India: Insolvency

The entire scheme and arrangement of the corporate insolvency resolution process (CIRP) as enumerated under the Insolvency & Bankruptcy Code, 2016 ('IBC' / 'Code') has been delicately carved out by the legislature for reorganization and 'Resolution' of a Company in financial instability failing which the Company may have to undergo 'Liquidation' as a consequential step.

The entire mechanism of effectively handling and carrying out the CIRP, as intended by the legislature, under the IBC, has been entrusted upon the 'Insolvency Professionals' ('IPs'), who are defined under Section 3(19) of the Code as under:

Part IV of the IBC specifically deals with 'Regulation of Insolvency Professionals, Agencies and Information Utilities'. Under Section 196 of the Code, the IBBI has been empowered to register IPs, look after their development, regulate their working, specify minimum eligibility criteria, specify standards of working, etc. Sections 206 to 208 of the Code categorically deal with registration, functions, and obligations of the IPs. To infuse confidence upon the public at large about the complete fairness and impartiality of the working of the IPs, the provisions of Chapter VI of the Code provide for a mechanism to keep checks and balances upon working of the said IPs.

To supplement the provisions of the IBC, the IBBI (Insolvency Professionals) Regulations, 2016 were also introduced. A holistic reading of the said regulations helps us to understand the eligibility, registration, and qualification conditions, etc., which are required to be met by the IPs.

The provisions of Regulation 5 provides for the minimum qualification and experience for registration as an IP. On a perusal of the said regulation, it is clear that once an individual meets with the requirements as per Regulation 5, they are entitled to apply for a certificate of registration. Upon receipt of such application, the IBBI, if satisfied, after such inspection or inquiry, as it deems necessary, may grant a certificate of registration to the applicant entitling the applicant to act as an IP. A detailed code of conduct to manage the workings and affairs of the IPs have also been formulated by the IBBI, as contained in the First Schedule of the said Regulations. It is pertinent to mention that under the said code of conduct, the IBBI has categorically mentioned the need of IPs time and again and emphasized on maintaining and upgrading their professional knowledge and skills to render competent professional service.

In brief, the minimum eligibility criteria for getting registered as an IP, as per Regulation 5, include, passing the Limited Liability Examination, completing the pre-registration educational course, completing the National / Graduate Insolvency Programme, having fifteen years experience in management with Bachelor's Degree, or, ten years experience as a Chartered Accountant, Company Secretary, Cost Accountant or Advocate. Though there is no dispute whatsoever in respect of the competence of the above-referred qualifications and examinations, however, what is pertinent to be seen is that such examinations are restricted in terms of evaluating the knowledge of an individual relating to the provisions of the IBC, Companies Act, other general, economic and commercial aspects. There is no pragmatic way to assess the ability of a prospective IP to run a large industry or business.

This brings us to a critical question as to whether the Insolvency Professionals (IPs) who are at the helm of affairs a Company undergoing insolvency resolution process under the Code are adept in as much as having professional expertise including technical know-how to drive the resolution process?

With coming into effect of the IBC, and with an enormity of cases being filed and initiated under the said Code, we have, to date, witnessed a plethora of cases and instances where the provisions of the said code have been invoked. The provisions of IBC have been invoked inter-alia in commercial contracts, failure to adhere to financial commitments, builder-buyer agreements, supply agreements, etc., all on account of default in payment of debts, whether financial or operational. While taking stock of the proceedings as initiated under the Code, it is to be kept in mind that the said proceedings are about the companies across all sectors, having a varying capital base and debt profile ranging from a few lakhs to thousands of crores.

Once a case under the provisions of IBC (Under Sections 7, 9 or 10) is admitted, the appointed IP immediately takes over control of the entire working and management of the Corporate Debtor and is foremost expected to keep the said Corporate Debtor as a going concern. We are still mindful of the fact that the IPs are qualified in terms of Regulation 5 as discussed above. But in essence, how adept are these IPs, who are qualified chartered accountants, cost accountants, advocates, company secretaries, etc. to effectively run established business concerns having a varied line of operations, dealing with a multiplicity of complex transactions every day, requiring huge financial decisions to be taken daily and to continue operations uninterruptedly?

Catena of cases under the IBC has witnessed IPs taking over companies related to the power sector, infrastructure, hospitality, manufacturing, trading, etc. In cases where the appointed IP can effectively handle the management and affairs of the Corporate Debtor is not a cause of concern, however, in cases where the appointed IP is unable to discharge his duties, which are imperative under the Code, on account of his limited professional competence, it interferes with the awed object of the Code. There is no shying away from the fact that the quantum and degree of tasks performed by the IPs day in and day out while discharging their duties are immense and praiseworthy. But in essence, how effectively are these duties discharged in all those cases where the IPs lack technical knowledge of a particular field is a question which has been repeatedly doing rounds.

It has time and again been observed in many cases that to effectively perform their obligations, the IPs appoint external service providers including professionals and seek their assistance in carrying out their designated works.

It is argued that the expectation for an IP to immediately take into his/ her control the working of a Corporate Debtor and continue to run it effectively is ambitious. However, to expect the same IP, who may be an excellent chartered accountant or an excellent advocate, to also be an ace businessman or to have excellent business acumen is being over-ambitious. The IPs have sound technical knowledge in their particular field in which they have practiced for long. Thus, it is prudent to realize that IPs now and then face situations where they are required to run a business about whose working process/model they are completely unaware of.

In situations where a particular IP finds himself stuck where they are unable to make a decision, they usually resort to external help. This external assistance can be in the form of a professional to whom the IP pays extra money. Thus, adding to the cost of the Insolvency Process.

Was this really what the legislature intended? If constant external support is sought for, then why was there ever a need to include individuals in the definition of an Insolvency Professional? Why the legislature did not only provide for Insolvency Professional Entities?

When we talk about IPs who are appointed as the Resolution Professional in case of a Company undergoing resolution process under the Code and checks and balances if any applicable upon them, the first thing that comes to everyone's mind is the Committee of Creditors ('CoC'). It is here that the role of the CoC takes relevance. The CoC, which monitors the process as regards the Company under the Code is invariably expected to be in sync with the nature of the business and operations of the Company. The Banking Law Reform Committee (BLRC) acknowledging the distinct nature and interest of Financial Creditors in the operation of a Company specifically included such Financial Creditors in the CoC. The CoC as a watchdog is required to review the activities as well as the competence of IP appointed in each case to best meet the requirement of the Company undergoing resolution process under the Code. The aspect of lenders taking over control and management of Companies in distress is not something new. Under the informal regime of restructuring, there has been the participation of lenders through a debt-equity swap wherein the lenders directly-indirectly control the management. Similarly, even the SARFAESI Act entitled the lenders to take over the management and control of the defaulting borrower. Such taking over of the control statutorily did not provide for an individual to steer the entire resolution process sans requisite professional expertise.

Now that the Code specifically makes the IPs as the all-encompassing individual to spearhead the resolution process in case of a company undergoing resolution under the Code albeit under the supervision of the CoC, is there a scope of classification as regards the appointment of IPs on a case to case basis. The Code has to date not provided for any classification of cases based on the pecuniary value of the total financial debt or asset base of the Company as to whether such cases be overseen by an individual IP or an Insolvency Professional Entity. Whether any such classification shall meet the requirement of the specific sector in which the Corporate Debtor is operating is also required to be seen.

Time and again, it is seen that cases where financial debt exposure of a Corporate Debtor is running in several crores, the IP appoints a series of professionals to help him/her discharge his/her functions. There is also little doubt in the fact that such huge companies cannot be run by an individual IP owing to their magnitude of transactions and coverage of such transactions across pan India.

Accordingly, the classification as regards the appointment of individual IP as the Resolution Professional vis-à-vis Insolvency Professional Agencies as the Resolution Professionals might help resolve the aspect of due discharge of duties with requisite professional expertise by the IPs. The CoC till such time should ensure that the Resolution Professionals as appointed by them, can manage all aspects of the Company under resolution with or without additional help. Since IPs are one of the major pillars under the Code, the best practice approach as regards the appointment of IPs shall go a long way for the success of the Code.