Insolvency Professionals – An IBC Pillar Whose Systemic Support Needs Upgradation (2024)

Insolvency Professionals are supposed to form a crucial pillar on which the entire edifice of the insolvency and bankruptcy process rests. During the CIRP, the management of the CD is vested with the IRP/RP, who then stands in the position of the board of directors of the CD. Undoubtedly, this is an onerous task, but there is sheer lack of systemic support to the IP and the so-called pillar faces multitude of problems at ground level when he commences this task. There is an urgent need to augment the support system to the IPs on the following lines:

i. police protection must be provided to the IRP/RP when he approaches the premises of a CD for the first time in all cases;

ii. power to approach Government Authorities for assistance should lie with the IP himself;

iii. IP is expected to seek assistance from the CD’s employees alone and not from the CoC constituents, whose stake in keeping the CD as a going concern is much higher. Also, this added arrangement of obtaining very limited manpower from the CoC constituents shall place some trustworthy manpower at IP’s disposal and empower the IP to control the CD and its staff in a much more efficient manner;

iv. there should be a provision for a centralised pool of funds for an IP to bank upon (with prior approval of AA) in situations of extreme adversity;

v. a statutory provision under the IBC may be incorporated making it incumbent upon the respective Government Authorities to provide technical assistance to IPs free of cost on most priority basis so as to enable IPs to handle legal requirements in course of the resolution process, in situations where engagement of professional or legal advisers is not feasible due to shortage of funds.

The CDs should not perceive an IP as a toothless tiger who is remote-controlled by the AA at all times. The objective should be to allow IPs function with adequate freedom and support system without compromising on the overall control to be exercised by the AA.

Introduction

The Insolvency and Bankruptcy Code (IBC) was introduced in 2016 to resolve claims involving insolvent companies so as to tackle the bad loan problems that were affecting the banking system. The IBC has been a game changer in the realm of economic legislations as by putting in place a comprehensive ‘one-stop-shop’ for insolvency resolution, it has paved the way for ease of exit in case of honest business failure.[1] The IBC provides for a mechanism for distressed businesses to resolve insolvency in an orderly and time-bound manner. The Code overhauled the legal regime for corporate distress resolution in India and replaced it with a predictable, market-led, incentive-compliant, and time-bound mechanism. It addresses the market imperfections and plugs the information asymmetries, enabling the “freedom to exit” for commercial entities (through corporate insolvency resolution regimes) and entrepreneurs.[2] The IBC was enacted as a critical building block of India’s progression to a mature market economy. The first objective of the Code is resolution. The second objective is to maximize the value of assets of the corporate debtor and the third objective is to promote entrepreneurship, availability of credit, and balancing the interests. The order of these objectives is sacrosanct.[3]

Pillars under the IBC

2. The IBC provides for four pillars under its ecosystem to protect, safeguard and implement the provisions of law and practices in respect of corporate insolvency resolution and liquidation processes, namely, Insolvency and Bankruptcy Board of India (IBBI), Adjudicating Authority (AA), Information Utility (IU) and Insolvency Professionals (IP). The function[4] of each of the four pillars under the IBC is briefly stated in Figure 1.

Appointment of an IP

3. An IP is defined in section 3(19) of the IBC as below:

‘Insolvency professional means a person enrolled under section 206 with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207’

Only an IP can be appointed as an interim resolution professional (IRP), a resolution professional (RP), a liquidator, or a bankruptcy trustee under the IBC. The AA appoints an IRP or an RP to run the CIRP of a CD, and a liquidator to run the liquidation process. A bankruptcy trustee runs the insolvency and bankruptcy process for partnerships and individuals. Hence, the IP—acting as an IPR, RP, liquidator, or bankruptcy trustee—is supposed to be the foundation of the IBC.[5]

Functions and Obligations of an IP

4. Section 208 of the IBC provides for the functions and obligations of IPs, wherein, Section 208(1) inter alia states as below:

‘(1) 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, namely: –

(a) a fresh start order process under Chapter II of Part III;

(b) individual insolvency resolution process under Chapter III of Part III

(c) corporate insolvency resolution process under Chapter II of Part II.

(ca) pre-packaged insolvency resolution process under Chapter III-A of Part II;

(d) individual bankruptcy process under Chapter IV of Part III; and

(e) liquidation of a corporate debtor firm under Chapter III of Part II.’

Statutory Protection Ensured for an IP

5. The IP is accorded statutory protection for his actions while discharging the statutory functions under section 233 of the IBC which provides as below:

‘No suit, prosecution or other legal proceeding shall lie against the Government or any officer of the Government, or the Chairperson, Member, officer or other employee of the Board or an insolvency professional or liquidator for anything which is done or intended to be done in good faith under this Code or the rules or regulations made thereunder.’

Augmentation in Systemic Support to IPs at ground level

6. The AA appoints an IRP or an RP to run the CIRP of a CD, and a liquidator to run the liquidation process. Subsequent to appointment, at times, there is a considerable time lag when AA actually signs and issues the appointment order. The IRP or RP is expected to demonstrate considerable alacrity and ensure that he need not wait for AA’s office to convey such order to him, rather obtain it on his own volition as there is immense pressure on him under Proviso 2 of section 12(3) providing that a CIRP must mandatorily be completed within 330 days from the insolvency commencement date, including any extension of the period of the CIRP granted and the time taken in legal proceedings in relation to the resolution process.[6] Since most IBC procedures are directly dependent upon the timely action on daily basis by an IRP/RP at each stage, it becomes incumbent upon the IP to be proactive and receive the AA’s appointment order, i.e., at the very outset, the situation at ground level ensures that the IP functions in an atmosphere where he is always at a receiving end.

7. As soon as an IP is appointed as an IRP, under section 17(1) of the IBC, the management of the affairs of the CD vests in the IRP and the powers of the board of directors or the partners of the CD stand suspended and are to be exercised by the IRP. This continues when the IRP is confirmed as the RP. When the IRP is replaced by the RP, it is the RP who then exercises the powers of the board of directors of the CD. This continues until the CIRP is completed. During the CIRP, the management of the CD rests with the IRP/RP, who then stands in the position of the board of directors of the CD.[7] Undoubtedly, this is an onerous task. It would be pertinent to analyse the lack of systemic support that the so-called pillar faces when he commences this humongous task:

a) Where the IP is faced with hostile workers or unions, or where the IP is unable to enter the unit of the CD, it is expected that he should contact the local police and produce a copy of the order passed by the AA to the police authorities for assistance. It cannot be denied that the CD and IP are invariably working at cross-purposes. On commencement of the insolvency proceedings, since management of the CD is going to rest with the IRP/RP, a CD ceding control of its organisation in an amicable atmosphere may not happen at all times. There is every likelihood of a CD turning hostile towards the IRP/RP. There is no police protection provided to the IRP/RP when he first approaches the CD. A lot of intimidation is faced by resolution professionals not only from corporate debtors or authorities but also from employees, workers, creditors and in some remote areas even from locals as well. It is really difficult to steer the process in such an environment.[8] The order of AA in the case of The Central Bank of India and The State Bank of India Vs. M/S. Ashok Magnetics Ltd.and Punjab National Bank Vs. Divyajyoti Sponge Iron Pvt Ltd. [CA (IB) No. 570/KB/2017 in C.P (IB) No. 363/KB/17] to give proper police assistance and personal security to the IRP is alright but, like other Government agencies, for example, Income Tax Department, whose personnel are always provided with police escorts beforehand to prevent occurrence of any mishap, similarly, police protection must be provided to the IRP/RP as well when he approaches the premises of a CD for the first time in all cases and in future contingencies as well, as per his discretion/requirement.

b) The IRP/RP is expected to be capable enough to single-handedly influence the entire chain of employees of the CD, right from the board of directors to a steno/peon so that everyone functions as per his bidding from day one. There is no systemic and administrative support at the disposal of the IRP/RP to access and control the humungous functions and data (depending upon the size and functions of the CD under CIRP). It should not be assumed that an IP will be able to handle the employees of the CD in all situations with such deftness that the sanctity of crucial information is not compromised. If any personnel of the CD, its promoter, or any other person required to assist or cooperate with the IRP or RP does not provide such assistance or cooperation, the IRP or RP can take recourse to certain measures with follow-up action by the AA on the following lines:

• IRP may take recourse to section 19(2) of the IBC which provides as below:

‘(2) Where any personnel of the corporate debtor, its promoter or any other person required to assist or cooperate with the interim resolution professional does not assist or cooperate, the interim resolution professional may make an application to the Adjudicating Authority for necessary directions.’

• In subsequence to the application made by the IRP, the AA may pass an order under section 19(3) of the IBC as below:

‘(3) The Adjudicating Authority, on receiving an application under sub-section (2), shall by an order, direct such personnel or other person to comply with the instructions of the resolution professional and to cooperate with him in collection of information and management of the corporate debtor.’

• Regulation 30 of the CIRP Regulations[9] provides as below:

‘The interim resolution professional or the resolution professional, as the case may be, may make an application to the Adjudicating Authority for an order seeking the assistance of the local district administration in discharging his duties under the Code or these Regulations.’

These regulations are all fine, however, at ground level, scrupulously following such procedures leads to loss of valuable time and compromising the sanctity of data lying in possession of the CD. Also, these provisions inadvertently convey an impression to the CD that the IP is only a toothless tiger who is remote-controlled by the AA at all times. It is, therefore, expedient that power to approach Government Authorities for assistance should lie with the IP himself. He may do so by recording his reasons and conveying the same to the AA for intimation. If the recorded reasons and circ*mstances are flimsy, the IP is bound by the code of conduct and may be subjected to disciplinary action by the AA, so as to prevent any mis-use of such provisions.

c)The Committee of Creditors (CoC) exercises its commercial wisdom and plays a fundamental role in the turnaround and restructuring of the CD within the timelines set down by the IBC. The CoC is uniquely positioned to support and facilitate the discharge of duties by the RP. Members of the CoC support and help the RP in maximizing the value of the assets of the CD by discharging their own duties with alacrity.[10] That being the present status under the IBC, it is incomprehensible that the IP is expected to seek assistance from the CD’s employees alone and not from the CoC constituents, whose stake in keeping the CD as a going concern is much higher. Also, this added arrangement of obtaining very limited manpower from the CoC constituents shall place some trustworthy manpower at IP’s disposal and empower the IP to control the CD and its staff in a much more efficient manner. Of course, the IP would be expected to keep sensitive information out of purview of the manpower provided by the CoC constituents and relieve them as soon as he has gained control over the CD.

d) With respect to the fee and other expenses incurred by an IP, the Code of Conduct for the IPs contained under the First Schedule to the IP Regulations[11] inter alia states as below:

‘25. An insolvency professional must provide services for remuneration which is charged in a transparent manner, is a reasonable reflection of the work necessarily and properly undertaken, and is not inconsistent with the applicable regulations.

26. 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.’

Further, the IBBI has issued the Cost Circular[12] which inter alia provides as below:

‘An Insolvency Professional (IP) is vested with the management of its affairs and he manages its operations as a going concern. He conducts the entire CIRP. Such responsibilities of an IP require the highest level of professional excellence, dexterity and integrity. An IP is obliged under section 208(2)(a) of the Code to take reasonable care and diligence while performing his duties, including incurring expenses. He must, therefore, ensure that not only fee payable to him is reasonable, but also other expenses incurred by him are reasonable.’

On the contrary, majority of the times, the CD does not have the funds to even meet the expenses incurred on or by the IRP. Regulation 33 of the CIRP Regulations[13] provides that the applicant, i.e., the FC, OC, or corporate applicant who has filed the application for initiation of the CIRP, shall fix the expenses to be incurred on or by the IRP. In case the applicant has not fixed the same, the AA shall fix the expenses. Further, Regulation 34 of the CIRP Regulations[14] provides that the CoC shall fix the expenses to be incurred on or by the RP and the expenses shall constitute insolvency resolution process costs.

Though, the IP needs to be compensated for his professional services commensurate to his ability, duties, and responsibilities, however, at ground level, an IP is at the mercy of adequacy of funds at the disposal of the CD, the applicant or the creditors. Undoubtedly, adequacy of funds is a pre-requisite for keeping a CD as a going concern as in many cases, the CD lacks sufficient funds to meet the CIRP or liquidation costs. The funds may not even be enough to pay the IP’s fee, or to take control and custody of the assets of the CD. On approaching the existing lenders, in many cases, such lenders do not wish to take on further risk and exposure to the CD. This creates a vicious cycle where in order to execute his statutory functions to keep the CD as a going concern, an IP has to struggle at multiple levels. In order to ameliorate the situation, there should be a provision for a centralised pool of funds for an IP to bank upon (with prior approval of AA) in situations of extreme adversity.

8.In a circular issued on January 3, 2018,[15] the IBBI inter alia directed as below:

1. It is hereby directed that while acting as an Interim Resolution Professional, a Resolution Professional, or a Liquidator for a corporate person under the Code, an insolvency professional shall exercise reasonable care and diligence and take all necessary steps to ensure that the corporate person undergoing any process under the Code complies with the applicable laws.
2. It is clarified that if a corporate person during any of the aforesaid processes under the Code suffers any loss, including penalty, if any, on account of non-compliance of any provision of the applicable laws, such loss shall not form part of insolvency resolution process cost or liquidation process cost under the Code. It is also clarified that the insolvency professional will be responsible for the non-compliance of the provisions of the applicable laws if it is on account of his conduct.’

The said circular seems to be in contravention of the spirit of section 233 of the IBC which states that no suit, prosecution, or other legal proceeding may be brought against an IP or liquidator for anything done or intended to be done in good faith and according to the IBC’s rules and regulations. That being said, any deliberate misdemeanour by the IP compromising the integrity and code of conduct under the resolution process needs to dealt with iron hands, but, holding IP responsible for non-compliance of routine corporate functions out of myriad of legal requirements which a potentially complex CD may involve, is quite excessive.

IP needs confidential professional support all along. IPEs are expected to provide support services to IPs, but former’s engagement may not sufficient to cater to all legal requirements. Though, sections 20(2)(a), 25(2)(d) and 35(1)(i) of the IBC specifically empower the IRP, the RP, and the liquidator respectively to appoint accountants, legal, or other professionals as may be necessary for assistance to carry out his responsibilities,[16] however, in most cases the cash flows of the CD are not enough to engage professional or legal advisers or to pay the requisite fees to the legal and statutory authorities. Of course, IPs should build and constantly upgrade their own capacity but, it would be a herculean task for IPs themselves to obviate the requirement to hire professionals in complex matters. To help matters, a statutory provision under the IBC may be incorporated making it incumbent upon the respective Government Authorities to provide technical assistance to IPs free of cost on most priority basis so as to enable IPs to handle such legal requirements in course of the resolution process, in situations where engagement of professional or legal advisers is not feasible due to shortage of funds.

Conclusion

9.It is incomprehensible that a so-called pillar under the IBC is expected to fend for himself from the very inception of CIRP proceedings. A CD, which is precariously placed and going downhill, is expected to be kept as a going concern by the IP singlehandedly. This is a herculean task. Despite all handicaps, there have been instances of exceptional performance by some highly competent and capable IPs who have successfully achieved resolution in some complex cases. However, it needs to be borne in mind that in most cases, IPs achieve resolution more out of luck coupled with the fact that CD itself wanted to cede control. It is only out of providence that IPs, the so-called one of the pillars under the IBC, have been able to function and discharge their statutory obligations thus far, even though while working as an IRP/RP/liquidator, IPs have faced extreme challenges, such as physical attacks, kidnapping, detention, torture and ransom demands.

10.IPs are expected to maintain integrity by being honest, straightforward, and forthright in all professional relationships. This is an essential requirement to enable the insolvency process culminates efficiently. However, adequate systemic support needs to be upgraded so that IPs can function as a true pillar at ground level and this pillar’s core needs to be strengthened to bear the burden on which the entire edifice of IBC rests upon. After all, an IP cannot be perceived as a toothless tiger who is remote-controlled by the AA at all times. The objective should be to allow IPs function with adequate freedom and support system without compromising on the overall control to be exercised by the AA.