1. There are different classes of professionals in India: Lawyers, Chartered Accountants, Company Secretaries, Cost and Works Accountant etc. etc. Each one of them is registered, regulated and monitored by their own professional body. However, with the passing of Insolvency and Bankruptcy Code, 2016, a new class of professionals has come into existence who will be called as 'Insolvency Professionals'.
To understand the registration, role, position and responsibilities of Insolvency Professionals, we should first understand the main objectives and processes under The Insolvency and Bankruptcy Code, 2016 (hereinafter referred as 'Code'). The Code is a landmark legislation which subsumes various legislations dealing with corporate and non-corporate (individuals and partnerships) insolvency1. The Code received Presidential Assent on 28 May 2016 and is drafted on the recommendations of Bankruptcy Reforms Law Committee. The code has three-fold objectives. Firstly, to create an institutional framework, consisting of Insolvency and Bankruptcy Board, Insolvency Professional Agencies, Insolvency Professionals, Information Utilities and Adjudicating Authorities. Secondly, to facilitate time bound insolvency process and liquidation. Thirdly, to improve ease of doing business in India and also to set up a better and faster debt recovery mechanism in India2.
The Insolvency and Bankruptcy Board which is a body corporate having perpetual succession and common seal is the centralised regulator3 which is empowered to frame and issue regulations under the Code to regulate Insolvency Professional Agencies and Insolvency Professionals4. Insolvency Professional Agency is a professional body which is registered with Insolvency and Bankruptcy Board under section 201 of the Code5. The Institutes of Company Secretaries; Chartered Accountants; and Cost and Works Accountants have already registered them as Insolvency Professional Agencies through their subsidiaries6. The Insolvency Professionals are the professionals who are enrolled with the Insolvency Professional Agency and registered with the Insolvency and Bankruptcy Board7. They play the major role in carrying out all the processes before adjudicating authority for insolvency resolution or liquidation in case of corporate persons, or insolvency resolution or bankruptcy in case of non-corporate persons. The adjudicating authority in case of corporate person is National Company Law Tribunal and in case of non-corporate person is Debt Recovery Tribunal.
The Code is divided into five parts. First part is preliminary in nature. Part II deals with insolvency resolution and liquidation for corporate persons comprising seven chapters. Part III deals insolvency resolution and bankruptcy for individuals and partnerships (non-corporate persons) comprising seven chapters. Fourth part deals with regulation of insolvency professionals, agencies and information utilities comprising seven chapters. Fifth part is miscellaneous8.
The different processes under the code either lead to resolution of insolvency or initiation of liquidation in case of companies; or resolution of insolvency or initiation of bankruptcy proceedings in case of non-corporate persons (individuals and partnership firms). The process for insolvency under Part II of the code for insolvency resolution or liquidation of corporate persons can be initiated by financial creditor9, operational creditor10 or by the corporate applicant itself. The steps for initiating insolvency resolution varies in each case11. The insolvency resolution can be initiated by a financial creditor by filing an application along with the record of default and name of Insolvency Professional who is proposed to act as an interim resolution professional. The verification of application is done by the adjudicating authority and application is either admitted or rejected. Similarly, the corporate applicant can file an application along with the details of default and verification of application shall be done by the adjudicating authority. The application is either admitted or rejected after verification. However, the operational creditor has to first deliver a demand notice along with the copy of invoice demanding payment of amount involved in default. Corporate debtor can file a reply to such notice or pay within 10 days of the receipt of the notice. The operational creditor can then file an application with the adjudicating authority where no reply or payment is received from corporate debtor. The application is verified by the adjudicating authority and is either admitted or rejected. In either of the cases, once the application is admitted by the adjudicating authority, the insolvency process commences from the date of admission of application. There is a fixed time period within which insolvency resolution process has to be completed or else the company goes into liquidation.
The Insolvency Professional under Part II may be termed as either an Interim Resolution Professional (IRP) or as Resolution Professional (RP). Interim Resolution Professional is the professional appointed by Adjudicating Authority within 14 days from commencement of insolvency process either by itself or accepted by it if applicant has made proposal for name of Insolvency Professional. The Interim Resolution Professional may continue as Resolution Professional if his name is accepted by committee of creditors at its first meeting. The committee of creditors may also replace Interim Resolution Professional with another Resolution Professional.
Part III of the code which deals with insolvency resolution and bankruptcy for non-corporate persons contains two types of insolvency procedures. Firstly, by way of Fresh Start Process12 and secondly, by Insolvency Resolution process13. Under fresh start process, an eligible debtor14 who is unable to pay his debts can make an application to adjudicating authority either personally or through an Insolvency Professional. The application is either admitted or rejected after verification. Similarly, under insolvency resolution process, a debtor or any creditor can make an application for insolvency resolution to adjudicating authority either personally or through an Insolvency Professional which is either admitted or rejected after verification. In either of the cases, once the application is admitted by adjudicating authority, the insolvency process commences from the date of admission of application. If the insolvency cannot be resolved within a fixed time period, then bankruptcy proceedings are initiated.
It may be any process under Part II or Part III of the code, the Insolvency Professionals has a prominent place. This article deals with the different facets of Insolvency Professionals, inter alia, their qualification, duties, obligations and monitoring.
Scope of Profession
2. There are around 700 sick industrial company cases (covered by now repealed Sick Industrial Companies (Special Provisions) Act, 1985), 15000 Debt Recovery Tribunal cases (now subsumed under the Code), 5200 winding up / amalgamation cases pending. It is pertinent to mention that all these cases shall now be covered under the Code and the Insolvency Professional shall occupy the central stage in their processes. Further, a study has revealed that effective implementation of the Code can potentially release about Rs. 25,000 crores capital currently locked in non-performing assets over next four to five years15.
Registration of Insolvency Professionals
3. The registration of Insolvency Professionals is governed by section 207 of the Code read with Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 [hereinafter referred as 'Insolvency Professionals Regulations']. Every Insolvency Professional is required to obtain membership of any professional agency and then register himself with the Insolvency and Bankruptcy Board (hereinafter referred as 'board')16. The professional seeking registration with the board must fulfil eligibility, qualifications and experience requirements.
An individual is eligible to be registered as an insolvency professional if he: (1) is a major; (2) is a person resident in India; (3) possess qualification and experience requirement; (4) has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude, and a period of five years has not elapsed from the date of expiry of the sentence provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be registered; (5) he is not an un-discharged insolvent, or has not applied to be adjudicated as an insolvent; (6) is of sound mind; and (7) is a fit and proper person. The fit and proper person is considered after taking into account criterion relating to integrity, reputation, character, competence and net worth.
An individual is said to be qualified and experienced if he: (1) has passed the National Insolvency Examination; or (2) has passed the Limited Insolvency Examination, and has fifteen years of experience in management, after he received a Bachelor's degree from a university established or recognized by law; or (3) has passed the Limited Insolvency Examination, and has ten years of experience as a Chartered Accountant, Company Secretary, Cost Accountant or an Advocate.
An individual who fulfils the eligibility, qualification and experience requirements has to make an application to the Board in Form A as mentioned in Second Schedule of the Insolvency Professional Regulations along with non-refundable application fee. The Board then inspects the documents submitted by the applicant. It may call for further information or additional documents to decide on the application. Once the Board is satisfied after inspection or inquiry as it deems necessary that the applicant is eligible, it may grant certificate of registration to the applicant to carry out activities of an Insolvency Professional. This certificate is issued in Form B as mentioned in Second Schedule of the Insolvency Professional Regulations. The time period prescribed for granting the certificate for registration is sixty days excluding the time given by the Board for representations17.
The Board has the powers to refuse granting of certificate for registration under Insolvency Professional regulations18. In such cases, the Board, prima facie forms an opinion after considering the application of an Insolvency Professional. The affected applicant is then given an opportunity to give explanations. The Board after considering the explanations of the applicant forms a final opinion and communicates it to the applicant.
In Re: ABC19, the Board took into cognizance the 'fit and proper' criteria to refuse granting of certificate of registration as there were three criminal cases pending against the professional enrolled with XYZ Insolvency Professional Agency. The three criminal cases were registered by the Registrar of Companies under section 58A(10) of the Companies Act, 1956 (1956 Act) for non-compliance of directions issued by Company Law Board under provisions of section 58A(9) of 1956 Act. The Board took strength from the SEBI regulations/Securities Appellate Tribunal (SAT) orders to hold that "It is thus clear that reputation and character of the applicant is a material consideration. What is material is what others feel about the applicant who has three criminal proceedings pending against him. It is also material what kind of association the applicant has with the Company which has been repeatedly contravening the provisions of the Act and ignoring several directions of the CLB and whom he was representing before the CLB for these contraventions. Does such a person inspire confidence of the stakeholders who can entrust him with property of lakhs of crores for management under corporate insolvency resolution process? Pendency of three criminal proceedings against the applicant adversely impacts his reputation and makes him not a person fit and proper to become an IP."
In another case20, the Board denied registration to a professional as he was engaged in some other employment. The Board formed an opinion that his employment shall create conflict of interest as the insolvency process has to be completed within a time period of 180 days which mandates time critical services to be rendered by the Insolvency Professional. Further, the Board held that engagement in some other employment shall violate Clause 23 of the Code of Conduct for Insolvency Professionals: "23. An insolvency professional must not engage in any employment, except when he has temporarily surrendered his certificate of membership with the insolvency professional agency with which he is registered."
4. The appointment of a registered Insolvency Professional to a particular case under the Code varies from process to process. Under Part II of the Code, if the process for corporate insolvency is initiated by a financial creditor or the corporate debtor himself, then the appointment of Insolvency Professional is almost automatic provided that there is no disciplinary proceedings pending against the Insolvency Professional21. The financial creditor is bound to furnish the name of Resolution Professional proposed to act as an interim resolution professional22. The interim resolution professional may become resolution professional later on if his name is accepted by the committee of creditors. Similarly, a corporate debtor is also bound to furnish the name of resolution professional proposed to be appointed as an interim resolution professional23. However, an operational creditor while initiating insolvency proceedings may name a resolution professional as interim resolution professional. The Adjudicating Authority makes a reference to the Board if no proposal is made by the applicant. The Board is required to recommend the name of an Insolvency Professional against whom no disciplinary proceeding is pending.
Under Part III of the Code, there are two types of processes: (1) Fresh Start Process and (2) Insolvency Resolution Process. A Fresh Start Process may be initiated by an eligible debtor either personally or through a resolution professional. Similarly, insolvency resolution process may be initiated by a creditor or debtor either personally or through a resolution professional. In either of the cases, the Adjudicating Authority makes a reference to the board if the applicant has not named any resolution professional24. The Board is required to recommend the name of an Insolvency Professional against whom no disciplinary proceeding is pending.
Duties and Role
5. The duties of insolvency professionals can be studied separately for corporate persons under Part II and non corporate persons under Part III. The insolvency professional plays two roles under Part II: Interim Resolution Professional and Resolution Professional. The duties of Interim Resolution Professional are enshrined under section 18 of the Code. They are as follows:
|(a)||Collect 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: (i) business operations for the previous two years; (ii) financial and operational payments for the previous two years; (iii) list of assets and liabilities as on the initiation date; and (iv) such other matters as may be specified;|
|(b)||Receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;|
|(c)||Constitute a committee of creditors;|
|(d)||Monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors;|
|(e)||File information collected with the information utility, if necessary; and|
|(f)||Take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including: (i) assets over which the corporate debtor has ownership rights which may be located in a foreign country; (ii) assets that may or may not be in possession of the corporate debtor; (iii) tangible assets, whether movable or immovable; (iv) intangible assets including intellectual property; (v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies; (vi) assets subject to the determination of ownership by a court or authority;|
In addition to the above mentioned duties, the interim resolution professional has to perform other duties. The interim resolution professional makes a public announcement immediately after his appointment25. The contents of public announcement should be as per the provisions of section 15 read with Regulation 6 of Insolvency Professional Regulations. Thereafter, he has to manage the affairs of corporate debtor. All powers of the board of directors are exercised by the interim resolution professional26. He has to manage the corporate debtor as a going concern27. The interim resolution professional after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors28.
The duties of resolution professional are enshrined under section 25 of the Code. They are as follows:
|(a)||Take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor;|
|(b)||Represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings;|
|(c)||Raise interim finances subject to the approval of the committee of creditors under section 28;|
|(d)||Appoint accountants, legal or other professionals;|
|(e)||Maintain an updated list of claims;|
|(f)||Convene and attend all meetings of the committee of creditors;|
|(g)||Prepare the information memorandum in accordance with section 29;|
|(h)||Invite prospective lenders, investors, and any other persons to put forward resolution plans;|
|(i)||Present all resolution plans at the meetings of the committee of creditors; and|
|(j)||File application for avoidance of transactions.|
Where the Adjudicating Authority passes an order of liquidation of the corporate debtor, the resolution professional appointed for insolvency resolution process acts as liquidator unless replaced by the adjudicating authority29. The insolvency professional acting as liquidator also performs various functions as enshrined under section 35 of the Code.
Under Part III, insolvency professional has an important role to play in both Fresh Start process and Insolvency resolution process. The insolvency professional may make an application to adjudicating authority. After his appointment, he submits a report recommending for approval or rejection of application. Insolvency professional registers the claim of the creditors and prepare a list of creditors. He conducts the meetings of creditors, submits repayment plan and supervises the implementation of the repayment plan. Where the adjudicating authority passes an order of bankruptcy for non-corporate persons, the insolvency professional may act as bankruptcy trustee30.
Code of Conduct and Other Obligations
6. The Insolvency Professionals are bound to abide by the Code of Conduct as a condition to the certificate of registration31. The First Schedule to the Insolvency Professional Regulations contains the Code of Conduct which must be observed by Insolvency Professionals. The focus areas of this Code of Conduct are: (1) Integrity and objectivity; (2) Independence and impartiality; (3) Professional competence; (4) Representation of correct facts and correcting misapprehensions; (5) Timeliness; (6) Information Management; (7) Confidentiality; (8) Occupation, employability and restrictions; (9) Remuneration and costs; and (10) Gifts and hospitality.
In addition, Schedule attached to the Insolvency and Bankruptcy Board of India (Model Bye Laws & Governing Board Insolvency Professional Agencies) Regulations, 201632 lays down some other obligations of the Insolvency Professionals: (1) Act in good faith in discharge of his duties as an insolvency professional; (2) Endeavour to maximize the value of assets of the debtor; (3) Discharge his functions with utmost integrity and objectivity; (4) Be independent and impartial; (5) Discharge his functions with the highest standards of professional competence and professional ethics; (6) Continuously upgrade his professional expertise; (7) Perform duties as quickly and efficiently as reasonable, subject to the timelines under the Code; (8) Comply with applicable laws in the performance of his functions; and (9) Maintain confidentiality of information obtained in the course of his professional activities unless required to disclose such information by law.
7. The Code does not prescribe any fixed or specific remuneration or fee for Insolvency Professionals. The professional has to make objective assessment of his own33. The Code of Conduct for Insolvency Professionals provides some principles for charging fee by the professionals: (1) An insolvency professional must provide services for remuneration which is charged in transparent manner, is a reasonable reflection of the work necessarily and properly undertaken, and is not inconsistent with the applicable regulations; (2) An insolvency professional shall not accept any fees or charges other than those which are disclosed to and approved by the persons fixing his remuneration; and (3) An insolvency professional shall disclose all costs towards the insolvency resolution process costs, liquidation costs, or costs of the bankruptcy process, as applicable, to all relevant stakeholders, and must endeavour to ensure that such costs are not unreasonable.
However, the manner to determine fee payable to Insolvency Professionals acting as liquidator in case of liquidation has been prescribed34. The committee of creditors may fix the fee payable to liquidator before a liquidation order is passed under sections 33(1)(a) or 33(2) of the Code. In all other cases, the liquidator is entitled to a fee as a percentage of the amount realised net of other liquidation costs, and of amount distributed as prescribed under Regulation 4. The fee payable to the liquidator forms part of the liquidation cost.
Opportunities for Professionals
8. The Insolvency and Bankruptcy Code, 2016 has opened up plethora of opportunities for professionals. The professionals who were dealing with corporate matters like winding up, restructuring, debt recovery are gearing up to become Insolvency Professionals. The Insolvency Professionals can do various ancillary work arising out of the Code. Deepak Jain35 in his write up on opportunities for professionals under the Code has highlighted various ancillary works which can be done by professionals: (1) Working out voting share or voting rights of the lenders / creditors; (2) Valuation of securities held by lenders / creditors at the time of making application; (3) Valuation of assets including properties, stock, securities at the time of making of resolution plan, liquidation etc.; (4) Drawing the information memorandum and resolution plan; (5) Advisory and Due Diligence services; (6) Opportunity to run as Information Utility centres.
9. From the above discussion, it can be noticed that the Code has opened up plethora of opportunities for Insolvency Professionals. However, the profession of Insolvency Professionals is full of challenges. It requires a high standard of integrity and morality. Only senior professionals having an experience of 15/10 years are required for the profession. The effective role of Insolvency Professionals calls for multiple skills in the field of finance, people management, court procedures, stakeholder management, business dynamics, strategic foresight and business valuation36. The Code lays down two-tier structure for strict regulation of the insolvency professionals – (1) Insolvency Professional Agencies and (2) Insolvency and Bankruptcy Board of India. Be it as it may, the single codified law for corporate insolvency is still in infancy. The regulator and other functionaries have to stand the test of time.
1. Deepak Jain, "The Insolvency and Bankruptcy Code, 2016 - An Analysis and Opportunities for Professionals under the Code," Chartered Secretary, March 2017, pp. 38-42.
2. Rakesh Wadhwa, "Insolvency and Bankruptcy Code, 2016," Chartered Secretary, September 2016, pp. 23-28.
3. See generally, Chapter I of Part IV of the Insolvency and Bankruptcy Code, 2016 (herein after referred as Code of 2016 or Code).
4. Code of 2016, s. 240
5. See generally, Chapter III of Part IV of the Code.
6. ICSI Insolvency Professionals Agency; Indian Institute of Insolvency Professionals of ICAI; and Insolvency Professional Agency of Institute of Cost Accountants of India.
7. Code of 2016, ss. 206 and 207.
8. See generally, Code of 2016.
9. Ibid., s. 5(7): Financial Creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
10. Ibid., s. 5(20): Operational Creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
11. Mahesh A. Athavale and Anagha Anasingaraju, "Opportunities for Company Secretaries under the Insolvency and Bankruptcy Code, 2016," Chartered Secretary, September 2016, 88-92.
12. Code of 2016, s. 8.
13. Ibid., s. 94.
14. Ibid., s. 80(2). Eligible debtor is a person who fulfils the conditions laid down under section 80(2).
15. ASSOCHAM and CRISIL, "Insolvency and Bankruptcy Code 2016: A Game Changer," 2016.
16. Code of 2016, s. 207.
17. Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, Regulation 7.
18. Ibid., Regulation 8.
19. Re: ABC, Insolvency and Bankruptcy Board of India, 14 March 2017.
20. Re: ABC, Insolvency and Bankruptcy Board of India, 02 March 2017.
21. D K Prahlada Rao, "Role & Responsibility of Insolvency Professionals under the Code – An Analysis," Chartered Secretary, March 2017, pp. 21-23, at p. 21.
22. Code of 2016, s. 7(3)(b).
23. Ibid., s. 10(3)(b).
24. Ibid., s. 97.
25. Ibid., s. 13.
26. Ibid., s. 17.
27. Ibid., s. 20.
28. Ibid., s. 21.
29. Hemant Sharma, 2017, p. 58.
30. Code of 2016, s. 125.
31. Insolvency Professional Regulations, Regulation 7(2)(h).
32. Part VII: Duties of Members, Schedule, Insolvency and Bankruptcy Board of India (Model Bye Laws & Governing Board Insolvency Professional Agencies) Regulations, 2016.
33. Alka Kapoor and Lakshmi Arun, 2017, p. 31.
34. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, Regulation 4.
35. Deepak Jain, 2017, p. 41.
36. Alka Kapoor and Lakshmi Arun, 2017, p. 31.