Fundamental Change in Insolvency Commencement Date – Ambivalent Thinking

The Insolvency and Bankruptcy Second Amendment Bill, 2018 provides for a fundamental change in the insolvency commencement date (ICD) of Corporate Insolvency Resolution Process (CIRP). Presently ICD commences on the date when the order is passed by NCLT admitting the application for CIRP under section 7, 9 or 10. ICD is a significant date in the Code and many things turn on it such as the countdown for period of CIRP begins from ICD and the moratorium takes effect from ICD amongst others. In some cases, while passing the order of admission, the Bench does not simultaneously appoint an Interim Resolution Professional. This was a source of confusion as the appointment of the IRP at a later date than admission used to allow the IRP or RP lesser time than envisaged under the Code. The Second Amendment Bill, in order to correct this situation, has proposed to commence the ICD from the date of appointment of the IRP by NCLT by adding a proviso in section 5(12).

The proposed amendment looks reasonable on paper and is probably  based on experience out of the cases under the Code so far. The Code, we all know, owes its genesis to the Vishwanathan Committee Report (Bankruptcy Law Reforms Committee Report). The Report has an incomparable sense of clarity of thought and as per the Report, the ICD plays an important role in the CIRP. 

The Report recommended commencement of moratorium from Insolvency Commencement Date. The date of passing of order of admission by the Adjudicating Authority was considered as a significant date and the moratorium also commenced from this date. Moratorium has a rational relation to CIRP in the sense that this marks the beginning of calm period. Calm period provides for no coercive action against the assets of the corporate debtor and also bars transfer or alienation of property of the corporate debtor. 

With the proposal to shift the Insolvency Commencement Date to the date of appointment of IRP by NCLT, there may be gap of few days in the date of order admitting the application and date of appointment of IRP. For this gap, no moratorium will be in effect and this may prove to be counter productive. Section 14(2) provides that supply of essential goods or services to the corporate debtor shall not be terminated or suspended or interrupted during moratorium period. During the gap between the order admitting the application for CIRP and date of appointment of IRP, this provision will not have any effect and the essential services may get disrupted which may affect the functionality and working of the corporate debtors as the news of CIRP spreads like wild fire. This does not behold good for the stakeholders of the corporate debtor. Penal sections such as section 71 will effectively lose their sting.

The solution lies in amending several provisions of the existing Code to retain the effect of the provisions of the Code. This is the beginning of more changes.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

THIRD AMENDMENT IN CIRP REGULATIONS – A CASE OF OVERSTEPPING BY IBBI

Since its introduction, the Insolvency and Bankruptcy Code, 2016 (Code) has ruffled feathers amongst the Indian corporate sector. Original Code has been amended few times and every amendment has been a classic case of discussion amongst the insolvency practitioners, who are front runners for their implementation. The recent amendment of corporate insolvency resolution process regulations by the Insolvency and Bankruptcy Board of India (IBBI) is no different. IBBI has exceeded its authority under the Code besides stoking confusion. The genesis of the Third Amendment in corporate insolvency resolution process regulations lies in the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (6 of 2018) which was promulgated by the President of India on 6 June 2018. The Amendment Ordinance, in turn, owes its existence to the Report of the Insolvency Law Committee submitted in March 2018.The need to amend the CIRP Regulations arose because of the Amendment Ordinance 2018.

Gap between Date of Ordinance and Amended Regulations

The gap between the date of commencement of the Ordinance and the date of amended Regulations was avoidable. The purpose of issuing Ordinance is to legislate urgent matters while the Parliament is not in session. Without the amended regulations, some of the amendments brought in by the Ordinance remained on paper and this has defeated the very purpose of promulgating the Ordinance. It was incumbent upon the Regulator to be prepared and issue the Regulations soon after the Ordinance for faster and effective implementation of the amendments.

Applicability of Third Amendment CIRP Regulations

The applicability clause of the Third Amendment has become a cause of concern. On plain reading, it sounds good, but a deeper analysis shows that clause 1(2) has been drafted without much thought. Clause (1) reads as under:

“1(1) These regulations may be called the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018.

 (2) They shall come into force on the date of their publicationin the Official Gazette and shall apply to corporate insolvencyresolution processes commencing on or after the said date.”

The enforcement date states that the amended regulations come into force from the date of their publication (i.e.3 July 2018) but applicabilityis restricted to corporate insolvency resolution processes commencing on or after 3 July 2018. This has come from nowhere, effectively nullifying the immediate applicability of the provisions amended by Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (6 of 2018). It may be recalled that Amendment Ordinance 2018 came into force from 6 June 2018 and it is applicable for all corporate insolvency resolution processes regardless of their commencement date. In other words, any pending action under pending corporate insolvency resolution process or corporate insolvency resolution process commencing on or after 6 June 2018 requires compliance of amended provisions. It does not make a distinction between pending corporate insolvency resolution process or the corporate insolvency resolution process which commences on or after the date of enforcement of the Ordinance.

With no such express or implied intent in Ordinance, the Third Amendment in CIRP Regulations still distinguishes between the corporate insolvency resolution processes on the basis of their commencement date. The amended Regulations apply to corporate insolvency resolution processes commencing on or after 3rdJuly 2018. For example, Regulation 6 provides for public announcement. It has been amended to provide that the public announcement must state additional matters as per newly inserted clauses (ba) and (bb). Applying the applicability clause of the regulation, it applies to corporate insolvency resolution process that commence on or after 3 July 2018. In a case where application for initiation of corporate insolvency resolution process was admitted on 2 July 2018 and the public announcement was yet to be made, the additional matters are not required to be stated in the public announcement. In that sense, two sets of regulations will exist simultaneously and the Interim Resolution Professionals, resolution professionals, corporate debtors, committee of creditors, resolution applicants and adjudicating authority will have to keep in mind the two sets of regulations. It is a sure shot recipe for confusion and chaos.

The following tabular presentation assesses the difficulty that may arise in implementing some of the provisions of the Code which have become applicable from 6 June 2018:

Regulation  Number Subject Matter Analysis
3(1A) Consent to be obtained from Interim Resolution Professional or Resolution professional replacing Interim Resolution Professional in Form AA In pending corporate insolvency resolution process cases, this need not be followed as per applicability clause whereas the Code mandates that w.e.f 6 June 2018, written consent of Interim Resolution Professional and resolution professional replacing Interim Resolution Professional must be obtained.
4A Choice of Authorised Representative The Ordinance amended the Code treating property buyers as financial creditors w.e.f 6.6.2018. Hence, a right vests in such financial creditors to be a part of committee of creditors through authorized representative from that date. However, such a right has been negated in cases of corporate insolvency resolution processes pending as on 3.7.2018 since regulations relating to class of creditors are applicable for corporate insolvency resolution process commencing on or after 3 July 2018.
12(2) Late Submission of claims Prior to amendment, the claims could be filed with the Interim Resolution Professional or resolution professional before the approval of resolution plan. This has been changed to restrict late filing of claim up to ninety days from the insolvency commencement date.

Distinguishing between pending corporate insolvency resolution processes and fresh corporate insolvency resolution process on or after 3 July 2018 seems discretionary and there is no rational relation to the objective sought to be achieved.

30A Withdrawal of Application The Code has inserted a section for withdrawal of applications. Restricting it to cases of corporate insolvency resolution process commencing on or after 3 July 2018 defies reasoning. The Code does not state that this provision is applicable to future corporate insolvency resolution processes.

 

Regulation 30A relating to withdrawal of admitted application under section 12A is non-est

The insertion of Regulation 30A prescribing the manner of withdrawal of applications under section 12A cannot be a case of simple oversight. Section 12A of the Code reads as under:

“12A. Withdrawal of application admitted under section 7, 9 or 10.

The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be prescribed.”

The presence of the words ‘as may be prescribed’ in section 12A means that a corresponding Rule will be prescribed by the Central Government. This intent runs throughout the Code. This view is fortified if we consider clause (fa) inserted in Section 239(2), which reads as under:

“239. Power to make rules. –

(1) The Central Government may, by notification, make rules for carrying out the provisions of this Code.

(2) Without prejudice to the generality of the provisions of sub-section (1), the Central Government may make rules for any of the following matters, namely: –

 xxxx

 (fa) the manner of withdrawal of application under section 12A;

 xxxx”

Clause (fa) has been inserted by Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (6 of 2018) as a consequence of insertion of section 12A. Conjunct reading of section 12A and 239(2)(fa) underlines the fact that rules have to be made for the subject matter provided in section 12A and such rules can only be made by the Central Government. IBBI enjoys no power under section 12A or section 240 of the Code to make Regulations in respect of withdrawal of applications as provided under section 12A. The exercise of power by IBBI by inserting Regulation 30A exceeds authority. The Regulation 30 is a nullity in the eyes of law.

The exercise of ‘super authority’ by IBBI has created an avoidable confusion and chaos. Interestingly, the provisions of making the application under section 7,9 and 10 for initiating corporate insolvency resolution process are provided in the Rules framed by the Central Government but the manner of withdrawal of such an application is provided in the Regulations. This mistaken assumption of power by IBBI in prescribing the manner of withdrawal of application needs to be addressed immediately.

Resolution Professional to make Application for Withdrawal

Regulation 30A(1) provides that Interim Resolution Professional shall make an application for withdrawal of application under section 12A in Form FA, after obtaining the consent of the committee of creditors by ninety percent voting share. The application is required to be made before issue of invitation of expression of interest under Regulation 6A. Section 12A does not restrict the time for making an application for withdrawal of application. However, the Regulation 30A prescribes the outer limit within which the application for withdrawal is to be made. This seems to be contrary to the scheme of the Code.

Further, the use of the word ‘applicant’ in section 12A refers to the applicant creditor and not the resolution professional. Sub-regulation (3) of Regulation 30A provides that the application for withdrawal is to be made by the resolution professional to the committee of creditors. Significantly, the Code provides that the application is to be made to the Tribunal.

Bank Guarantee to accompany the application

Regulation 30A(2) also provides that application for withdrawal shall be accompanied by a bank guarantee towards estimated cost incurred for purposes of clauses (c) and (d) of regulation 31 till the date of application. This provision is an additional requirement not envisaged under the Code. It is also not clear as to who will provide the bank guarantee – resolution professional or applicant creditor or corporate debtor or promoters/directors of the corporate debtor.

Committee of creditors to consider application within seven days

Regulation 30A(3) provides that the committee of creditors shall consider the application made by the resolution professional within seven days of its constitution or seven days of receipt of the application, whichever is later. The committee of creditors, in turn, has to approve the decision of withdrawal with ninety percent vote for withdrawal to be effective. There is no provision in the Code for making application to committee of creditors in section 12A.

Application to be forwarded to the Tribunal

Regulation 30A(4) also provides that ince the application is approved by the committee with ninety percent voting share, the resolution professional shall submit the application under sub-regulation (1) to the Adjudicating Authority on behalf of the applicant, within three days of such approval. The use of the word ‘on behalf of the applicant’ is surprising. The resolution professional, while making the application has to submit an affidavit verifying the application. Here, resolution professional becomes an applicant on behalf of the applicant. Such an intent is also missing in the Code.

Conclusion

IBBI has exceeded its authority while framing the Regulations. In terms of section 240, the Regulations framed by IBBI cannot be inconsistent with the provisions of the Code and the Rules framed thereunder. The Amended Regulations is a typical example of inconsistency between the Code and Regulations. IBBI has clearly overstepped its authority and the power delegated to it under the Code. IBBI owes its existence to the Code and it not expected to transgress the threshold set for it.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

 

To Empanel or Not To Empanel – Confusion Confounds!

The Insolvency professionals are in a dilemma. The banks and financial institutions are creating a panel of their own to select insolvency professionals to be appointed as Interim Resolution Professional and Resolution Professionals. The lenders are doing this based on their own criteria and parameters. The persons selected to be on their panel are the registered insolvency professionals.

Mussadi Lal’s case set the tone when the Principal Bench headed by the President of NCLT rejected the decision of the committee of creditors to appoint a Resolution Professional in place of the Interim Resolution Professional because the insolvency professional was on the panel of one of the financial creditors. The Bench held that such a insolvency professional cannot be regarded as independent umpire to conduct corporate insolvency resolution process. The mere fact of empanelment of the insolvency professional became the cause of rejection.

The New Delhi Bench, in a recent order in Uttam Strips Limited, has, however, held that shortlisting of the names of eligible Resolution Professionals (sic) and maintenance of the list by Banks does not per se give rise to the fact that Resolution Professional would lean in favour of the financial creditor. The Bench held that his work is open to scrutiny and subject to final decision of the CoC.

The Bench took judicial note of the fact that banks normally propose the appointment of a Resolution Professional of their own choice and a person different from the one who had initially acted as the IRP. The Bank had shortlisted names of empaneled and eligible Resolution Professionals  for recommending the names in various corporate insolvency resolution processes. The Bench also noted that the person recommended had not rendered any professional services to the Bank in the past in any professional capacity. The Bank had shortlisted the names of 125 professionals for their appointment as Resolution Professional. This was done so that no time is lost in assessing their eligibility or seeking their consent. The fact that the bank had previously scrutinised the credentials of a professional is no ground to impute partiality.  The Bench held that there is nothing wrong in any bank maintaining their list of resolution professionals whom they feel are competent or experienced to handle the resolution process.

Understanding Counter View

This order by New Delhi Bench is in stark contrast to the earlier order of the Principal Bench. The interest of empanelled IPs may conflict if they have rendered any services to the Bank or financial creditor empanelling them. There may be a counter argument that the IP appointed as IRP or RP may have to tow the line of the Bank or else may not stand any chance of being recommended again for appointment in another case. The neutrality gets affected to this extent. But this argument may not hold good as the IP is bound by the ethical norms under the Code and Regulations. Independence is a state of mind and IP is independent if he acts independently.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

 

 

 

More Hits than Misses – Critical Analysis of India’s Insolvency & Bankruptcy Ordinance, 2018

Second Ordinance in Six Months

The Indian Insolvency law is shedding its infancy sooner than expected. In a span of little over six months, the President has promulgated the second Ordinance brining sweeping changes in the Insolvency and Bankruptcy Code, 2016 (Code). It can be argued that the Government is responsive to the needs of the time, but some look at it as a result of poor drafting in the original law. Regardless of the reason, it looks like the Government is taking the emerging misperceptions seriously. The upshot of the Code is that the limited liability business entities are forced to make sweeping changes in their business dealings with the creditors. They can no longer afford to ignore their timely payments. Financial discipline is here to stay. The second Ordinance has its roots in Insolvency Law Committee Report, 2018.

Immediate Commencement of the Provisions

As expected of any Ordinance, this one also comes into force immediately, that is, from 6thJune, 2018. But the question that begs answer is whether the Government and the Regulator are ready with the consequent amendments in Rules and Regulations? The most likely answer is ‘No’. The Insolvency and Bankruptcy Board of India (Board or Regulator) and the Central Government would work on the Regulations after the promulgation of the Ordinance as they are not supposed to know its contents beforehand.  This means that it will be some time before we see amended rules or regulations to be notified. Practically speaking, the provisions requiring amendment in Rules and Regulations would remain on paper unless supported by the Rules or Regulations.

Home buyers are Financial Creditors

Bringing home buyers under the umbrella of financial creditor was a long-standing demand of the society. In few cases, the debt owed to them forms a majority, yet they were relegated to the fringe by the Code. To strike a balance, they are now considered as a financial creditor under S. 5(8)(f); the amount paid by a home buyer is now deemed as the amount having the commercial effect of borrowing. The impact of this amendment is far reaching and the home buyers now, being a financial creditor, get a right to be a part of committee of creditors albeit through a representative who will be the insolvency professional appointed by the NCLT. How many of us know that proposal to include home buyers in financial creditor was dissented to by three committee members of Insolvency Law Committee? Like home buyers, there are many creditors who are neither operational creditors nor financial creditors. Ordinance has not offered any solutions for them. Amending the definition of operational creditors to mean “creditors other than financial creditors” would solve the problem. This, it seems, has to wait.

Assets of Personal and Corporate Guarantors are outside Moratorium

 Conflicting judgments of NCLT Benches, NCLAT and Allahabad High Court have been set to rest and rightly so by an amendment placing the assets of personal and corporate guarantors outside the purview of moratorium. Corporate insolvency resolution process cannot be allowed to disturb the contractual arrangement between the lender and the surety. The personal and corporate guarantors need to fend themselves without taking a shelter of moratorium under the Code.

Related Party and Relatives

The Ordinance now defines ‘related party in relation to an individual’for the purposes of corporate insolvency resolution process. It is extensive and is meant to control the conflict of interest of individuals associated with corporate insolvency resolution process. Surprisingly, the definition contains the phrase ‘spouse’ but does not define it. Interestingly, Companies Amendment Bill 2008 also contained this phrase in the definition of relative but was omitted from the next version of Bill. The Explanation defines relative for the purposes of ‘related party in relation to an individual’. This may confound the confusion as relative is defined for the purposes of newly added clause (24A) in S. 5 but the term relative for the purposes of clause (24) – related party in relation to a corporate debtor has no definition. Having not been defined, one will rely on its definition in the Companies Act, 2013 by virtue of S. 3(37). This may lead to a dichotomous situation – same phrase having two different meanings under the Code. This calls for super amendment now.

Correcting the Drafting errors

The Ordinance corrects many drafting errors in the Code. Supreme Court laid down the law that in S. 8, the word ‘and’ should be read as ‘or’ for the corporate debtor to bring to the notice of the operational creditor the existence of dispute or record of pendency of suit or arbitration proceedings in response to demand notice. The Ordinance seeks to correct this error. Similarly, the Ordinance corrects the situation by making a bank certificate optional for filing of application by an operational creditor.

Special Resolution made mandatory for initiation of corporate insolvency resolution process by Corporate Debtor

No longer corporate debtors would be permitted to file for their corporate insolvency resolution process on the basis of board resolution. Filing of such application now requires a special resolution by a company or three-fourth of the total number of partners of LLP. While adding this requirement, the Government missed an opportunity to correct drafting error in clause (b) of S. 10(3) which reads as “the information relating to the resolution professional proposed to be appointed as an interim resolution professional”. It should actually read as “the information relating to the insolvency professional proposed to be appointed as an interim resolution professional”.

 Lowering of the Decision-Making Threshold in Committee of Creditors

In the Code, the decisions of the committee of creditors were to be made by a majority of 75%. It stands changed as follows:

 

Decision Voting Percentage in Committee of creditors Prior to the amendment Voting Percentage in Committee of creditors after the amendment
Extension of period of corporate insolvency resolution process 75 66
Withdrawal of application for corporate insolvency resolution process It was not allowed 90
Replacement of Resolution Professional 75 66
Actions under section 28 75 66
Approval of Resolution Plan 75 66
Decision of the Committee of creditors to liquidate 75 66
All other decisions 75 51

Lower threshold limit means the critical decisions such as approval of resolution plan, change of resolution professional, will now have a greater chance of getting through the committee of creditors. This may have been done to hear more success stories under the Code.

Interim Resolution Professional to continue after 30 days

 The Interim Resolution Professional will now hold office until the date of appointment of the resolution professional under section 22 and not until 30 days from the date of his appointment as per the provisions of Code. Similarly, the resolution professional shall continue to manage the operations of the corporate debtor after the expiry of corporate insolvency resolution process until an order is passed by NCLT approving or rejecting the resolution plan, provide the resolution plan has been submitted. These provisions correct the situation of uncertainty prevailing under the Code.

Interim Resolution Professional is responsible for all statutory compliances

A reigning doubt in the minds of the Interim Resolution Professionals has been set to rest by the Ordinance clearly mandating that the Interim Resolution Professional shall be responsible for complying with the requirements under any law on behalf of the corporate debtor.

Banks or FI’s holding shares in corporate debtor are no longer excluded from representation etc in committee of creditors

Banks or Financial Institutions, even though they were financial creditors, had no right of representation, participation and voting in the committee of creditors if they held more than twenty percent of voting rights. This led to an anomalous situation, which has now been corrected with the addition of a proviso in S. 21(2) providing that financial creditors regulated by a financial sector regulator shall not be excluded from representation, participation and voting in the committee of creditors merely because of the fact that their debt was converted into equity prior to insolvency commencement date.

Unwilling Interim Resolution Professional not to be continued as Resolution professional

The Interim Resolution Professional, if not willing, cannot be forced to continue as a Resolution Professional now as the Ordinance makes it mandatory to have the consent of Interim Resolution Professional before being appointed as resolution professional. Infact, consent of insolvency professionals to act as Interim Resolution Professional, Resolution professional or liquidator is a mandatory condition under the Code.

Implementation of Resolution Plan

 The Code had a gaping hole as to implementation of a resolution plan. The Ordinance makes it mandatory for NCLT to satisfy itself as to the provisions in the resolution plan for effective implementation. The onus to approve necessary approvals under any law has been fixed on the resolution applicant. These approvals will have to be obtained within a period of one year from the date of approval of the resolution plan by NCLT.

Accepted Claims can also be Appealed

The Ordinance has sorted out another anomaly in the Code by providing that claims accepted by the Liquidator can also be appealed. Earlier, only rejected claims could be appealed. This amendment was not really necessary as acceptance of lower amount of claim by liquidator was in fact a ‘rejection’ of the remaining amount and an appeal could lie for the partial rejection.

NCLT to exercise Jurisdiction in cases of Insolvency Resolution or Liquidation of Corporate Guarantors to a corporate debtor

In addition to the personal guarantors, the Ordinance now mandates that the insolvency resolution process or liquidation of a corporate guarantor to a corporate debtor shall be dealt by the bench of NCLT where the corporate insolvency resolution process or liquidation of the corporate debtor is under process. This is regardless of the location of the registered office of the corporate guarantor. Ordinarily, under the Code, the jurisdiction of NCLT Bench is decided by the situation of registered office of the corporate person but in case of corporate guarantor, it will be subject to the jurisdiction of the NCLT Bench dealing with the corporate insolvency resolution process or liquidation of the corporate debtor. Here, corporate guarantor means a corporate personwho is the surety in a contract of guarantee to a corporate debtor. Corporate guarantor will include company as well as limited liability partnership. The change also indicates that if the corporate insolvency resolution process or liquidation proceedings of a corporate guarantor is in process, having commenced prior in time to that of corporate debtor, such cases shall stand transferred to the NCLT bench dealing with corporate insolvency resolution process or liquidation of the corporate debtor.

Bar on Jurisdiction of Civil Courts

The Ordinance has extended the bar on jurisdiction of civil courts over the action taken in pursuance of orders passed by the Boardunder the Code. The Board is empowered to pass orders under several circumstances under the Code. Now, no such order can be questioned in a civil court. Earlier only orders of adjudicating authority were covered.

Limitation Act applies to the Code

 The Ordinance settles the dust over the applicability of law of limitation. Henceforth, no creditor with time barred debts can approach NCLT for initiating the corporate insolvency resolution process against the corporate person. This effectively nullifies the judgments of NCLAT which first held that law of limitation cannot apply to proceedings before modifying it to a substantial extent in a later judgment, which is under a stay by the Supreme Court. Now that case becomes infructuous.

Relief to Micro, Small and Medium Enterprises

 The Central Government has been delegated the power to determine the applicability of the provisions of the Code to micro, small and medium enterprises. The big relief also comes into the form of removing disqualification to act as a resolution applicant in two circumstances, namely, clause (c) and (g) of Section 29A. Further, if a person was convicted for any offence punishable with imprisonment for two years or more, he was not eligible to be a resolution applicant. Offences were not restricted to specific laws. The Ordinance has now added the Twelfth Schedule giving a list of 25 Acts, the offences of which shall make a person ineligible to act as a resolution applicant.

Transfer of Winding-up proceedings to the Tribunal

 Interestingly a proviso has been added in section 434 of the Companies Act, 2013 to provide that proceedings relating to winding-up of companies pending before High Court or any other Court prior to commencement of the Code can be directed to be transferred by such Court to the NCLT on an application made by any party to the proceedings. Such transferred proceedings shall be treated as an application for corporate insolvency resolution process under the Code. This provision may trigger transfer of winding-up cases from High Courts to NCLT.

The language employed is, however, confusing and may lead to unintended results. Firstly, it is not clear whether the intent is to transfer applications pending consideration of the Court whether to pass winding-up order or not, or to all cases including those where winding-up has been ordered or provisional liquidator has been appointed. The language suggests all cases including where winding-up is under process can be transferred.

Secondly, all such transferred cases will assume the status of application for initiation of corporate insolvency resolution process. It is not clear how the cases where winding-up is under process and substantially advanced be treated as application for initiation of corporate insolvency resolution process.

Thirdly, winding-up under the Companies Act, 1956 and 2013 was possible on many grounds including inability to pay debts. The Code has omitted only ‘inability to pay debts’ as a ground of winding-up from the Companies Act but not others. Inability to pay dents has been included in the Code broadly classifying it as ‘default’. The corporate insolvency resolution process is triggered on occurrence of default and not on any other ground. If a winding-up was pending before the High Court due to ‘other ground’ on the date of commencement of the Code, its transfer to the NCLT and treating it as a case of corporate insolvency resolution process defies reasoning and logic.

The confusion, it seems will be settled by the Courts. The agony of poor drafting, however, continues. Intriguingly, the Insolvency Law Committee did not deal with this aspect. It only suggested to amend section 434 of the Companies Act, 2013 by amending paragraph 34 of schedule XI of the Code to state that if a petition for winding up on the grounds of inability to pay debts is pending and an order for winding up of the company has been made or a provisional liquidator has been appointed, the leave of the court hearing the winding up proceeding must be obtained, if applicable, for initiation of the CIRP proceedings against such corporate debtor under the Code. The intent and content seem to be at variance. Law will take its own interpretational course.

Conclusion

The Ordinance was the need of the hour and irons out the blunt edges of the Code, which caused confusion amongst insolvency professionals and legal fraternity. The benches of NCLT, NCLAT and Supreme Courts were also at variance with each other, passing diametrically opposite judgments on some aspects. Making similar conceptual changes in Part III can be regarded as a missed opportunity. The experience of corporate insolvency resolution process is here and that could have been applied to the provisions of individual and partnership insolvency resolution and bankruptcy. It seems we will see another Ordinance after the commencement of Part III of the Code. But like it or hate it, insolvency law is here to stay. The full colour of the provisions of the Code is yet to be seen by the corporate persons, promoters, directors and insolvency professionals. One thing is clear, ignorance of this law will hit the debtors very hard.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Multinational Network CA Firms Caught on the Wrong Foot

The Chartered Accountant Firms in India having a network, association and simply being a member of an Association of Global Chartered Accountancy Network are caught on the wrong foot. The Report of the Institute of Chartered Accountants of India (ICAI)[1](Report) manifests the modus operandi adopted by the networked firms including sharing of fee, referral work to member firms, advertising affiliation amongst others. The Report was lying in dust in some corner until the Supreme Court of India, in a Civil Appeal filed by S. Sukumar and Writ petition filed by Centre for Public Interest Litigation[2], directed ICAI to further examine all the related issues at appropriate level as far as possible within three months and take such further steps as may be considered necessary. All the firms believed to be having some association with a foreign network or association as part of “information case” have been issued notices to submit their reply for formation of prima facie opinion.

The Supreme Court, in the afore stated judgment, observed that “the ICAI should have taken the matter to logical end, by drawing adverse inference, if information was withheld by the concerned groups.”Para 47 makes interesting reading:

“47. No doubt, the report of the committee of experts of ICAI dated 29th July, 2011 does not specifically name the MAFs involved, groups A,B,C,D are mentioned. The ICAI ought to constitute an expert panel to update its enquiry. Being an expert body, it should examine the matter further to uphold the law and give a report to concerned authorities for appropriate action. Though the Committee analysed available facts and found that MAFs were involved in violating ethics and law, it took hyper technical view that non availability of complete information and the groups as such were not amenable to its disciplinary jurisdiction in absence of registration. A premier professionals body cannot limit its oversight functions on technicalities and is expected to play proactive role for upholding ethics and values of the profession by going into all connected and incidental issues.”

The present structure of the Chartered Accountants Act, 1949 (Act) does not empower ICAI to regulate so-called multinational network accounting firms. Neither does it have power to take disciplinary action against such firms.

Flawed Notices

The notices have been issued by ICAI to all such reported firms calling upon them to name a member answerable. Additionally, it mentions that if a name is not mentioned, then all the partners of the firm shall be considered as answerable. There is an established legal principle that ‘what cannot be done directly cannot be done indirectly’. ICAI does not have power to take action against the firms of chartered accountants. Most of the firms are in a quandary as the decision to join a network was a firm’s decision taken long time ago. The partners who took the decision may have retired or may no longer be with the firm. Identifying a single member or partner answerable for a unanimous decision of the firm is like censuring one in a discriminatory manner. The firms should take a stand that ICAI does not have power to proceed against a firm. Joint and several liability of partners in a partnership firm does not extend to professional misconduct unless specifically stated in any of the Schedules of the Act.

Provision for Referral Business

 A mere provision of making or receiving referrals does not make a firm liable under Item (2) of Part I of the First Schedule. Actual payment does. Many firms have signed an agreement containing clauses of referrals but have neither received any referral nor made any payment for such referrals. Such firms are clearly outside the scope of First Schedule.

Response is the Key

An appropriate response by the firms may save the day for them. The reply to ICAI notices is crucial and they must reply appropriately after examining all the aspects. Take outside help, if needed.

Interesting battle is on between ICAI and Multinational Network Accounting Firms. Last word is yet to be written on this. 

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

[1]Report on Operation of Multinational Network Accounting Firms in India, 29thJuly, 2011.

[2]Civil Appeal No. 2422 OF 2018 and Writ Petition (Civil) No. 991 of 2013.

 

#IBBI – Changing Rules of the Game Midway

April 1 is traditionally a day of practical jokes or hoaxes or harmless pranks. Looks like, for IBBI, April 1 is a day of teaching some hard lessons to aspiring insolvency professionals, and insolvency professionals who have formed insolvency professional entities.

The Insolvency and Bankruptcy Board of India (IBBI or Board) has announced amendments in Insolvency Professionals Regulations changing the rules of the game from 1st April, 2018. The major changes relate to qualification and experience necessary for registration as an Insolvency Professional (IP), undergoing continuing professional education and requirement of minimum net worth and other conditions for an Insolvency Professional entity.

Qualifications and Experience

Prior to the amendments announced on 27th March, 2018, the registration as IP was subject to fulfilment of any of the three conditions, namely, passing of National Insolvency Examination, or passing of Limited Insolvency Examination and having 10 years of experience as a CA or CS or CMA or Advocate, or passing of Limited Insolvency Examination and having 15 years of experience in management with Bachelor’s degree.

The change brings about 3 basic conditions to be fulfilled before grant of registration as IP –

  1. Passing of Limited Insolvency Examination (LIE) within 12 months before the date of application for enrolment with IPA;
  2. Completion of pre-registration educational course from IPA after enrolment;
  3. Fulfilling any one of the following criteria:
  • successful completion of the National Insolvency Programme; or
  • successful completion of the Graduate Insolvency Programme; or
  • fifteen years’ of experience in management with Bachelor’s degree from a university established or recognised by law; or
  • ten years’ of experience as chartered accountant registered as a member of the Institute of Chartered Accountants of India, or company secretary registered as a member of the Institute of Company Secretaries of India or cost accountant registered as a member of the Institute of Cost Accountants of India, or advocate enrolled with the Bar Council.

Let’s analyse the changes:

  • The passing of LIE is now mandatory for everyone aspiring to be an IP. Earlier, passing of LIE was defacto mandatory as  National Insolvency Examination (NIE) was not notified.
  • The registration for IP is to be applied within 12 months of passing of LIE. The celebrated myth of life time validity of LIE stands shattered. If 12 months expire, LIE is to be passed again. Probably, the Board wants that aspiring IPs should remain current. But this was something which was not unthinkable at the time of original framing of Regulations.
  • Pre-registration educational course from IPA after enrolment has been made mandatory. The details of such a course are still not in public domain. Add to this the likely delays in the registration process since pre-registration course is yet to be designed.
  • Successful completion of National Insolvency Programme, or Graduate Insolvency Programme, or fifteen years’ of experience in management with Bachelor’s degree from a university established or recognised by law; or ten years’ of experience as chartered accountant registered as a member of the Institute of Chartered Accountants of India, or company secretary registered as a member of the Institute of Company Secretaries of India or cost accountant registered as a member of the Institute of Cost Accountants of India, or advocate enrolled with the Bar Council is a must.

No details are available for National Insolvency Programme, or Graduate Insolvency Programme – its duration, course curriculum, who will conduct etc. At the minimum, the Board should have been ready with details of these programs prior to introducing them through change in the Regulations.

Amendments Affect Aspirants who have passed LIE but deferred decision to Register

The change in Regulations, though prospective, affect the candidates who have passed LIE prior to 1.4.2018 but have not been granted registration. It is not clear what will be the fate of applicants whose applications are pending with Board. After 1.4.2018, in the absence of any exception in the Regulations, the Board has no power to grant registration to pending applicants unless they undergo pre-registration educational course from IPA .

Those who have not applied for registration despite having passed LIE will suffer in a similar way. This tantamount to discriminating between those who have registered and those who deferred their registration decision despite passing the LIE during the same time.

Grey area exists as to the status of those who have cleared LIE but whose applications are pending with IPAs for enrolment or with IBBI for registration or are in transit between IPAs and IBBI as on 1st April, 2018.

Some enthusiastic aspirant may challenge these amendments through a writ, and there  lies a huge chance for these amendments to be set aside for such persons. At best, the Board should have made them applicable prospectively clarifying that amended regulations will be applicable to those passing LIE on or after 1.4.2018.  This can still be done.

Continuous Professional Education

The Board has introduced a concept of undergoing continuing professional education, as may be required by the Board. The purpose of Regulations is to bring about clarity. Instead, through the amendments, the Board has retained power to notify requirement of continuing professional education. Perhaps, some guidelines can be expected for the number of hours and type of education. Introduction of continuing professional education is, however, a progressive step.

Change in Requirements of IPE

The change in IPE requirements are likely to hit hard the existing IPEs.

  • The IPEs cannot have any other business objective except provide support services to insolvency professionals, who are its partners or directors. Effectively this means that IPEs cannot render service to any other person except its own insolvency professionals.
  • The minimum net worth requirement of Rs. one crore is a regressive step as it is opposite to its objective of capacity building. Why the Board wants only moneyed IPEs to function? Why it was not thought of while notifying the Regulations originally? The criteria of minimum net worth has no relation to existence of IPE. These are service oriented entities and having a minimum paid-up capital has no rational relation to the objective sought to be achieved. The focus should be on intellect and knowledge rather than on paid-up capital. It is permitted to form a company without any requirement of paid-up capital but not IPE.
  • The requirement of majority of its shares or capital contribution to be held by insolvency professionals, who are its directors or partners also fails to satisfy the test of rationality.
  • The restriction that none of the partner or director of an IPE should be a partner or a director of another IPE is also beyond any comprehension.
  • As of 28th March, 2018, 76 IPEs[1] have been recognised by the Board. All such IPEs have been given time till 30th June, 2018 and 30th September, 2018 for fulfilling the criteria. Many are likely to exist IPE business, if that what IBBI wants.

The smaller IPEs with one or two partners or directors will be hit hard by these sudden changes by the Board. The amendments encourage concentration of work in few hands rather than individual insolvency professionals who have been lured by the glitter of opportunity offered by this newest profession. Instead of encouraging the professionals to come forward and join the bandwagon, the stricter Regulatory requirements have done exactly the opposite.

Dear IBBI, shifting goal post midway is never a good idea.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

[1] Source: http://ibbi.gov.in/insolvency-professional-entities.html

# Key Issues under IBC – Should IRP/RP consider interest while verifying and admitting the claims of creditors?

As regards financial creditors, the IRP/RP should take into account the interest claimed as per the terms of the loan agreement including penal interest, if any upto the insolvency commencement date.

For operational creditors, ordinarily the interest is not considered unless it is claimed by the operational creditor or other creditor and it is stated in purchase or work order. In other words, claim will be admitted to the extent there was agreement between the parties to charge and pay interest. If there is no agreement, merely the fact that it is mentioned in the invoice does not entitle the operational creditor to that interest. Interest has to be taken into account excluding the credit period as per the agreement or customary practice of the trade or usage having the force of law.

To conclude, no thumb rule can be established for providing and calculating the interest in claims by operational and other creditors; it depends on the facts and circumstances of each case.

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

Economics of Corporate Survival and Theory of Governance Gap vis-à-vis the Companies (Amendment)Act, 2017

 

Abstract

The Companies Amendment Act, 2017 ushers in a new regime of corporate governance with greater emphasis on self-governance by corporates. Corporate form of business has been in existence for over 150 years now. Over time, the management of the company is controlled by professionals as part of management team. With the advent of corporate governance norms under the Companies Act, 2013 encouraging independent decision making at board level, roles of those charged with governance and those charged with management have been segregated. Theories of corporate governance have drawn a line between governance and management advocating the policy of non-interference without realizing that the line has the risk of turning into a gap – called as ‘governance gap’. The Companies Amendment Act, 2017 has further liberalized the provisions making doing business easier reposing faith in democratic corporate set ups. The present article, while propounding a new ‘Theory of Governance Gap’ defining governance gap, indicating the stages involved and its components, examines how it affects the governance gap. The corporate survival depends on recognizing, identifying, considering and correcting the governance gap. The components of governance gap have been described with examples from real corporate world. The ultimate aim should be to bridge the gap to ensure the best performance.

 

Survival is the most dreaded term in the corporate world. Company boards discuss growth strategies but do not discuss survival; it is assumed. The focus remains on policy and strategy formation leaving implementation to the top management. Governance concentrates on strategic decision making defining core aspects – values, mission and vision. It is the “framework of accountability to users, stakeholders and the wider community, within which organisations take decisions, and lead and control their functions, to achieve their objectives [1]. Management, on the other hand, is believed to be concerned about working within the confines of strategies and policies. “The Board is responsible for the governance of the company but the Board does not look after the day-to-day management of the company. The Board of Directors meets periodically and makes policy decisions setting out the goals of the company. Achieving these goals effectively is the function of the management. The management function is left to the key officers of the company. In the business world, these key officers are commonly referred to as the top management. The top management shoulders the responsibility of all the functions of the company, be it administration, marketing, operation, finance, secretarial, human resources etc. [2]Corporate governance norms across the world support this practice. The scholarship available on the governance and management role restricts itself to this concept.

Governance Gap

Indisputably, there is separation between governance and management though “the boundary between governance and management is not hard and fast” [3]. Corporate culture and structure determines the dividing line. It settles on its own over a period of time as an accepted norm. Typically, for effective corporate governance, the board functions include policy management, risk analysis, encouraging disclosure and transparency, oversight of management functions, protecting stakeholder’s interests and strategic guidance [4]. Illustratively management functions include implementation of policies and plans, administrative control, compliances, communication and performance. In a way, Ordinarily, management functions start where governance ends with presumptions of no overlapping. In reality, however, there exists a gap between governance and management in every corporate entity, let’s term it as governance gap; though the extent may differ. No one has ever realized that defining and assigning governance and management functions this way results in governance gap.

 Governance Gap

 Identifying Missing Pieces

The missing link between the governance and management belongs to governance gap. Smart governance may not result in smart management but it will definitely create an atmosphere of management accountability. The converse may not be true at all. On paper, the dividing line between governance and management looks judicious; no one trips over the other with the existence of recognised separation. The principle of separation has been articulated so well over the years that it now resides in the sub-conscious mind of every governance and managerial personnel. The scholarship on corporate governance elaborately deals with the subject to ensure that governance functionaries know their boundaries and the management personnel are aware that their functions start where governance ends. With this assertion over the years, governance leaders have realised that their role is restricted to strategic decision making in board or committee meetings presuming that the policies framed by them will be implemented by management functionaries. This approach is enshrined in corporate governance norms across the countries. The weakness of this approach is that it fails to recognise the existence of governance gap. The governance and management are not separated by a line but there exists a gap – governance gap.

Stages of Governance Gap

Governance gap differs from one entity to another. Not only the size of governance gap may vary but also the elements constituting it. Ignoring governance gap may lead to disaster; understanding governance gap will reduce chances of its occurrence. The governance gap has four step routines called as governance gap stages. The corporates have to shift their focus on governance gap and they must deploy their resources to trace the gap through the stages. The four stages of governance gap are recognition, identification, consideration and correction. Briefly, the stages of governance gap are explained as follows.

Stage 1 – Recognition

The corporates have to recognize the governance gap.  Recognising involves understanding the factors that contribute to governance gap. This understanding is possible with open discussion between those who govern and those who manage. Governance leaders have to take the lead and ensure that the management team gets a fair chance to state their views. Balanced discussion is the key. Expert involvement in the discussion should be encouraged. Recognising the existence of governance gap is the most difficult step as it calls for free and frank dialogue between the two sets of leaders. Board members should take care not to dominate the discussion.

Stage 2 – Identification  

Having recognized the existence of gap, the next step calls for identification of the missing pieces. It emerges out of the analysis of the discussion. The process of identification calls for impartial study of discussion points gathered during recognition stage. Firstly, on macro basis, broad categories of governance gap should be identified. Thereafter, then micro level identification of the factors is required to be carried out.

Stage 3 – Consideration

Having identified the categories of governance gap broadly, the next stage involves analysing the causes of governance gap. What has triggered the governance gap is the question that needs to be answered in this stage? It is the reflection on cause and effect relationship. The analytical study of reasons behind the governance gap are bound to provide a useful insight. The evaluation of the causes should also be an independent exercise having unbiased view of the situation. Preferably, it should be carried out by an outside expert.

Stage 4 – Correction  

Correction involves joining the dots. Corrective measures will help in bridging the governance gap. The smaller is the governance gap, the higher will be the efficiency, performance and growth. Corrective steps mean paying special attention to the causes and finding out the specific solution. It may not be possible to remove altogether the causes but an attempt should be made to reduce the gap over a period of time. Correction also includes watching the impact of corrective measures.

 Governance Gap Components

Unique in its design, the stages will reveal causes of the governance gap. The task of identifying the factors will be followed by categorization of these factors into components of governance gap. The reasons will be unique to each company. Much would depend on existing governance and management structure of the company. Broad categorisation is necessary to understand the root of the problem. Once this exercise is over, micro level identification is necessary being an essential element to bridge the gap.

First Component – Perception Gap

Intuitive understanding and insight creates a veil of perception. The greater degree of difference of opinion between governance leadership and top management is the root cause of perception gap. The documents containing vision, mission and objectives of a corporate are ornamental pieces with elaborate use of elegant phrases which turn out to be confusing at the best. The top management’s perception of goals must be in sync with the governance leaders. The board of directors in their role of governance may envision company goals in a different perspective than the management leaders. Opinions may differ but understanding of the strategy calls for perfection. A Company, for example, in its manifesto, may have the mission to keep its ‘Customers First’. While it sounds good from governance perspective, the management team must know its elements to achieve it. Whatever the management does, they must keep this goal in view. The governance leadership must realise that they cannot remain detached but must ensure that their mission of keeping customers happy is implemented by carrying out with random scrutiny of execution steps. The perception gap is the most difficult to decode. This calls for constant discussion and understanding of the perception of each set of leaders.

Second Component – Communication Gap

The governance leaders usually come only for board or committee meetings with little interaction between two sets of corporate leadership. It results in non-meeting of minds with ever widening gap of communication. Board members rightly perceive themselves as non-interfering in the day-to-day functioning of the company, yet this does not mean that there should be a communication break between the two sets. The communication between the board members usually happens only when the board or committee meetings are organised. Communication link breaks no sooner the board or committee meeting is over. Consistent and effective communication will keep governance leaders abreast of company’s functioning on a continuous basis. Regular communication also helps in changing the perception. In India, for example, a board meeting of a company can be held at a maximum gap of 120 days. Ordinarily, the time of communication between the board and management starts with sending out board meeting notice and agenda and ends with minutes being circulated.  There remains no communication in between the board meetings. ‘No communication’ for over three months is a sure recipe for disaster.

Third Component – Strategy Gap  

 The corporate strategy flows from the top. The goals are defined once the strategy is known. Strategical policies should be concrete, realistic and implementable. Understanding the intent behind the strategy is the key. Strategy gap will breed disastrous results More often than not, strategy documents contain objects ignoring practical considerations. Governance and management leaders must understand each other’s view point. Policy implementation is dependent on and follows strategic management. For example, a company with five subsidiaries may decide, as part of strategy, to merge all subsidiaries with the parent company to reap tax benefit. But implementation may pose difficulties as each company may have different management style and culture. While finalising strategy, the governance leaders ought to consider the anticipated problems in implementation rather than merely looking at tax angle. The strategy gap can be understood to be the gap between ‘framing’ and ‘implementation’ of the strategy. Policy framework should be flexible recognising the real-world difficulties. Management leaders have a dominant role to play in the strategy gap. Lucid explanation of the complications involved in accomplishing the goals may become necessary for the governance heads to understand. The extent and severity of the problem is to be understood by the board members in the way the management team perceives it. Of all the components, strategy gap remains the most prominent.

Fourth Component – Performance Gap

Unarguably, management is responsible for operations and performance. The governance team, drawn from diverse vocation, has limited awareness how the business is run. They are experts in their own domain but not necessarily in the business of the company. Imperfect knowledge of corporate functioning leads to uncertainty. The governance theories, thus far, propagate ‘non-interference’ of governance leaders into management domain. The corporate governance regulations across the world are based on the doctrine of non-interference. Advancing this opinion for over a quarter century now, it has turned into conviction and a mandatory principle. The oversight of performance functions calls for thorough business understanding. Questioning operational style does not necessarily mean interference. Contrarily, the management style will undergo improvement, if judged by the governance leaders. For example, mere appointment of a professional CEO does not absolve the governance leaders with their oversight responsibility. Let the governance leaders understand the specific action planned by CEO for achieving the goals. Performance would improve if the board members understand the modus operandi adopted by the management in achieving the company’s goals. The board members have to shed their inhibition of extremely publicised norm of ‘non-interference’. Governance styles are not iron cast. Breaking free from dogmatic principles is the key to achieve higher trajectory growth. The governance leaders must, however, respect the independence of the management team. Governance does not involve monitoring on daily basis. Performance gap can be closed with effective understanding of the management approach.

Fifth Component – Compliance Gap

Compliance failure is the greatest indicators of corporate failure. Management team is primarily responsible for compliances but under the governance regulations those responsible for governance become liable for non-compliances. The governance leaders cannot be mere spectators to non-compliances. The delinquency in compliances is bound to be problematic for those in-charge of governance. The directors are under the threat of being responsible for something they did not bargain [5]. Rules of compliances must be understood by them and close interaction with the management at short intervals will keep them abreast of non-compliances in the company. More often than not, bank defaults are not immediately brought to the notice of the governance leaders. Keeping them under wrap till the last moment makes it difficult for the governance leaders to take corrective measures. The management filters the information supplied to the board in the hope of a correction in a short time. Such filtered information serves no useful purpose and affects decision making by the board. Corrective steps are not possible if the information about defaults of the company are concealed. Due diligence at regular intervals will reveal the existence of veil. The due diligence must, however, be carried by independent experts directly reporting to the committee chairs or the board. For example, secretarial due diligence must be carried out by the qualified company secretaries in practice with straight reporting to the audit committee or the board. The directors must build a safety net around them for protection. The safety net is a conscious effort on the part of directors to protect themselves from the legal penalties and liabilities under [the laws of any country]. The safety net is essentially an attempt to save the directors from unsolicited troubles. The safety net may work towards protecting the directors from the acts of omissions or commissions for which they are not party or have no role to play” [6].

Bridging the Governance Gap

Bridging the governance gap calls for seriousness to look within and take corrective steps. Once the factors causing the governance gap are determined, component stacking would make it easier for corrective action to follow. Ignoring the governance gap may continue to cause conflict between those charged with governance and those charged with management. Understanding the governance gap theory will lessen the impact of friction between two sets with positive consequence of better governance and better management. “The directors should adopt ‘liberalative approach’. It is a rare combination of rich board experience and knowledge of systems, business and regulations. It is gained and earned through classroom environment and exposure to real business situations [7]”. The earlier the gap is bridged, the better it is for the functioning of the company. The corporate survival hinges on early closure of governance gap.

Impact of Companies Amendment Act, 2017 on Corporate Survival and Governance Gap

The Companies Amendment Act, 2017, assented to by the President on 3rd January 2018 makes pragmatic changes in the Companies Act, 2013 to address the issues of corporate governance, survivability and gap that occurs in governance. The amendment in the definition of key managerial personnel permits those charged with governance to designate any officer in whole-time employment as key managerial personnel. This is step forward towards bridging the governance gap. The amendments also repose confidence in the board of the companies to decide remuneration payable to the managerial personnel. It cuts the power of the Central Government to sit in judgment approving the remuneration. This empowers the board of directors who can incentivize the good performance of managerial personnel. It helps in lessening the gap as it encourages open and deeper communication to understand the working of managerial personnel. The provision relating to evaluation of performance of the Board, under the amendment Act, permitting an independent external agency to carry out such evaluation is a measure which will help weed out underperforming and passive directors thereby improving the quality of the board members. Such an exercise will also keep the directors on their toes making them understand their role to make a discernible effort to curtail the governance gap.

References:

[1] United Kingdom Audit Commission, October 2003, Corporate Governance: Improvement and Trust in Local Public Services, p. 4.

[2] Chapter 12 – Key Managerial Personnel, Corporate Directors – Role, Responsibilities, Powers and Duties of Directors by Ashish Makhija, published by Lexis Nexis India.

[3] http://siteresources.worldbank.org/EXTGLOREGPARPROG/Resources/ grpp_sourcebook_chap12.pdf, para 12.3

[4] Adapted from OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264236882-en

[5] Chapter 26 – Safety Net, Corporate Directors – Role, Responsibilities, Powers and Duties of Directors by Ashish Makhija, published by Lexis Nexis India.

[6] Chapter 26 – Safety Net, Corporate Directors – Role, Responsibilities, Powers and Duties of Directors by Ashish Makhija, published by Lexis Nexis India.

[7] Chapter 19 – Corporate Governance – Practice and Procedure, Corporate Directors – Role, Responsibilities, Powers and Duties of Directors by Ashish Makhija, published by Lexis Nexis India.

 

Credit : Published in The Chartered Secretary, February 2018