Monday 28 November 2016

New discipline of insolvency profession: a need to make the right moves

(Written in July 2016 before notification of IP Regulations)

On 5th May 2016, the Parliament of India passed the Insolvency and Bankruptcy Code, 2016 (the Code) paving way for introduction of the much-needed modern framework to deal with insolvency and bankruptcy of corporate entities and natural persons in India. The Code received the assent of the President of India on 28th May 2016, and its provisions are likely to be notified in the near future.

A key component of an effective and efficient insolvency system is the role undertaken by the insolvency professional. A robust insolvency system seeks to achieve the appropriate balance between the debtor and its creditors, rehabilitation and liquidation, as among creditors, while preserving their negotiated right and ensuring that preferential transactions are appropriately managed and misfeasance is effectively addressed. The insolvency professional plays an important role in getting this balance correct and in effecting the insolvency proceeding in a timely manner and should arguably be a key driver of the process.

The Code provides for the creation of a new discipline of insolvency professional that will have a central role to perform in the insolvency process. The main functions and duties of insolvency professional under the Code are to serve as a resolution professional or liquidator or perform statutory and other functions assigned under the regulations in the matter of:

§  A fresh start order process under Chapter II of Part III;
§  Individual insolvency resolution process under Chapter III of Part III;
§  Corporate insolvency resolution process under Chapter II of Part II;
§  Individual bankruptcy process under Chapter IV of Part III;
§  Liquidation of a corporate debtor firm under Chapter III of Part II.
To best ensure that a jurisdiction achieves the maximum benefit from the work of insolvency professional, suitably qualified private sector insolvency practitioners, properly regulated are inevitable.

Qualifications and qualities

As per the Code, a person can render his services as insolvency professional only if he is enrolled as a member of an insolvency professional agency and registered with the Insolvency and Bankruptcy Board of India (the Board). Insolvency professional can apply for registration with the Board only after obtaining membership of any insolvency professional agency. The Code authorizes the Board to specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, and insolvency or such other field that would be qualified to serve as insolvency professionals. The eligibility criteria, process of registration and all other aspects related to insolvency professional will be prescribed in the regulations to be framed by the Board. In other words, all eyes are now set on the regulations to be framed by the Board or in its absence, the Central Government.
Well-qualified and respected insolvency professionals command respect from all of the enterprise’s stakeholders. It is critical that the qualifications prescribed by the Board for licensing of the insolvency professionals are consistent with and complementary to the role and functions prescribed for the insolvency professional. The complexity of the majority of insolvency and restructuring assignment’s demand that those who are involved in such actions are appropriately qualified.  These qualifications should include a good knowledge of the law (not only insolvency law, but also relevant commercial, financial, labor and business law) as well as adequate experience in commercial and financial matters, including, to some degree, accounting. An individual should possess good interpersonal skills, an ability to communicate clearly and to reconcile the different positions of stakeholders. They need good management skills. They will be required to balance commercial reality with legal requirements in order to preserve the entitlements of stakeholders, such as creditors, as well as to recognize issues relating to the public interest, where appropriate.
Equally important to the knowledge and experience requirement are the personal qualities of those who seek to be insolvency professionals. These include qualities such as integrity, impartiality, and independence. Integrity should require that the individual have a sound reputation and no criminal record or record of financial wrongdoing. They should be financially securable to finance their overhead and other operational costs. While their fees are usually paid promptly, there can be periods where they must finance their mandate and should therefore not be in a position of having their liquidity requirements dictate in any manner the course of action adopted. Also, in liquidations, they will have substantial trust funds and should have ability and resources to ensure that these are adequately protected. This is vital to maintaining confidence in the insolvency system.
It is also critical that the insolvency practitioner be and be able to demonstrate that he/she is independent from vested interests, whether of an economic, familial or other nature. While regulations should provide for a disclosure process, such requirement should not result in having to disclose what are likely trivial matters, but those which an informed person would find troublesome and result in a loss of trust and confidence in the insolvency system.
The standard of care to be employed by the insolvency administrator and his/her personal legal liability are important in the conduct of insolvency proceedings. The establishment of a measure for the care, diligence and skill with which the insolvency professional carries out duties and functions, usually in difficult circumstances, is vital. It requires balance; a standard that ensures competence but one that is not so stringent as to inordinately increase the costs of administration and to invite unnecessary litigation against insolvency practitioners.
Regulating the insolvency professional
As per the Code, to be able to serve as insolvency profession, a person will have to become a member of insolvency professional agency (the insolvency agency) and register with the Board.  The main functions of insolvency professional agency will be to:
§  Grant membership to persons who fulfill all requirements set out in its bye- laws on payment of membership fee;
§  Lay down standards of professional conduct for its members;
§  Monitor the performance of its members;
§  Safeguard the rights, privileges and interests of insolvency professionals who are its members;
§  Suspend or cancel the membership of insolvency professionals who are its members on the grounds set out in its bye-laws;
§  Redress the grievances of consumers against insolvency professionals who are its members; and
§  Publish information about its functions, list of its members, performance of its members and such other information as may be specified by regulations.
In a way therefore, the legislature has chosen to the Board to regulate the insolvency profession.   The insolvency agency will also play some regulatory role but that would be based on by-laws approved by the Board that will provide for the minimum standards of professional competence of the members of insolvency professional agencies; standards for professional and ethical conduct of the members of insolvency professional agencies; requirements for enrolment of persons as members of insolvency professional agencies which shall be non-discriminatory in the matter of religion, caste, gender or place of birth and such other grounds as may be specified; the manner of granting membership and other matters.

The regulatory approach adopted by policy makers appears to be based on the premise that the Indian insolvency industry is not mature and sophisticated enough to self-regulate and therefore the government must assume the regulatory role.  While that is a fair point it is equally important to appreciate that the insolvency industry is expected to grow rapidly (and surely, the government would also take necessary measures in that direction) and therefore, it should be ensured that insolvency profession should be left to self-regulate itself not too far ahead in future.  The role of Board should be hands-off approach of an observer, which is not involved in day-to-day regulatory affairs but steps in only when required.  The Board should develop regulations and leave it to insolvency agency to implement them diligently. Proper reporting by insolvency agency should be required. The Board should audit them and as stated, step in whenever its intervention becomes necessary.

Stringent requirements, though somewhat restrictive, facilitate the appointment of highly qualified individuals and assure quality control with respect to the standard of service required. Stringent requirements can provide the greatest overall benefit even though they might result in higher fees charged than if there were open, unrestricted access.  This is a small price to pay, as it is of paramount importance that the business and financial community, the employees of distressed enterprises and various government agencies all have confidence and trust in those charged with either the rehabilitation or liquidation process, and assist in providing an efficient resolution. They are agents of all of those who collectively have to accept an outcome different from that for which they bargained. At the same time, in a market where the development of the profession has to start from the scratch, it is important to balance the above approach by introducing sufficient incentives to attract good talent. Grandfathering in the experienced professionals from other disciplines like lawyers, chartered accountants and bankers is also needed. However, such approach should be only as a stopgap arrangement and full throttle push should be given for development of the profession. 

Remuneration

One of the thorniest issues is that of the insolvency practitioner’s remuneration. The remuneration should be commensurate with the qualifications required and the tasks to be performed and should achieve a balance between risk and reward in order to attract appropriately qualified professionals. It should encourage that an appropriate level of care, diligence, skill and creativity be exercised. While there are different methods of fixing remuneration, including time based systems or commission or percentage based systems or combination of both, there should be provision in the law for an independent review, including a judicial review, to be carried out where a stakeholder has concerns regarding this process. This safeguard, coupled with disclosure to creditors and other stakeholders, as well as the pressures of a competitive market, all help to ensure that value is delivered.

Any remuneration system should recognize that there are certain tasks or investigations that will be mandatory and provision for their costs should be part of whatever approach is adopted. Where a jurisdiction has a well-developed cadre of insolvency professional’s, who ascribe to the highest standards of conduct, together with the appropriate oversight, the insolvency system functions effectively and efficiently. A competent and recognized insolvency professional can overcome gaps in the legislative framework and make the system work for the benefit of all. The stature of insolvency professionals, their trust and skill enable them to bridge the differences between various stakeholders and to help ensure that business assets are deployed to maximize value.

The success or failure of the Code will depend on the quality of insolvency profession. It is critical that no stone is left unturned by the Board or in its absence, the Central Government, to provide a world-class framework for insolvency profession, drawn from international best practices that are suitable for Indian dynamics. 

With the enactment of the Code, it has become imperative that all the stakeholders play a proactive meaningful role in the development of the discipline of insolvency profession, and collaborates with key stakeholders to develop the insolvency framework and ecosystem in the country.    Organization’s like INSOL India and Society of Insolvency Practitioners of India have to lead this exercise. Support of INSOL International and other experienced bodies like Insolvency Practitioners Association of UK should also be sought in the development of insolvency practitioner’s framework.

The Code requires that the Board specify mechanisms for issuing regulations, including the conduct of public consultation processes before notification of any regulations.  It is hoped and expected that the Board or in its absence, the Central Government will hold a deep engagement with stakeholders while framing the regulations.



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