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.

NCLAT settles the crucial Issue: Speedy Liquidation Versus Endless Resolution

In a significant ruling in Kridhan Infrastructure Private Limited vs. Venkatesan Sankaranaryan & Another[1], NCLAT has held that timely liquidation is to be preferred over endless resolution. It has also held that unless the liquidation order is shown to contain material irregularity or fraud, liquidation order cannot be set aside using inherent powersin the light of specific provisions under section 61(4) of the Code. It has also categorically ruled that stakeholders’ consultation committee is different from committee of creditors and the decision of stakeholders’ consultation committee is not binding on the liquidator.

Briefly, in this case, upon failure of implementation of the resolution plan by the Resolution Applicant, NCLT directed liquidation of the corporate debtor as proposed by the committee of creditors. The Resolution Applicant aggrieved with this order filed an appeal before NCLAT alleging that it was not provided with an opportunity of being heard and that the order of NCLT ordering liquidation be set aside preferring ‘Resolution’ over ‘Liquidation’. Resolution Applicant undertook to implement the plan.

Here is the lowdown of the issues decided by NCLAT:

Speed is the Essence

NCLAT noted that prime reason behind enactment of IBC is time bound process. It specifically noted that “if an Adjudicating Authority extends the Insolvency Resolution Process beyond the timeline mentioned u/s 12(3) of the code, the same will be in negation of the underlying policy behind the court of ensuring timely resolution of Company Insolvency”.  NCLAT held that a “Timely Liquidation is preferred over endless Resolution process.”. Making it clear that time period mentioned in section 12 is mandatory and cannot be extended. It held that “If time specified by statute is changed, then it will give room for wider complications/implications, in the considered opinion of this Tribunal.”

Specifically noting that Resolution Applicant failed to adhere to the timelines for equity infusion as per the approved plan, NCLAT held that “the speed specified in the Code cannot be diluted as there is likelihood of adversely affecting the interests of both sides. If the same is delayed, maximization of value of assets of the ‘Corporate Debtor’ will weaken the realisation of potential creditors.”

Use of Inherent Power to set aside order of liquidation

On use of inherent powers under Rule 11 to set aside the order of liquidation as prayed by the Resolution Applicant, NCLAT noted that “it is well settled principle in Law that an ‘inherent power’ cannot be resorted to when there are specific provisions in Law to deal with the situations relying on the judgment of Apex Court in ‘Durgesh Sharma’ V. ‘Jayshree’ reported in Air 2009 Supreme Court at page 285. NCLAT refused to invoke jurisdiction under Rule 11 for setting aside order of liquidation.

Eligibility under Section 29A due to later development

NCLAT noted the strong objection of the Liquidator on the ground of huge default by the Resolution Applicant through its subsidiaries outside India. NCLAT held that provisions of Sections 29A(f) and (j) get attracted.

Stakeholders Consultation Committee recommendations are not binding on Liquidator

NCLAT upheld the argument on behalf of the Liquidator that “in so far as the ‘stakeholders’ consultation committee under the Liquidation process, unlike ‘Committee of Creditors’ under ‘Resolution process’ they do not have any power to determine and even their consultation is not binding on the liquidator.”

Conclusion

The judgment is unique as it deviates the beaten path of ‘maximization of value’ which is oft quoted to persuade NCLAT and NCLAT benches. The phrase has become a monologue to justify any attempt to resolve insolvency ignoring the crucial part of preamble which speaks of ‘time bound manner’.  This judgment notes the importance of timelines under the Code and sets an example that no matter what, timely liquidation is preferable over repeated attempts to resolution. This judgment is a trend setter in the era of IBC 2.0 and the NCLT benches are now armed to counter the over used phrase maximization of value.


[1] Company Appeal (AT) (Insolvency) No. 202 of 2020

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  

Retaining Books of Account Post Dissolution of a Corporate Debtor

Uncertainty remains as to how long the Liquidator should maintain the books of account of the corporate debtor under the Insolvency and Bankruptcy Code, 2016. Do they become bona vacantia? For clarity, it may be noted the Liquidation Regulations specify that the liquidator shall preserve specified registers and books of account for a period of eight years from the date of dissolution of the corporate debtor. These can be referred to as ‘books of the liquidator pertaining to liquidation’. The format of the registers and books of account has also been specified in the regulations. The regulations also mandate that the liquidator should complete the books of account of the corporate debtor if they are incomplete on the liquidation commencement date. The reference to books of account here is to ‘books of the corporate debtor prior to liquidator. In this sense, there are ‘books of the corporate debtor’ and books of the liquidator’.

The period of preservation of books of the liquidatorhas been provided in the regulations. But the Code and the regulations are silent on the period for which the books of the corporate debtorare to be preservedby the liquidator. Can they be destroyed upon order of dissolution?

The requirement of maintenance and preservation of books of account of a company is provided in the Companies Act, 2013 in following terms:

Books of Account are to be maintained for period of not less than eight financial years immediately preceding a financial year together with the vouchers relevant to any entry in such books of account. Where an investigation has been ordered in respect of the company, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit (s. 128).

The company shall maintain and preserve at its registered office copies of all documents and information as originally filed for incorporation till its dissolution (s.7).

Interestingly, the Companies Act, 2013 deals with the disposal of books of account upon dissolution as under (s. 347):

  • The books and papers of a company to be dissolvedand those of the Company Liquidator to be disposed of in the manner as directed by the Tribunal.
  • After the expiry of five years from the dissolution of the company, no responsibility shall devolve on the company, the Company Liquidator, or any person to whom the custody of the books and papers has been entrusted, by reason of any book or paper not being forthcoming to any person claiming to be interested therein.
  • The Central Government may, by rules, prevent for such period the destruction of the books and papers of a company which has been wound up and of its Company Liquidator.

Under the Company (Court) Rules, 1959 [Applicable to winding-up governed by provisions of the Companies Act, 1956], the High Court, in its discretion, can pass orders directing disposal of the books and papers of the company and of the Liquidator.

Section 356 of the CA 2013 provides that the dissolution can be declared as void by the Tribunal upon an application being made within two years from the date of dissolution.

Similar provisions find no place in the Code or in the Regulations. The period for preservation for books of liquidator is provided in the Regulations but not for books of the corporate debtor. Section 347 of the Companies Act, 2013 cannot be applied for liquidation under the Code regardless of the fact that the same Tribunal has the authority to deal with winding-up under the Companies Act, 2013 as well as liquidation under the Code. In any case, corporate debtor under the Code is a broader term and also includes limited liability partnership and there is no question of extending the applicability of provisions of the Companies Act, 2013 to a LLP. Winding-up process under the Companies Act, 2013 and liquidation process under the Code are two distinct processes under two different statutes.

Typically, the regulations should be amended to provide for the period of preservation of books of the corporate debtor. Until, this is done, the onus lies on the Tribunal using its power under section 60(5) of the Code to direct the period and the manner of preservation or disposal of the books of account of the corporate debtor upon the order of dissolution.

There may be case of pending investigation and litigation against the corporate debtor. Should the books and records be maintained till the end of investigation or litigation? The answer lies in the question itself. No corporate debtor should, ordinarily, be dissolved if any investigation, litigation or case is pending against it. Dissolving such a corporate debtor would be a huge lapse giving rise to a legal crisis.

@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.