(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.
