CIRP Assignments For Insolvency Professionals Restricted to 10 Assignments with effect from 22nd July, 2021

Insolvency Professionals will not be in a position to accept more than ten CIRP assignments as the Insolvency and Bankruptcy Board of India (Board) has added a clarification under clause 22 of the Code of Conduct for Insolvency Professionals attached as Schedule I to the IBBI (Insolvency Professionals) Regulations, 2016. This amendment has been notified on 22nd July, 2021 with immediate effect. The clarification also seeks to restrict the large assignments to three within the overall assignment limit of ten at any point of time. Large assignments mean where admitted claims exceed Rs. 1000 crores. The clarification reads as under:

Clarification: An insolvency professional may, at any point of time, not have more than ten assignments as resolution professional in corporate insolvency resolution process, of which not more than three shall have admitted claims exceeding one thousand crore rupees each.

Let us understand the impact of this newly added clarification:

  1. The amendment is effective from 22nd July, 2021. It is not clear whether this would apply to existing assignments in hand or the limit in number of assignments is to be applied for future assignments. For example, if the Insolvency Professional is already handling 12 assignments, would he be required to reduce it to 10 assignments? Logically, that does not seem to be the intent. The application of the clarification should be prospective and it should not affect the existing number of assignments. In other words, if an insolvency professional is already handling CIRP assignments exceeding the limit, he should be able to continue to handle them but he will not be in a position to accept any more CIRP assignment unless the number of CIRP assignments is reduced below the limit. The sub-limit applicable for large assignments would also apply in a similar way. However, a clarification from the Board is desirable.
  2. The clarification uses the expression “assignments as resolution professional” causing confusion as to whether this would include assignments as interim resolution professional. Also what happens if the insolvency professional continues to perform his duties as a resolution professional in his capacity as interim resolution professional where resolution professional is not appointed by the committee of creditors. Looking at the intent of the clarification and conjunct reading with the definition of resolution professional [S. 5(27)], which includes interim resolution professional, it can be concluded that assignments being handled as interim resolution professional would also be covered within the overall limit of ten assignments and sub-limit of three large assignments.
  3. The restriction applies only to CIRP assignments. This means assignments being handled by an insolvency professional as a liquidator or resolution professional under pre-packaged insolvency resolution process under Part II or resolution professional or bankruptcy trustee under Part III will not be counted for the purposes of limit of 10 assignments and sub-limit of 3 large assignments. The use of the words “ten assignments as resolution professional in corporate insolvency resolution process” is quite clear and leaves no room for ambiguity. The use of the expression “ten assignments as resolution professional in corporate insolvency resolution process” seems to be intentional. It, however, defies logic and reasoning as burden of handling liquidation cases is as cumbersome as that of CIRP assignments. The idea behind restricting assignments is to ensure effective handling considering clause 22 which provides that 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.The expression “assignment” used in clause 22 is not restricted to CIRP assignments alone. It includes, in its ambit, all assignments accepted by an insolvency professional. Be that as it may, the language employed in clarification is clear and unambiguous to restrict CIRP assignments only. 
  4. Large CIRP assignments have been restricted to maximum of three within overall limit of ten assignments. Large assignments mean the assignments where admitted claims exceed Rs. 1000 crores. There seems to be some practical difficulty in implementing this. The amount of admitted claim is fluid and dynamic in CIRP assignments. At a given point of time, the admitted claims may be less than Rs. 1000 crores but may swell beyond this limit after a while. For example, an insolvency professional has accepted 10 assignments out of which 3 assignments are having admitted claims of more than Rs 1000 crores. This seems to be in compliance of clarification. What would happen if in two more cases, the value of admitted claims exceed Rs 1000 crores at a given point of time? Would the insolvency professional be considered in non-compliance of the Code of Conduct? Is he expected to shun two such large assignments? Whether he would be permitted by Adjudicating Authority to resign and leave the assignments mid-way? There is no clarity on these aspects at this point of time. However, it is suggested that insolvency professional must take appropriate steps to remain within the limits set in the clarification.

Conclusion : Welcome Step but Board needs to Clarify the Clarification!

This amendment was expected and this would ensure fair and equitable distribution of assignments besides ensuring that assignments are handled effectively by the insolvency professionals. However, some aspects, as noted above, require clarifications and the Board is expected to issue clarification clarifying the clarification!

Disclaimer: The views expressed here are for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, Ashish Makhija, Author and/or Tranzission does not take any responsibility for any liability or non-compliance.


@Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on personal interpretation of the author 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.

NCLT Has No Power To Quash Civil Suit or Direct Police To Arrest Any Person Obstructing Liquidator Under IBC : NCLAT

In an unprecedented order, Mumbai Bench of NCLT had passed an order quashing a Civil Suit against the corporate debtor pending with Civil Court, Junior Division, Wada District Palghar, Maharashtra filed by a person claiming user of property auctioned by the liquidator during liquidation process. NCLT also directed Police to arrest the said person for threatening and obstructing Liquidator. 

On appeal[1], the Appellate Tribunal has set aside the order of the NCLT holding that the direction passed by the Adjudicating Authority quashing Civil Suit is not legal. The NCLT had relied upon section 33(5) of the Insolvency and Bankruptcy Code, 2016 to pass such an order and the Appellate Tribunal rightly noted that “even if such bar is there in section 33(5) read with sectiosn 63 and 231, it is not appropriate for the Adjudicating Authority to quash the concerned suit which is filed in the Civil Court. It would be for the Liquidator to move the concerned Civil Court pointing out the provision of IBC or to move the District Court in the hierarchy for quashing of the Suit concerned.”

The Appellate Tribunal also modified the order of arrest by the Police with the direction that “the Police concerned should take suitable action as per law.”

Conclusion

At the first instance, the Adjudicating Authority should not have passed such an unusual order quashing civil suit as it has no power to do so under IBC. Its jurisdiction does not extend to orders passed by civil courts. On the contrary, It should have directed the liquidator to approach the civil court by bringing to its attention relevant provisions of the Code barring jurisdiction of civil courts during liquidation or corporate insolvency resolution process. Based on the outcome, higher courts could have been approached by the liquidator including filing of a writ petition before the High Court. Seemingly, even the liquidator was ill advised.

NCLT should have also refrained from directing arrest of the Appellant as it cannot do so under the Code. Appellate Tribunal remedied the situation by modifying the order of NCLT and directing the Police to take action as may be warranted under law. The over enthusiastic approach adopted by NCLT does not reflect the judicial wisdom expected of NCLT benches, which is critical to success of the Code. Though subtle in nature, the course correction by Appellate Tribunal was desirable.

@Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on personal interpretation of the author 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] E.C. John vs.  Jitender Kumar Jain & Ors., Company Appeal (AT) (Ins) No.249 of 2020, dated 1st September, 2020  

Understanding 2019 IBC Amendments

Insolvency and Bankruptcy Code of India has been the subject of interpretation at various judicial forums from Adjudicating Authority to Appellate Tribunal to Apex Court of India. Last amendment in 2018 brought in home buyers as financial creditors but many questions remained unanswered as most of the homebuyers did not participate in the voting process. New issues relating to distribution to operational creditors in a resolution plan cropped up with the judgment of Appellate Tribunal in Essar Steel in July 2019, which is now under a stay by the Apex Court.  

The IBC Amendment Bill 2019, introduced in Rajya Sabha on 24 July, 2019 was passed by Rajya Sabha on 29thJuly and by Lok Sabha on 1stAugust, 2019. It is awaiting President’s assent and the Central Government’s notification.

Here is the analysis of the 2019 amendments in IBC:

Ascertaining existence of default in 14 days by NCLT

A provision exists in the Code which mandates the Adjudicating Authority (NCLT for Corporate Insolvency) to ascertain the existence of default within 14 days of the receipt of the application from a financial creditor for initiating corporate insolvency resolution process. The use of the word `shall’ in the mandate cannot be overemphasized. However, this wasn’t being put to practice. The reasons could be either too much workload at hand (the application filed is not listed so soon before NCLT after filing) and the Courts reading principle of natural justice in this provision by issuing notice of the application filed to the corporate debtors. Naturally, the process of filing reply and rejoinders took longer than required 14 days. 

The amendment now requires the NCLT to record reasons if the ascertainment of existence of default is not done within 14 days of filing of application. Under the existing provision, it is incumbent upon the NCLT to dispose of the application within 14 days of the receipt of application and not only ascertain the existence of default. It is important to refer to section 64 of the Code which provides for expeditious disposal of the applications by NCLT. It also provides that NCLT should record reasons if the application is not disposed of within the prescribed time frame and that an extension should be sought from the President of NCLT by the Adjudicating Authority giving reasons of delay and the President is empowered to extend it for maximum of 10 days on the basis of reasons recorded. Looking through this prism, the existing provision intended to achieve the same objective that is now sought to be achieved. From a practical perspective, section 64 was rendered nugatory by the judgment of Appellate Tribunal in J.K.Jute Mills Company Limited vs Surendra Trading Company, 1stMay, 2017, wherein by a stroke of pen, the Appellate Tribunal held that the period of 14 days within which NCLT is mandated to admit or eject the application is directory and not mandatory. Unfortunately, this part of judgment wasn’t touched by the Apex Court in an appeal before it.

Being already covered by this judgment of Appellate Tribunal, the proposed amendment is a non-starter from the word go. If not, judiciary will find a way through this. It is flummoxing why a similar amendment has not been brought in section 9 and 10 which also mandate the NCLT to pass an order within 14 days of receipt of application.

Fixing the outer time-limit for completion of Corporate Insolvency Resolution Process

The Code boldly announced that corporate insolvency resolution process shall be completed within 180 days with an extension of maximum of 90 days; in all 270 days. The experience says as on 30thJune, 2019, 445 insolvency processes are going on beyond 270 days out of the total pendency of 1292; a whopping 34%. Time period of 270 days does not look to be practical due to cases going back and forth to Appellate Tribunal and to Supreme Court. 

The amendment now provides that whatever may be the reason of delay including the period consumed in litigation or stay, the overall time period for a corporate insolvency resolution process cannot exceed 330 days under any circumstance. The use of the phrase “shall mandatorily be completed”reflects the urgency and dictate of the Parliament. While granting outer limit of 330 days, the provision has been couched in a language which covers extension and exclusion of period for any reason curtailing the power of the Adjudicating Authority granted to it under the judgment of Appellate Tribunal in Quinn Logistics India P. Ltd. v. Mack Soft Tech Pvt. Ltd.whereby the Adjudicating Authority could exclude certain period from the 270 days for good grounds and unforeseen circumstances. 

There have been spurt in exclusion applications after this judgment and in few cases, the Adjudicating Authority has allowed exclusion of 270 days on the ground of non-cooperation by the personnel of the corporate debtor! The amendment wishes to rein this in but again judiciary may have the last laugh. The big question that arises is whether Quinn Logisticssurvives after this amendment? The amendment nullifies the judicial decision for now, but it remains to be seen – how long. 

In cases where 300 days have already gone by, the amendment provides that they must be completed within 90 days from the date of commencement of the Amendment.

Allottees’ (Homebuyers) Majority Decision Makes Their Voting Share Absolute

The allottees were considered as a ‘class of creditors’ and attained the status of financial creditors by an amendment in 2018 to be represented by an Authorised Representative in a Committee of Creditors (CoC), who used to vote in the CoC on their behalf as per the voting pattern by each allottee. Their voting share were counted on the basis of the debt due to each of them. Experientially, all the allottees never voted and they always fell short of their aggregate voting share. For example, in a CoC, if the voting share of 560 allottees was 66% and assuming only allottees holding 56% voting share voted, the decision was left at the mercy of other financial creditors in the CoC. The amendment takes care of this anomaly and it provides that once the allottees in a class of creditors take a decision by more than 51% vote (correct phrase would have been fifty one percent or more), the Authorised Representative shall cast the vote as if 100% of them have approved it. Here, more than fifty one percent is calculated on the basis of the votes cast and not total votes. Let us understand by way of an illustration:

ParticularsNumber/Percentage
Voting Share of aggregate of allottees in CoC66%
Voting Percentage of votes cast in favour of an item by allottees56% 
Voting Percentage of votes cast against the item by allottees10%
Voting Percentage of abstention of allottees34%
Overall Voting Share of allottees for the purposes of voting in CoC (prior to amendment)36.96 (56% of 66%)
Overall Voting Share of allottees for the purposes of voting in CoC (after amendment)66%

This is beneficial for the allottees as law now assumes that 100% of the allottees have decided in one way or the other if decision is represented by more than 51% of the votes cast. This makes their voting share in CoC absolute even though the actual voting share may be lesser. Authorised Representative shall, henceforth, vote as a group of ‘class of creditors’ and not as per wish of each allottee.

Anticipated Problem Due to Erroneous Drafting in 2019 Amendment

The problem, however, does not end here. The erroneous drafting is bound to make things complex. Assuming, the votes cast to arrive at a decision do not attain the benchmark of ‘more than fifty one percent’ (Votes cast in favour – 50.80% and against – 49.20%). It is not clear how the Authorised Representative will vote in such a situation. Instead of the phrase, ‘more than fifty one percent’, the use of ‘by majority’would have been appropriate and practical.

Protecting Interest of Operational Creditors and Dissenting Financial Creditors in a Resolution Plan

In order to further protect the interest of the operational creditors, amendment has been made in section 30. Now it is mandatory for a resolution plan to provide for minimum payment to operational creditors, which should be higher of amount that would have been paid to operational creditors under liquidation in accordance with section 53 or amount that would have been paid to operational creditors if the amount under the resolution plan would have been distributed as per order of priority stated in section 53 of the Code. Prior to amendment, it was restricted to the amount that would have been paid to the operational creditors under liquidation.

The change now enhances their chances of being considered for payment on a higher footing. Under liquidation, the amount would have restricted to ‘liquidation value’ but now the order of priority for operational creditors would be considered higher of ‘liquidation value’ and ‘amount under resolution plan’. 

 The dissenting financial creditors are also allowed to be paid the amount not less than the amount payable in accordance with order of priority in section 53 of the Code. The manner of such payment has been left to be specified by the Board. Consequent amendment has been made in regulation making power of the Board in section 240.

Interestingly, this provision will operate retrospectively for all cases where the approval of Adjudicating Authority to a resolution plan is pending, or appeal is pending or time for filing appeal has not lapsed, or where any other legal proceeding is pending against the decision of the Adjudicating Authority in respect of a resolution plan. Retrospective application of these provisions would make the process slow, complicated and may result in unintended consequences. Let us take a case where the application for approval of resolution plan is pending under section 30/31, the resolution plan, which is not in accordance with the amended provisions, will have to be re-drawn and re-approved by the committee of creditors. If the corporate insolvency resolution period is already over (original period allowed plus extension of 90 days plus exclusion), embargo of 330 days in section 12 will apply and it would make it legally impossible to grant more time eventually leading to liquidation of such a corporate debtor.   

 To overcome recent Essar Steel judgment of the Appellate Tribunal which paved way for parity of payment to operational creditors, the amendment now provides that the manner of distribution proposed must take into account the order of priority amongst creditors as laid down in Section 53 and the value of security interest of a secured creditor. The mandatory consideration of ‘value of the security interest of a secured creditor’ seems ambiguous and unnecessary. Section 53 disregards the value of security interest of a secured creditor, which means if the secured creditor relinquishes the security interest, the amount available is distributed proportionately amongst secured creditors regardless of the value of the security interest and ranking of their charge. This amendment is prospective and will not apply retrospectively to plans approved but pending for approval of adjudicating authority or pending in appeal or other legal proceeding. 

Resolution Plan Binding on Government and Government Authorities

An amendment has been made in section 31 providing that the resolution plan once approved shall also be binding of Central Government, State Government, local authority in respect of statutory dues owed to them. This amendment is clarificatory in nature as there was not any doubt in this regard but in some cases, the statutory authorities such as Income Tax etc interpreted it otherwise. By specifically including them here, the amendment paves the way for resolution plan being binding on Government and government authorities.

Decision to Liquidate Can Be Taken at Any Stage

The unamended provision gave ample powers to the committee of creditors to take the decision to liquidate at any stage of corporate insolvency resolution process. But some benches of NCLT ruled otherwise and in few cases passed strictures against committee of creditors if they decided to liquidate at early stages of corporate insolvency resolution process. Fortifying the intent of the Code that commercial decision to resolve or liquidate fall within the exclusive domain of the committee of creditors, the amendment now seeks to clarify that the committee of creditors is free to take decision to liquidate at any stage even before the preparation of information memorandum. This amendment would reduce the financial burden on the members of the committee of creditors as they will not be required to shell out CIRP costs and costs relating to keeping the corporate debtor as a going concern when they foresee no viability in the business of the corporate debtor. The amendment strengthens the decision-making power of the committee of creditors. However, this may not take away the power of Adjudicating Authority or Appellant Tribunal or the Supreme Court to examine whether such a decision has been taken fraudulently.

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

[Updated after passage of Insolvency and Bankruptcy (Second Amendment) Act, 2018]

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:

The Second Amendment Act, 2018 has amended the language of section 12A and it 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 specified.”

“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.

Clause (fa) proposed to be inserted by Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (6 of 2018) as a consequence of insertion of section 12A stands omitted in the Second Amendment Act, 2018.

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.

By amending the language of section 12A with replacement of as may be prescribed with as may be specified, the regulations issued by IBBI have become valid but it has created another dichotomy –  making of application under section 7, 9, 10 is governed by the Rules whereas withdrawal of application is governed by Regulations. This anomaly, if challenged, may lead to setting aside of Regulations.

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