Chapter 17 Professional and Ethical Practices for Insolvency Practitioners – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Professional and Ethical Practices for Insolvency Practitioners – CS Professional Insolvency Law and Practice Study Material
Question 1.
‘Integrity, objectivity and Independence are the primary criteria to be appointed as Resolution Professional’s – Elucidate the statement highlighting few important code of conduct for Insolvency professionals under the Insolvency and Bankruptcy Code, 2016. (Dec 2020, 6 marks)
Answer:
Integrity and Objectivity
- An insolvency professional must maintain integrity by being honest, straightforward, and forthright in all professional relationships.
- An insolvency professional must not misrepresent any facts or situations and should refrain from being involved in any action that would bring disrepute to the profession.
- An insolvency professional must act with objectivity in his professional dealings by ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not.
- An insolvency professional appointed as an interim resolution professional, resolution professional, liquidator, or bankruptcy trustee should not himself acquire, directly or indirectly, any of the assets of the debtor, nor knowingly permit any relative to do so.
Independence
- An insolvency professional must maintain complete independence in his professional relationships and should conduct the insolvency resolution, liquidation or bankruptcy process, as the case may be, independent of external influences.
- In cases where the insolvency professional is dealing with assets of a debtor during liquidation or bankruptcy process, he must ensure that he or his relatives do not knowingly acquire any such assets, whether directly or indirectly unless it is shown that there was no impairment of objectivity, independence or impartiality in the liquidation or bankruptcy process and the approval of the Board has been obtained in the matter.
- An insolvency professional shall not take up an assignment under the Code, if he, any of his relatives, any of the partners or directors of the insolvency professional entity of which he is a partner or director, or the insolvency professional entity of which he is a partner or director is not independent, in terms of the Regulations related to the processes under the Code, in relation to the corporate person/ debtor and its related parties.
- An insolvency professional shall disclose the existence of any pecuniary or personal relationship with any of the stakeholders entitled to distribution under sections 53 or 178 of the Code.
- An insolvency professional shall not influence the decision or the work of the committee of creditors or debtor, or other stakeholders under the Code, so as to make any undue or unlawful gains for himself or his related parties, or cause any undue preference for any other persons for undue or unlawful gains and shall not adopt any illegal or improper means to achieve any mala side objectives
Question 2.
What are the powers of the disciplinary committee of Insolvency and Bankruptcy Board of India (IBBI)? Also elaborate the circumstances when the IBBI can cancel or suspend the registration of an Insolvency Professional Agency (IPA). (Dec 2021, 3 + 3 = 6 marks)
Answer:
Powers of the Disciplinary Committee
Section 220 of the Insolvency and Bankruptcy Code, 2016 deals with the appointment of disciplinary committee. It provides that-
- The Board shall constitute a disciplinary committee to consider the reports of the investigating authority submitted under section 218(6). Provided that the members of the disciplinary committee shall consist of whole-time members of the Board only.
- On examination of the report of the Investigating Authority, if the disciplinary committee is satisfied that sufficient cause exists, it may impose penalty as specified in sub-section 3 or suspend or cancel the registration of the Insolvency Professional (IP) or suspend or cancel the registration of Insolvency Professional Agency (IPA) or Information Utility (IU).
- Where any IPA or IP or an IU has contravened any provisions of this Code or rules or regulations made, thereunder, the disciplinary committee may impose penalty which shall be-
- Three times the amount of the loss caused, or likely to have been caused, to persons concerned on account of such contravention; or
- Three times the amount of the unlawful gain made on account of such contravention, whichever is higher.
Provided that where such loss or unlawful gain is not quantifiable, the total amount of the penalty imposed shall not exceed more than one crore rupees.
- Notwithstanding anything contained in sub-section (3), the board may direct any person who has made unlawful gains or averted loss by indulging in any activity in contravention of this Code, or the rules or regulations made thereunder, to disgorge an amount equivalent to such unlawful gain or aversion of loss.
- The Board may take such action as may be required to provide restitution to the person who suffered loss on account of any contravention from the amount so disgorged, if the person who suffered such loss is identifiable and the loss suffered is directly attributable to such person.
- The Board may make regulations to specify-
a. the procedure for claiming restitution under sub-section (5),
b. the period within which such restitution may be claimed, and
c. the manner in which restitution of amount may be made.
Cancellation or suspensions of registration of IPA:
Section 201 (5) of the Insolvency and Bankruptcy Code, 2016 deals with the provisions relating to the cancellation or suspension of registration of IPA. It provides that the Board may, by order, suspend or cancel the certificate of registration granted to an IPA on any of the following grounds namely:
a. that is has obtained registration by making a false statement or misrepresentation or by any other unlawful means;
b. that it has failed to comply with the requirements of the regulations made by the Board or bye-law made by the IPA;
c. that is has contravened any of the provisions of the Act or the rules or the regulations made thereunder;
d. on any other ground as may be specified by regulations.
Provided that no order shall be made under this sub-section unless the IPA concerned has been given a reasonable opportunity of being heard.
Provided further that no such order shall be passed by any member except whole- time members of the Board.
Question 3.
The Insolvency and Bankruptcy Board of India (IBBI) and Insolvency Professional Agencies (IPAs) have come across, some mistakes being committed by some of the Insolvency Professionals (IPs) in conduct of Corporate Insolvency Resolution Process (CIRP). These mistakes costs to the Corporate Debtor (CD) and to the economy, and often amounts to contravention of provisions of the law.
Explain in detail the mistakes committed by the Insolvency Professionals (IPs) with reference to the:
(i) Accepting the assignment without having the Authorisation For Assignment (AFA),
(ii) Fee payable to the IP,
(iii) Appointment of Professionals and
(iv) Appointment of Registered Valuers, by qouting the relevant provisions of the Insolvency and Bankruptcy Code, 2016. (Dec 2021, 3 marks each)
Answer:
Yes, it is true to say that the Insolvency and Bankruptcy Board of India (IBBI) and Insolvency Professional Agencies (IPAs) have come across some mistakes being committed by some of the IPs in conduct of CIRPs. These mistakes are costs to the Corporate Debtor (CD) and the economy, and often amount to contravention of provisions of the law.
The mistakes committed by the IPs and the relevant provisions of the IBC are as under:
(i) Assignment without having Authorisation : Regulation 7A of the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations) requires that an IP shall not accept or undertake any assignment, including CIRP, unless he holds an authorisation for assignment (AFA) on the date of such acceptance or commencement of such assignment, as the case may be.
As per Regulation 12A(5) of Insolvency and Bankruptcy Board of India (Model Bye- Laws and Governing Board Of Insolvency Professional Agencies) Regulations, 2016 i.e. (bye-laws of the IPAs) provide that, if the AFA is not issued, renewed or rejected by the IPA within 15 days of the date of receipt of application, the authorisation shall be deemed to have been issued or renewed, as the case may be, by the IPA. The Insolvency and Bankruptcy Board of India (IBBI) has made available an IT facility for the IPs to apply for the issuance or renewal of AFA and the IPAs to issue or renew AFAs, as the case may be, in a time bound manner. There are, however, instances where an IP undertook CIRP without having an AFA and in some cases, without even applying for an AFA, in contravention of the provisions of law.
(ii) Fee payable to IP: The Code of Conduct for Insolvency Professionals (IPs) under the IBBI (Insolvency Professionals) Regulations, 2016 require that an IP must provide services for remuneration which is charged in a transparent manner, and is a reasonable reflection of the work necessarily and properly undertaken.
Regulation 33 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) requires that the applicant shall fix the expenses to be incurred on or by the IRP. Regulation 34 requires that the committee of creditors (CoC) shall fix the expenses to be incurred on or by the RP. Regulation 39D requires the CoC to fix the fee payable to the liquidator, in the event the CD proceeds for liquidation.
It is, however, observed that in a few cases, the fee payable to an IP was not fixed beforehand and the IP drew a fee on his own without approval of such fee from the competent authority, in contravention of the provisions of law.
(iii) Appointment of professionals : It is the duty of the Resolution Professional (RP) to preserve and protect the assets of the Corporate Debtor (CD), including continuing its business operations. Section 25(2) of the Code empowers an RP to appoint accountants, legal or other professionals for this purpose. Clause 23B of the Code of Conduct under the IBBI (Insolvency Professionals) Regulations, 2016 prohibits an IP from engaging or appointing any of his relatives or related parties for or in connection with any work relating to any of his assignment.
An IP is, therefore, required to satisfy himself that there is a need for services of a professional; such services are not available within the CD; the person is qualified to render professional service; the professional to be appointed is suitable for the purpose; the professional is not a relative or related party of the IP; the fee to be paid to the professional is reasonable; etc.
RP needs to apply his mind to these and other related aspects while appointing a professional. RP must not appoint any person who is not a professional, or who is his relative or a related party, or who is choice of a stakeholder. RP must not appoint a professional to provide services to a stakeholder, or a professional because a stakeholder wants that professional to be appointed. There are instances where the RP appointed a professional who is the choice of a stakeholder or a person who is not a professional for professional services. This compromises the independence of the IP as well as that of the professionals and imposes avoidable cost on the CD and other stakeholders.
(iv) Appointment of registered valuers : Regulation 27 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) envisages estimation of fair value and liquidation value of the assets of the Corporate Debtor (CD). These values serve as reference for evaluation of choices, including liquidation, and selection of the choice that decides the fate of the CD, and consequently of the stakeholders. A wrong valuation may liquidate an otherwise viable CD, which may be disastrous for an economy.
Given the importance of valuation in CIRP, the CIRP Regulations require that fair value and liquidation value of the CD shall be determined by two registered valuers (RVs) and it is the duty of the RP to appoint RVs only. There are, however, a few instances where the RP appointed persons other than RVs for conduct of valuations and in some cases, appointed only one RV instead of two. This indicates lack of due diligence and sincerity of the IP and probably demonstrates mala fide intent in some cases to get a valuation done to subserve certain interests. This potentially risks the life of the CD and adversely affects the interests of stakeholders, and drives out qualified and regulated valuation professionals out of practice.
Question 4.
The Insolvency and Bankruptcy Board of India (IBBI) had issued ‘Show Cause Notice’ (SCN) to Suresh Kumar, Insolvency Professional (IP) under Regulation 11 of the IBBI (Insolvency Professionals) Regulations, 2016 for accepting the assignment as Resolution Professional (RP) in the Corporate Insolvency Resolution Process (CIRP) of Crane India Ltd, a Corporate Debtor (CD) after 31st December, 2019, without holding a valid Authorisation for Assignment (AFA) issued to him by his Insolvency Professional Agency (IPA).
In this case Suresh Kumar was ratified to act as RP in the meeting of Committee of Creditors (CoC) held on 19th January, 2020. However, consent for CIRP assignment by RP was given in June, 2018 and CIRP commenced in November, 2019.
The IBBI alleged that, Suresh Kumar had accepted assignment as the RP in CIRP of the CD after 31st December, 2019 without having valid AFA which is in the contravention of Section 208 of IBC.
However, the RP replied to the SCN that the assignment was accepted to act as RP before 31st December, 2019 by him and the same was admitted by Hon’ble National Company Law Tribunal (NCLT). He further stated that he did not have any malafide intention for not obtaining the AFA and apologized for the same.
But it was referred to Disciplinary Committee (DC) by the IBBI for disposal of the SCN in accordance with the Code and Regulations made thereunder.
Whether the RP is liable on the basis of above facts ? (June 2022, 6 marks)
Question 5.
Who is insolvency professional?
Answer:
- Insolvency Professional means a person enrolled with an Insolvency Professional Agency as its member and registered with the IBBI as an Insolvency Professional.
- “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.
- An Insolvency Professional (IP) plays a very important role under the Insolvency and Bankruptcy Code, 2016.
Question 6.
Explain the following key terms as per the Insolvency and Bankruptcy Code, 2016:
(a) Liquidator
(b) Resolution Professional
(c) Bankruptcy Trustee
(d) Resolution Professional
Answer:
(a) Liquidator: “Liquidator” means an insolvency professional appointed as a liquidator in accordance with the provisions of Chapter III or Chapter V of Part II, as the case may be.
(b) Resolution Professional: “Resolution Professional”, for the purposes of Part II, means an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim-resolution professional.
(c) Bankruptcy Trustee: “Bankruptcy Trustee” means the insolvency professional appointed as a trustee for the estate of the bankrupt under
section 125.
(d) Resolution Professional: “Resolution Professional” means an insolvency professional appointed under Part III as a resolution professional for conducting the fresh start process or insolvency resolution process
Question 7.
Explain the provisions related to enrolment and registration of Insolvency Professionals?
Answer:
- Section 206 of the Insolvency and Bankruptcy Code lays down that no person shall render his services as insolvency professional under this Code without being enrolled as a member of an insolvency professional agency and registered with the Board.
- Section 207(1) further lays down that every insolvency professional shall, after obtaining the membership of any insolvency professional agency, register himself with the Board within such time, in such manner and on payment of such fee, as may be specified by regulations.
- Section 207(2) empowers the IBBI to specify the categories of professionals or persons possessing such qualifications and experience in the field of finance, law, management, insolvency or such other field to act as insolvency professionals.
- The Insolvency and Bankruptcy Board of India has made the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016 to regulate the working of Insolvency Professionals. These regulations are amended from time to time by the Insolvency and Bankruptcy Board of India
Question 8.
State the functions and obligations of Insolvency Professionals?
Answer:
Functions of insolvency Professionals
Section 208(1) of the Code provides that 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;
(d) individual bankruptcy process under Chapter IV of Part III; and
(e) liquidation of a corporate debtor firm under Chapter III of Part II. Obligations of Insolvency Professionals
Section 208(2) mandates that every insolvency professional shall abide by the following code of conduct:-
(a) to take reasonable care and diligence while performing his duties;
(b) to comply with all requirements and terms and conditions specified in the bye-laws of the insolvency professional agency of which he is a member;
(c) to allow the insolvency professional agency to inspect his records;
(d) to submit a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as to the insolvency professional agency of which he is a member; and
(e) to perform his functions in such manner and subject to such conditions as may be specified.
Question 9.
Explain in detail the “Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016”?
Answer:
- The Insolvency and Bankruptcy Board of India has made the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 in exercise of the powers conferred by sections 196,207 and 208 read with section 240 of the Insolvency and Bankruptcy Code, 2016.
- These regulations came into force with effect from 29th November 2016. The IBBI (Insolvency Professionals) Regulations, 2016 makes provisions for the examination and registration of Insolvency Professionals with the Insolvency and Bankruptcy Board of India.
- These regulations also make provisions for the disciplinary proceedings against the insolvency professional as well as prescribes a code of conduct for insolvency professionals.
According to Regulation 4, no individual shall be eligible to be registered as an insolvency professional if he
(a) is a minor;
(b) is not a person resident in India;
(c) does not have the qualification and experience specified in regulations 5 and 9 of the IBBI (Insolvency Professionals) Regulations, 2016;
(d) has 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;
(e) he is an undischarged insolvent, or has applied to be adjudicated as an insolvent;
(f) he has been declared to be of unsound mind; or
(g) he is not a fit and proper person. First Schedule to the aforesaid regulations prescribes a code of conduct for insolvency professionals.
According to Regulation 7(2)(h), the registration of an insolvency professional shall be subject to the condition that he shall abide by the following Code of Conduct specified in the First Schedule to the Regulations
Question 10.
Write a note on provisions related to Code of Conduct for Insolvency Professionals?
Answer:
Provisions related to Code of Conduct for Insolvency Professionals are as under:
Integrity and objectivity
1. An insolvency professional must maintain integrity by being honest, straightforward, and forthright in all professional relationships.
2. An insolvency professional must not misrepresent any facts or situations and should refrain from being involved in any action that would bring disrepute to the profession.
3. An insolvency professional must act with objectivity in his professional dealings by ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not.
4. An insolvency professional appointed as an interim resolution professional, resolution professional, liquidator, or bankruptcy trustee should not himself acquire, directly or indirectly, any of the assets of the debtor, nor knowingly permit any relative to do so.
Independence and impartiality
5. An insolvency professional must maintain complete independence in his professional relationships and should conduct the insolvency resolution, liquidation or bankruptcy process, as the case may be, independent of external influences.
6. In cases where the insolvency professional is dealing with assets of a debtor during liquidation or bankruptcy process, he must ensure that he or his relatives do not knowingly acquire any such assets, whether directly or indirectly unless it is shown that there was no impairment of objectivity, independence or impartiality in the liquidation or bankruptcy process and the approval of the Board has been obtained in the matter.
7. An insolvency professional shall not take up an assignment under the Code if he, any of his relatives, any of the partners or directors of the insolvency professional entity of which he is a partner or director, or the insolvency professional entity of which he is a partner or director is not independent, in terms of the Regulations related to the processes under the Code, in relation to the corporate person/ debtor and its related parties.
8. An insolvency professional shall disclose the existence of any pecuniary or personal relationship with any of the stakeholders entitled to distribution under sections 53 or 178 of the Code, and the concerned corporate person/ debtor as soon as he becomes aware of it, by making a declaration of the same to the applicant, committee of creditors, and the person proposing appointment, as applicable.
8A. An insolvency professional shall disclose as to whether he was an employee of or has been in the panel of any financial creditor of the corporate debtor, to the committee of creditors and to the insolvency professional agency of which he is a professional member and the agency shall publish such disclosure on its website.
9. An insolvency professional shall not influence the decision or the work of the committee of creditors or debtor, or other stakeholders under the Code, so as to make any undue or unlawful gains for himself or his related parties, or cause any undue preference for any other persons for undue or unlawful gains and shall not adopt any illegal or improper means to achieve any mala fide objectives.
Professional competence
10. An insolvency professional must maintain and upgrade his professional knowledge and skills to render competent professional service. Representation of correct facts and correcting misapprehensions
11. An insolvency professional must inform such persons under the Code as may be required, of a misapprehension or wrongful consideration of a fact of which he becomes aware, as soon as may be practicable.
12. An insolvency professional must not conceal any material information or knowingly make a misleading statement to the Board, the Adjudicating Authority or any stakeholder, as applicable.
Timeliness
13. An insolvency professional must adhere to the time limits prescribed in the Code and the rules, regulations and guidelines thereunder for insolvency resolution, liquidation or bankruptcy process, as the case may be, and must carefully plan his actions, and promptly communicate with all stakeholders involved for the timely discharge of his duties.
14. An insolvency professional must not act with mala fide or be negligent while performing his functions and duties under the Code.
Information management
15. An insolvency professional must make efforts to ensure that all communication to the stakeholders, whether in the form of notices, reports, updates, directions, or clarifications, is made well in advance and in a manner which is simple, clear, and easily understood by the recipients.
16. An insolvency professional must ensure that he maintains written contemporaneous records for any decision taken, the reasons for taking the decision, and the information and evidence in support of such decision. This shall be maintained so as to sufficiently enable a reasonable person to take a view on the appropriateness of his decisions and actions.
17. An insolvency professional must not make any private communication with any of the stakeholders unless required by the Code, rules, regulations and guidelines thereunder, or orders of the Adjudicating Authority.
18. An insolvency professional must appear, co-operate and be available for inspections and investigations carried out by the Board, any person authorised by the Board or the insolvency professional agency with which he is enrolled.
19. An insolvency professional must provide all information and records as may be required by the Board or the insolvency professional agency with which he is enrolled.
20. An insolvency professional must be available and provide information for any periodic study, research and audit conducted by the Board.
Confidentiality
21. An insolvency professional must ensure that confidentiality of the information relating to the insolvency resolution process, liquidation or bankruptcy process, as the case may be, is maintained at all times. However, this shall not prevent him from disclosing any information with the consent of the relevant parties or required by law.
Occupation, employability and restrictions
22. An insolvency professional must refrain from accepting too many assignments, if he is unlikely to be able to devote adequate time to each of his assignments. In the matter of IDBI Bank Ltd. v. Lanco Infratech Ltd, NCLT Hyderabad Bench held that an Insolvency Professional must refrain from accepting too many assignments, if he is unable to devote adequate time to each of his assignments as per Clause 22, Schedule I 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.
24. An insolvency professional must not conduct business which in the opinion of the Board is inconsistent with the reputation of the profession.
Remuneration and costs
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.
25A. An insolvency professional shall disclose the fee payable to him, the fee payable to the insolvency professional entity, and the fee payable to professionals engaged by him to the insolvency professional agency of which he is a professional member and the agency shall publish such disclosure on its website.
26. 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.
27. 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.
Gifts and hospitality
28. An insolvency professional, or his relative must not accept gifts or hospitality which undermines or affects his independence as an insolvency professional.
29. An insolvency professional shall not offer gifts or hospitality or a financial or any other advantage to a public servant or any other person, intending to obtain or retain work for himself, or to obtain or retain an advantage in the conduct of profession for himself. Code
Question 11.
Write a note on provisions related to Code of Conduct for Insolvency Professionals?
Answer:
- The Code is intended to assist insolvency practitioners meet the obligations expected of them by providing professional and ethical guidance.
- The purpose of the Code is to provide a high standard of professional and ethical guidance amongst insolvency professionals.
- The insolvency professionals should be guided not merely by the terms but also by the spirit of the Code. Since it is impossible to define every situation to which the principles set out in the Code will be relevant, there are a few basic principles stated in Schedule I [Under regulation 7(2)(g)] of Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations,2016 which lays down the broad principles under ‘Code of Conduct for Insolvency Professionals’.
- As a professional membership body promoting high standards of practice in relation to work undertaken by its members, we require our members to adhere to certain principles in all aspects of professional work.
Question 12.
Insolvency professional to ensure compliance with provisions of the applicable laws. Comment
Answer:
Insolvency professional to ensure compliance with provisions of the applicable laws.
IBBI in exercise of powers under section 196 read with section 208 of the Insolvency and Bankruptcy Code, 2016 has issued a Circular dated 3rd January, 2019 stating that,
- A corporate person undergoing insolvency resolution process, fast track insolvency resolution process, liquidation process or voluntary liquidation process under the Insolvency and Bankruptcy Code, 2016 (Code) needs to comply with provisions of the applicable laws (Acts, Rules and Regulations, Circulars, Guidelines, Orders, Directions, etc.) during such process. For example, a corporate person undergoing insolvency resolution process, if listed on a stock exchange, needs to comply with every provision of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, unless the provision is specifically exempted by the competent authority or becomes inapplicable by operation of law for the corporate person.
- 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.
- 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.
Question 13.
Insolvency professional not to outsource his responsibilities. Comment.
Answer:
Insolvency professional should not to outsource his responsibilities.
IBBI in exercise of powers under section 196 read with section 208 of the Insolvency and Bankruptcy Code, 2016 has issued a Circular dated 3rd January, 2019 stating that,
- The Insolvency and Bankruptcy Code, 2016 (Code) read with regulations made thereunder cast specific duties and responsibilities on an insolvency professional. An insolvency professional is required to perform certain tasks under the Code while acting as an Interim Resolution Professional, a Resolution Professional, a Liquidator or a Bankruptcy Trustee for various processes. For example, an insolvency professional is required to manage the operations of the corporate debtor as a going concern. He is also required to invite resolution plans, examine them and present to the committee of creditors for its approval such resolution plans which comply with the provisions of the Code. To assist him in carrying out his responsibilities, the Code read with regulations allow an insolvency professional to appoint accountants, legal or other professionals, as may be necessary.
- It has been observed that a few insolvency professionals are advising the prospective resolution applicants to submit a certificate from another person to the effect that they are eligible to be resolution applicants. This requirement amounts to outsourcing responsibilities of an insolvency professional to another person. Further, this adds to cost of the’ resolution applicant and delays submission of resolution plans. The Code read with regulations do not envisage such a certification from a third person.
- It is hereby directed that an insolvency resolution professional shall not outsource any of his duties and responsibilities under the Code. He shall not require any certificate from another person certifying eligibility of a resolution applicant.
Question 14.
What are the Disclosures required to be made by Insolvency Professionals and other Professionals appointed by Insolvency Professionals conducting Resolution Processes?
Answer:
The Board vide its Circular No. IP/005/2018 dated 16th January, 2018 has made it mandatory for the IRP or the RP, as the case may be, to disclose the following to the IPA with which he is enrolled:
- His relationship (if any) with the corporate debtor (after appointment):
- His relationship (if any) with the Committee of creditors, within a period of three days from the constitution of the committee of creditors;
- His relationship with any professional(s) appointed by him within a period of three days from the date of the appointment;
- His relationship with the interim finance provider, within three days of the agreement with the interim finance provider; and-
- His relationship with the prospective resolution applicant (s) within three days of supply of the information memorandum to the prospective resolution applicant.
In addition to the above, the IRP or the RP, as the case may be, must make: - Disclosure of the relationship of the other professional(s) engaged by him, with himself, the Corporate Debtor, Financial Creditor(s) within three days of the appointment;
- Disclosure of the relationship of the Interim Finance Provider(s) with himself, the Corporate Debtor, Financial Creditor(s), within three days of the agreement with the Interim Finance Provider;
- Disclosure of the relationship of the Prospective Resolution Applicant(s) with himself, the Corporate Debtor, Financial Creditor(s), within three days of the supply of information memorandum to the Prospective Resolution Applicant.
Question 15.
What are the common mistakes being committed by some of the Insolvency Professional in conduct of corporate insolvency resolution process?
Answer:
Some of the mistakes committed by any Insolvency Professional which may
also lead to initiate any disciplinary action are as under:
(a) Assignment without having Authorisation:
Regulation 7Aof the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations) requires that an IP shall not accept or undertake any assignment, including CIRP, unless he holds an authorisation for assignment (AFA) on the date of such acceptance or commencement of such assignment, as the case may be. The bye-laws of the IPAs provide that, if the AFA is not issued, renewed or rejected by the IPA within 15 days of the date of receipt of application, the authorisation shall be deemed to have been issued or renewed, as the case may be, by the IPA. The IBBI has made available an IT facility for the IPs to apply for the issuance or renewal of AFA and the IPAs to issue or renew AFAs, as the case may be, in a time bound manner. There are, however, instances where an IP undertook CIRP without having an AFA and in some cases, without even applying for an AFA, in contravention of the provisions of law.
(b) Fee payable to IP:
The Code of Conduct for IPs under the IP Regulations require that an IP must provide services for remuneration which is charged in a transparent manner, and is a reasonable reflection of the work necessarily and properly undertaken. Regulation 39D requires the Committee of Creditors to fix the fee payable to the liquidator, in the event the Corporate Debtors proceeds for liquidation. It is, however, observed that in a few cases, the fee payable to an IP was not fixed beforehand and the IP drew a fee on his own without approval of such fee from the competent authority, in contravention of the provisions of law.
(c) Application for cooperation:
A CIRP requires cooperation of the CD, and its promoters, suspended directors, and management. However, co-operation may not be forthcoming in all cases. Section 19 of the Code, therefore, enables the IRP/RP to file an application to the Adjudicating Authority (AA) in case of non-co-operation for direction to such persons to comply with the instructions of the IRP/RP and to co-operate with him. Since time is the essence of a CIRP, the IRP /RP must act with promptitude and file the application, wherever required, without any procrastination. There are instances where the IRP / RP failed to file such applications or filed it so late that it lost its purpose and effectiveness. Any delay in filing applications despite continuing non-cooperation may reflect undue influence of promoters on the IP, and endanger the life of the CD.
(d) Public announcement:
Section 15 of the Code read with regulation 6 of the CIRP Regulations requires the IRP to make a public announcement of commencement of CIRP within three days of his appointment. Such announcement is required to be made in one English and one regional language paper with wide circulation at the location of the registered office and principal office of the CD. This enables the creditors to submit claims to the IRP and consideration of such claims by the authorised stakeholders while resolving stress of the CD. There are instances where the IRP did not make public announcement promptly on his appointment, or made it later, or made it in one newspaper, or made it in one English newspaper having circulation at the location of the CD. This not only puts the CIRP at risk, but also deprives the stakeholders of their legitimate rights.
(e) Updating of list of claims:
Section 25(2)(e) read with regulation 13 of the CIRP Regulations mandates that the IRP/RP shall verify every claim as per time line and maintain a list of creditors containing their names along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, update the list and display it on the website, if any, of the CD. There are instances where some IRPs/RPs did not display the list of creditors on the web site of the CD and in some cases, did not update it. This increases queries and complaints about the status of claims, impacts transparency and compromises interests of stakeholders.
(f) Authority of CoC:
The Code read with Regulations has specified responsibilities of an IP and of the CoC in a CIRP. These require decisions on several matters by the CoC with the required majority of voting share. No creditor, whether secured or unsecured, irrespective of its voting power or share, or no pool of creditors such as Joint Lenders’ Forum is a substitute of the CoC. It has been observed in a few cases that an IP took directions of a creditor having significant voting power or a pool of creditors. This compromises the independence of IP and amounts to contravention of the provisions of the Code.
(g) Appointment of professionals:
It is the duty of the RP to preserve and protect the assets of the CD, including continuing its business operations. Section 25(2) of the Code empowers an RP to appoint accountants, legal or other professionals for this purpose. Clause 23B of the Code of Conduct under the IP Regulations prohibits an IP from engaging or appointing any of his relatives or related parties for or in connection with any work relating to any of his assignment. He must not appoint any person who is not a professional, or who is his relative or a related party, or who is choice of a stakeholder. There are instances where the RP appointed a professional who is the choice of a stakeholder or a person who is not a professional for professional services. This compromises the independence of the IP as well as that of the professionals and imposes avoidable cost on the CD and other stakeholders.
(h) Appointment of registered valuers:
Given the importance of valuation in CIRP, the CIRP Regulations require that fair value and liquidation value of the CD shall be determined by two registered valuers (RVs) and it is the duty of the RP to appoint RVs only. There are, however, a few instances where the RP appointed persons other than RVs for conduct of valuations and in some cases, appointed only one RV instead of two. This indicates lack of due diligence and sincerity of the IP and probably demonstrates mala fide intent in some cases to get a valuation done to subserve
certain interests. This potentially risks the life of the CD and adversely affects the interests of stakeholders, and drives out qualified and regulated valuation professionals out of practice.
(i) Payment for professional services:
An IP and every other professional he appoints are independent professionals. They need to be paid reasonable fee commensurate to their services and such fee must be agreed before the appointment. The IP or professional concerned must raise bills / invoices in his name towards such fee, and such fee must be credited to his bank account. Any payment of fee for the services of an IP or any other professional appointed by the IP to any person other than the IP or such other professional, as the case may be, does not form part of the insolvency resolution process cost (IRPC). There are, however, a few instances where fee was paid to a person other than the IP or the professional concerned. This impacts transparency and cleanliness of the process while diluting professional accountability.
(j) Disclosure of fee and relationship:
The CIRP Regulations require the IRP / RP to make relationship and cost disclosures in the manner required by IBBI. It is the duty of an IP to disclose the fee payable to him as well as the fee payable to professionals engaged by him while performing the duties as an IP. It is also his duty to disclose the relationship he has with the professionals engaged by him. This ensures transparency and enables the stakeholders to take informed decisions. Failure to disclose these details creates a suspicion in the mind of stakeholders about impartiality and objectivity of the IP and possibly, conflict of interests, he may have.
(k) Fee for authorised representatives:
Regulation 16A of the CIRP Regulations entitles an authorised representative (AR) of creditors in a class to receive the specified amount of fee for every meeting of the CoC attended by him. It is, however, observed that ARs in a few CIRPs were paid an amount different from what is permissible under the Regulations.
(l) Representation in judicial proceedings:
Section 25(2)(b) of the Code mandates RP to represent and act on behalf of the CD with third parties, and exercise rights for the benefit of the CD in judicial, quasi-judicial or arbitration proceedings. There are instances where the IP failed to represent the CD in judicial proceedings. Failure to do so compromises the duties of the RP to preserve and protect the interests of the CD, in addition to compromising the objective of value maximisation of the Code.
(m) Related party transactions:
Section 28 of the Code requires the RP to take prior approval of the CoC before undertaking any related party transactions during the CIRP. Any such transaction without approval of the CoC is void. There are instances where the IP failed to take approval of the CoC before undertaking such transactions. This puts the transaction at risk and compromises the objective of value maximisation through CIRP and may reflect the intention of the RP to give undue advantage to a related party.
(n) Payment to creditors during CIRP:
The Code requires every creditor to submit claims as on insolvency commencement date (ICD) to the IRP. The IRP / RP cannot clear the dues of any creditor during the CIRP, as this amounts to giving preferential treatment to one creditor over others and thereby alters the priority mandated under the Code. There are instances where the RP allowed payment of dues outstanding as on the ICD to some creditors during CIRP.
(o) Avoidance transactions:
The Code read with the CIRP Regulations casts a duty on the RP to file applications in respect of avoidance transactions (preferential, undervalued, extortionate and fraudulent transactions) for appropriate directions with a view to claw back the value lost in these transactions. He is required to form an opinion on such transactions within 75 days of the ICD and to file applications to the AA within 135 days of the ICD. There are instances where the RP failed to independently apply mind to such transactions and file applications in respect of them. In a few cases, he allowed himself to be directed by the CoC or stakeholders. This may reflect serious dereliction of duty and breach of trust in addition to depriving the stakeholders of their legitimate dues.
(p) Supply of information:
Section 29 of the Code casts a duty on the RP to provide access to all relevant information to prospective RAs in physical and electronic form. Regulation 36 of the CIRP Regulations requires the RP to provide information memorandum in electronic form to each member of the CoC. However, in few instances, it has been observed that RPs did not provide the relevant information to prospective RAs and members of the CoC. This compromises the possibility of revival of the CD in contravention to the provisions of the Code.
(q) Confidentiality undertaking:
The CIRP Regulations require the RP to obtain an undertaking of confidentiality from every prospective RA and every member of the CoC before sharing the information memorandum. There are instances where the RP shared the documents with the members of the CoC and/or prospective RAs without obtaining the required undertaking. This exposes the CD to risks such as insider trading or weakens its competitive position in the market. This may reflect intention of the IP to provide privileged access to some persons at the cost of others and compromise value maximisation.
(r) Disclosure of information:
The Code read with Regulations requires disclosure of certain information such as commencement of CIRP and details list of creditors in public domain. The details of valuation are required to be disclosed to every member of the CoC in electronic form, on receiving a confidentiality undertaking. Thus, information and documents need to be disclosed or supplied to entitled persons, in the specified manner, at the specified time, after meeting the specified requirements. It has been observed that in a few cases, certain information meant for entitled stakeholders were disclosed in public domain, or certain information meant for public were not disclosed in public domain, or certain information were disclosed before or after the time specified in the law.
(s) Window for views:
Regulation 16A (9) of the CIRP Regulations mandates that an AR shall circulate the agenda to creditors in a class, and may seek their preliminary views on any item in the agenda to enable him to effectively participate in the meeting of the CoC. The creditors have a time window of at least 12 hours to submit their preliminary views, and the said window must open at least 24 hours after the AR has sought preliminary views. Further, regulation 25(6) of the CIRP Regulations requires the AR to circulate the minutes of the meeting to creditors in a class and announce the voting window at least 24 hours before the window opens for voting instructions and keep the voting window open for at least 12 hours. It is observed that such timelines were not adhered to in a few cases and voting window remained open for a period shorter than that is provided in the Regulations or for unusually long periods. This may create suspicion about the intention of the IP and may deprive a creditor of its right to vote.
(t) Circulation of minutes:
The CIRP Regulations, therefore, require the RP to circulate the minutes of the meetings by electronic means to members of CoC and ARs, if any, within 48 hours of the conclusion of the meeting. There are instances where the IRP/RP failed to record and circulate minutes promptly or did it late. This may reflect poorly on the competence and integrity of the IP and cause delay in critical decisions.
(u) Inclusion of costs in IRPC:
Section 5(13) of the Code read with regulation 31 of the CIRP Regulations specifies what is included in IRPC. It includes only those costs which are necessary for a CIRP. The law does not allow inclusion of any other cost in IRPC. A member of CoC may incur costs to travel to attend the meetings of the CoC; the CoC may incur costs to obtain a legal advice or in engaging a professional; the CD may have incurred a cost before ICD; the RP may pay a penalty for non-compliance with any law during CIRP; etc. There are instances where such costs were included in the IRPC. This may reflect undue influence of beneficiaries on the IP, in addition to causing diminution of value of the CD.
(v) Compliance with applicable laws:
Section 17(2)(e) of the Code mandates the IRP/RP to comply with the requirements under any law for the time being in force on behalf of the CD. Any non-compliance has a cost to the CD and its stakeholders and attracts penal consequences. For example, a listed company has several continuing obligations under the securities laws. Failure to discharge these obligations compromises the interests of investors in securities. There are, however, instances where an IRP/RP failed to comply with requirements of various laws.
(w) Timeline:
It is the duty of the IRP/RP to ensure that every task in the CIRP is completed in time unless directed otherwise by a competent authority. There are instances where the IP failed to adhere to specified timelines. This endangers the life of the CD, compromises the interests of stakeholders, and frustrates the objectives of the Code.
(x) Compliance with orders:
The AA issues directions from time to time to facilitate smooth conduct of CIRP, generally based on applications by the parties. The proceedings before the AA are judicial proceedings and its directions are orders of the Court. Any non-compliance with any of their orders may amount to contempt of court. There are a few instances where the RP failed to comply with directions of the AA. Such disregard of the order of the AA may jeopardise the CIRP, impact the interests of stakeholders and drain scarce judicial resources.
(y) Maintenance of records:
Regulation 39A of the CIRP Regulations requires an IRP/RP to preserve a physical as well as an electronic copy of the records relating to CIRP of the. It has been observed that in a few cases an IP failed to produce complete records in respect of CIRPs conducted by him. This suggests the possibility of failure to comply with the relevant provisions of law as well as lack of transparency.
(z) Co-operation with the Inspecting Authority:
The Code enables the IBBI and the IPA to monitor conduct and performance of the IPs. The IBBI appoints an Inspecting Authority (IA) to conduct an inspection of an IP. It is the duty of the IP to give all assistance to the IA, produce all records in his custody or control, and furnish all statements and information which the IA may require. There are instances where an IP failed to cooperate with the IA, did not produce documents and records promptly and prolonged inspection on some excuse or the other. This may be construed as a hindrance to the functioning of the IBBI or the IPA, as the case may be, and compromise of interests of stakeholders.