (as the case may be). The application is accompanied by the name of an IP who has consented to act as an Interim IP.
On the acceptance of the application the AA appoints an interim IP in terms of section 16 of the Code and declares a moratorium in terms of section 14 of Code. The appointment of IP in the case of financial creditor or the Corporate debtor as proposed respectively in the application under section 7 or section 10, shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.(Ref.Section 16(2) of Code).
However, the position in the case of operational creditor is somewhat different as when an application for initiation of corporate insolvency resolution process is made by an operational creditor, there arises two scenarios:
- a) no proposal for an interim resolution professional is made, the Adjudicating Authority shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional.
- b) a proposal for an interim resolution professional is made under sub-section (4) of section 9, the resolution professional as proposed, shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.
In case, no proposal for an interim resolution professional is made by operational creditor in its application initiating corporate insolvency resolution process, the Adjudicating Authority shall make a reference to the Board and the Board shall, within ten days of the receipt of a reference from the Adjudicating Authority recommend the name of an insolvency professional to the Adjudicating Authority against whom no disciplinary proceedings are pending, to be appointed the insolvency professional in that particular matter.(Ref. Section 16(3) and (4) of Code)
The present article analyses the role of insolvency professionals (IPs) in the process of corporate insolvency resolution. While an insolvent company essentially comes under the creditors’ discretion, the IP becomes the nodal agency that brings the creditors together, ensures the going-concern nature of the insolvent entity during the resolution process, preserves its assets and, where required enhances the value of assets by challenging questionable transfers of assets or creation of obligations, and above all, plays an enabling role in the framing of the resolution plan. It may be intuitive to think of the IP as an agency imposed by some or other creditors, and therefore, have the upfront risk of being taken as anti-debtor, it is important to understand that the IP’s play a crucial role of balancing and maximising the interests of the corporate debtor and the creditors.
Requirement of experienced and specialized Professionals for Insolvency and Liquidation Process.
It is emphasized that processes of resolution and liquidation should be conducted by specialized professionals and their need is very well recognised. UNCITRAL Legislative Guide on Insolvency Law had also appreciated the role of “insolvency representative” and recognised their role as follows:
“However appointed, the insolvency representative plays a central role in the effective and efficient implementation of an insolvency law, with certain powers over debtors and their assets and a duty to protect those assets and their value, as well as the interests of creditors and employees, and to ensure that the law is applied effectively and impartially. Accordingly, it is essential that the insolvency representative be appropriately qualified and possess the knowledge, experience and personal qualities that will ensure not only the effective and efficient conduct of the proceedings and but also that there is confidence in the insolvency regime.”[1]
In “Orderly and Effective Insolvency Procedures”[2] by International Monetary Fund, the International Monetary Fund, has described the role of a liquidator or an administrator with a suitable caution –
“The liquidator and the administrator play a central role in the effective implementation of the law. Although their respective roles differ substantially, they are similar in one important respect. As court-appointed officials, they have an obligation to ensure that the law is applied effectively and impartially. Moreover, since they normally have the most information regarding the circumstances of the debtor, they are in the best position to make informed decisions. That does not mean, however, that they are a substitute for the court: due process requires that a dispute between the liquidator and an interested party be adjudicated by a court of competent jurisdiction. Even in countries where there are serious problems with the capacity of the judiciary, there is a limit to the amount of authority that the law can confer upon these officers.”
It will also be worthy to mention that Bankruptcy Law Reforms Committee, the recommendations of which has led to the enactment of the Code, in its Final Report had also emphasised the role of an insolvency professional as follows:
“In an insolvency and bankruptcy resolution process driven by the law there are judicial decisions being taken by the adjudicator. But there are also checks and accounting as well as conduct of due process that are carried out by the IPs. Insolvency professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process.
. . . . In administering the resolution outcomes, the role of the IP encompasses a wide range of functions, which include adhering to procedure of the law, as well as accounting and finance related functions. The latter include the identification of the assets and liabilities of the defaulting debtor, its management during the insolvency proceedings if it is an enterprise, preparation of the resolution proposal, implementation of the solution for individual resolution, the construction, negotiation and mediation of deals as well as distribution of the realisation proceeds under bankruptcy resolution. In performing these tasks, an IP acts as an agent of the adjudicator. In a way the adjudicator depends on the specialized skills and expertise of the IPs to carry out these tasks in an efficient and professional manner.
The role of the IPs is thus vital to the efficient operation of the insolvency and bankruptcy resolution process. A well-functioning system of resolution driven by IPs enables the adjudicator to delegate more and more powers and duties to the professionals. This creates the positive externality of better utilisation of judicial time. The worse the performance of IPs, the more the adjudicator may need to personally supervise the process, which in turn my cause inordinate delays. Consumers in a well-functioning market for IPs are likely to have greater trust in the overall insolvency resolution system. On the other hand, poor quality services, and recurring instances of malpractice and fraud, erode consumer trust.”
In tune with the recommendation of the Bankruptcy Law Reforms Committee, the Code requires an insolvency professional to play a catalytic role in corporate insolvency process (as Resolution Professional), corporate liquidation process (as Liquidator), individual insolvency resolution (as Resolution Professional) and individual bankruptcy process (as Bankruptcy Trustee). This article focuses solely on the role of an insolvency professional as “resolution professional” in the corporate insolvency resolution process.
Role and duties of IP in the Corporate Insolvency Resolution Process under the IBC Code
The entire insolvency and bankruptcy process under the Code is managed and regulated by licensed professionals, namely IP’s, duly appointed by the AA. Insolvency Process Resolution(“IPR”) driven by the law have adequate checks, accounting as well as due processes that are carried out by the IPs. Therefore, the IPs form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the entire insolvency process.
In administering the resolution outcomes, the role of the IP encompasses a wide range of functions, which includes adhering to the procedures of law as well as accounting and finance related functions. The latter includes the identification of assets and liabilities of the defaulting debtor, management during the insolvency proceedings, preparation of the resolution proposal as well as distribution of the realisation proceeds under bankruptcy resolution. In performing these tasks, IP acts as an agent of the AA. In order to complete the above tasks effectively and professionally, the AA depends and relies upon the IP’s knowledge and experience.
The role of the IPs is thus vital to the efficient operation of the IPR. When the resolution system enabled by IP works in a smooth and efficient manner, adjudicating authority tend to give more authority and responsibility to the IP’s.
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.(“COC”).
Since the Resolution Professional (“RP”) is an appointee of the committee of creditors and 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. It is pertinent to 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. The role played by the RP (including an interim resolution professional) has been explained in the following paragraphs.
Management of the affairs of the corporate debtor
Section 17 of the Code provides for vesting of the management of the affairs of the corporate debtor in the hands of interim resolution professional, which is a 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 on the basis of the US Bankruptcy Code.
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 are not unfettered and the powers of the interim resolution professional/resolution professional are subject to the authority of the committee of creditors.
Section 17 also provides for suspension of the powers of the board of directors, yet clearly it states that all officers and employees will report to the interim resolution professional. Hence, the suspension of the powers of the board of directors must have no bearing on the executive machinery. It is to be noted that the executive machinery may typically be headed by the managing director. Therefore, the managing director, who works under the supervision of the board of directors, will now work under the supervision of the IRP. Executive directors will cease to have the powers of “directors” but will continue their respective functional roles, under the supervision of the interim resolution professional.
The duties of Insolvency Professional in CIRP Process are:
(i) On appointment as an interim IP in the case of a corporate debtor, the first and the foremost duty is to make a public announcement about the commencement of insolvency process which coincides with the admission of the application by the AA. The contents of public announcement should conform to requirements prescribed in section 15 of the Code read with Regulation 6 of Insolvency & Bankruptcy Board of India(Insolvency Resolution Process For Corporate Persons)Regulations,2016.
(ii) The public announcement should include details of the date of appointment of the IP, the name of the corporate debtor, address, ,the last date for submission of claims by the creditors. The public announcement should be made in the Form A(Ref. Regulation 6(2) of Insolvency & Bankruptcy Board of India(Insolvency Resolution Process For Corporate Persons Regulations,2016 and public announcement should appear not later than three days from the date of appointment of the IP. The public announcement should be published in one English language newspaper and one Regional language newspaper each to be circulated at the registered office and principal office of the corporate debtor.
Sections 18, 20 and 25 of the Code also lays down the duties and functions of the RP. 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. In order 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:
(i) to enter into 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.
Section 28 of Code acts as a limit to authority of interim resolution professional/resolution professional as it lists out certain acts which shall not be undertaken without prior approval of committee of creditors. These acts include:
(i) raising interim finance in excess of limits approved by the committee of creditors.
(ii) creating security interest on the assets of the corporate debtor.
(iii) changing the capital structure of the corporate debtor,
(iv) undertaking related party transactions.
(v) amending constitutional documents of the corporate debtor etc.
Management of the entity as “going concern”
The Code emphasises that the interim resolution professional shall manage the operations of the corporate debtor as a “going concern” (Refer Section 20 of Code). “Going concern” refers to an enterprise continuing in operation for the foreseeable future. When the management of an entity is to be run on a going concern basis, it is generally believed that the enterprise has neither the intention nor the necessity of liquidation[3].
The interim resolution professional or resolution professional will manage the company “as is,” without making any significant changes to the scope of operations or selling off a significant portion of its assets that might jeopardize the company’s ability to survive as a corporate debtor.
Custody of the assets of corporate debtor
Section 18 of Code requires the interim resolution professional to take control and custody of any asset over which the corporate debtor has ownership rights and section 20 of Code obliges the interim resolution professional to make every endeavour to protect and preserve the value of the property of the corporate debtor.
Section 25 of Code 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. Code has also amended section 429(1) of the Companies Act, 2013 empowering the NCLT to pass instructions to executory authorities for taking control and custody of assets, in case the RP is facing difficulties in doing so. It is also important to note that the words “take control and custody” shall not be misinterpreted to mean taking control and custody of the assets for the purpose of disposal thereof , the objective of the provision is to move the custody and control of the assets from the existing directors of corporate debtor to the interim resolution professional for the purpose of monitoring and not as a pre-disposal measure.
Constitution of Committee of creditors and ascertaining voting rights of Creditors
It is the interim resolution professional, who shall constitute the committee of creditors after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor (Ref. Section 21 of Code). The committee of creditors is a collective body of financial creditors of the corporate debtor which, by way of majority vote, decides the fate of the corporate debtor, i.e. whether to resolve the insolvency or to liquidate the CD. Resolution professional is appointed by Committee of Creditors in its first meeting and is then entrusted with the task of convening and conducting the meetings of the committee of creditors during the resolution process. (Refer Section 24 of Code).
Conducting the CIRP Process of CD
Section 23 of Code states that the resolution professional shall conduct the entire CIRP Process and manage the operations of the corporate debtor during the corporate insolvency resolution process period. During the corporate insolvency resolution process period, the interim resolution professional/ resolution professional has to undertake the following activities –
- making public announcement of the insolvency resolution process in respect of the corporate debtor
- collection of all 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.
- receipt and collation of all claims of the creditors submitted pursuant to the public announcement
- constitution of the committee of creditors.
- convening and conducting the meetings of the committee of creditors.
- filing of necessary information with information utility(“IU”)
- preparation of information memorandum(“IM”) for facilitating the formulation of a resolution plan.
- inviting prospective resolution applicants(“PRA”) to put forward their resolution plans.
- examining each resolution plan received so as to see whether the resolution plan meets the criteria mentioned in section 30 (2) and presenting the eligible resolution plans at the meetings of the committee of creditors.
- submission of the resolution plan (which is approved by the committee of creditors) to the adjudicating authority for its final approval.
- making applications for avoidance of undervalued, preferential and fraudulent transactions; etc.
Responsibility as regards preparation of IM
Section 29 of Code casts a responsibility on the RP that he shall prepare an information memorandum in such form and manner and containing such relevant information as may be specified by the Board for formulating a resolution plan. The information memorandum shall contain details on the basis of which a resolution plan may be formulated. Regulation 36 (2) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 lists out the details of CD which shall be contained in the information memorandum.
Facilitating the formulation of Resolution Plan
As mentioned in the preceding paragraph, the resolution professional prepares the information memorandum which serves as an input and basis for the formulation of the resolution plan. The task of the resolution professional in respect of the resolution plan does not end here. Section 30 of the Code, 2016 read with regulation 38 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 mandates that a resolution plan must confirm to certain minimum requirements. Resolution professional must examine each resolution plan received by him to confirm that each resolution plan:
(i) provides for the payment of insolvency resolution process costs in priority to the repayment of other debts of the corporate debtor and identifies specific sources of funds to pay the same.
(ii) provides for the repayment of the debts of operational creditors which shall not be less than the liquidation value due to the operational creditors in priority to any financial creditor and before the expiry of thirty days after the approval of a resolution plan by the adjudicating authority.
(iii) provides for the repayment of the liquidation value due to dissenting financial creditors before any recoveries are made by the financial creditors who voted in favour of the resolution plan.
(iv) provides for the management and control of the affairs of the corporate debtor after approval of the resolution plan.
(v) the implementation and supervision of the resolution plan.
(vi) does not contravene any of the provisions of the law for the time being in force.
The resolution professional shall present to the committee of creditors for its approval such resolution plans which confirm to the conditions as mentioned in the above mentioned paragraph. The resolution plan which is approved by the committee of creditors shall then be submitted by the resolution professional to the adjudicating authority for its approval. Where the resolution plan is approved by the adjudicating authority, RP shall forward all records relating to the conduct of the CIRP Process of CD and the resolution plan to the IBBI to be recorded and stored in its database.
It would not be out of place to mention that the RP acts as the catalyst to the entire CIRP process as he is not the one who actually prepares the resolution plan. The resolution plan is prepared by a “resolution applicant”, who may either be one of the lenders themselves or a totally unrelated company, whose main aim is to take over the CD after its revival.
An attempt to resolve the insolvency of CD by devising a resolution plan(“Plan”) acts as a rescue strategy because this process involves a close scrutiny of the assets, liabilities, incomes and expenses of CD. In terms of assets, the plan may provide for sale of non-core assets, or replacing owned assets by leased assets. In respect of liabilities, the plan may provide for conversion of the unsustainable debt into equity, or relinquishment of security interest of CD against a third party. The plan may involve reduction of overall expenditure, reorganisation of the business operations of the CD and may involve alteration of product mix(when CD engages in business of sale of variety of products), a change in product markets (when CD’s products cater to a different set of consumers and a market located in a particular geographical region ).
Duties of IP under Insolvency and Bankruptcy Board of India (Model Bye Laws and governing board of Insolvency professional agencies) Regulations 2016.
Regulation 13[4] casts 9 duties upon the insolvency professional members (which are enrolled with Insolvency Professional Agency and registered with IBBI). The 9 duties mentioned in above regulation are:
(a) that he shall act in good faith in discharge of his duties as an insolvency professional.
(b) that he shall endeavour to maximize the value of assets of the debtor.
(c) that he shall discharge his functions with utmost integrity and objectivity
(d) that he shall be independent and impartial.
(e) the he shall discharge his functions with the highest standards of professional competence and professional ethics.
(f) that he shall continuously upgrade his professional expertise.
(g) that he shall perform duties as quickly and efficiently as reasonable, subject to the timelines under the Code.
(h) that he shall comply with applicable laws in the performance of his functions
(i) that he shall maintain confidentiality of information obtained in the course of his professional activities unless required to disclose such information by law.
Prospective Challenges and numerous Opportunities for IP’s.
As the field of insolvency grows and evolves with time, the challenges for IPs to carry out the insolvency assignment and its associated work also increases.
IP’s can also engage themselves in other ancillary work associated with the CIRP Process which inter alia include:
(i) Working out the voting share or voting rights of the financial creditors in COC.
(ii) Valuation of security interest held by the financial creditors( relevant at time when any FC makes an application for initiation of CIRP and at time of distribution of proceeds according to waterfall arrangement under Section 53)
(iii) Valuation of the assets of CD including properties, stock, securities at the time of making of resolution plan, liquidation etc [ Section 247 of Companies Act, 2013]
(iv) Giving Advice to other creditors ,carrying out due Diligence regarding whether any transaction is a Preferential transaction under sections 43 and 44 of the Code.
(v) Giving Advice to other creditors ,carrying out due Diligence regarding whether any transaction regarding whether any transaction is an undervalued transactions by way of gift given by CD (Sections 45 to 48 of Code).
(vi) Giving Advice to other creditors ,carrying out due Diligence regarding whether any transaction is a Fraudulent and Extortionate transaction [Section 49 and 50 of Code]
(viii) IPs have an opportunity to run as Information Utility centres, just like TIN-NSDL facilities, in order to facilitate uploading of data relating to contracts, invoices / Bills, agreements and others.
The requirement of the Insolvency Profession is of individuals possessing high standards of integrity and probit. In terms of work the insolvency professional has to carry heavy workload-secretarial, legal, finance, management of business of the debtor and the assessment of assets and liabilities of the debtor, valuation and sale of assets etc. fall under the care of insolvency professional. This calls for establishment of adequate and proper infrastructure facility by the insolvency professional. In addition to the above, adequate human resource and experts in the field of finance, valuation of assets, security enforcement, taxation etc. are also required. Recognising the complex nature of work to be handled by an IP, the Regulations provide for training of his staff including subject knowledge to be imparted by the IPA .
IPA is also entrusted with the task of developing the insolvency profession of its members by organising educative programmes. This will keep the members updated on national and international development on a continuous basis in the field of insolvency and its related issues. It is also recommended that IP needs to continuously observe the code of Conduct which has been laid down under the First Schedule to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Conclusion
The insolvency profession offers a challenging opportunity to the Company Secretary(“CS”) members. The grant of certificate of registration by “ICSI Insolvency Professional Agency” augurs well for the CS members and provides an ease of opportunity for them to become insolvency professionals.
It is also to be noted that during these initial years, NCLT benches would also be struggling with a large caseload and inadequate infrastructure and manpower. At this stage the IPs have to chip in with their expertise and resources to ensure appropriate use of judicial time and ensure that the NCLTs are not saddled and burdened with an unmanageable caseload at the initial stage. As mentioned in brief above, there are certain practical issues that may require ironing out and a practical solution and these issues will get resolved as the CIRP mechanism attains a certain maturity. It is also important to note that greater responsibility lies with all stakeholders to ensure that the IP is given the support, assistance and cooperation that he is seeking from all stakeholders and what is required to be provided by stakeholders to him under the provisions of the Code.
It is conceivable for an insolvency system to function with minimal interventions by courts or government agencies but it is totally inconceivable for such a system to function effectively without specialists, especially for purposes of reorganization.
The chances for an effective reorganization increases when agents of reorganization i.e insolvency professionals have the capacity to decide whether rescuing business is feasible and to advise on alternative courses of action which can be taken (liquidation, re-organization or a combinations of these).
The preceding paragraphs as mentioned in this article throws a light on the importance of the insolvency professionals in CIRP Process and the role played by them in the re-organisation, resolution and revival of an entity from the clutches of insolvency.
References:
[1] http://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf
[2] http://www.imf.org/external/pubs/ft/orderly/#institu
[3] Para 10 of the Accounting Standard (AS) 1 (Disclosure of Accounting Policies), issued by the Institute of Chartered Accountants of India
[4] Regulation 13 of Insolvency and Bankruptcy Board of India (Model Bye Laws and governing board of Insolvency professional agencies) Regulations 2016.
