Good News! Apex Court Holds Retired Bankers and Receiving Pension Eligible to be Appointed As Resolution Professional in CIRP

Appellate Tribunal’s judgment holding that an Insolvency Professional who was in service and getting pension from a financial creditor was disentitled to be a Resolution professional has been rejected by the Supreme Court. In an order passed by a 3-judge bench on 19th August, 2020, the Supreme Court has categorically held that the approach adopted by NCLAT is not correct “that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution professional” .

The Court held that since the order of NCLAT does not reflect correct approach, the same shall not be considered as a precedent. Incidentally, following its own judgment, NCLAT, in another case, also followed it and removed another past banker who was drawing pension.

Appellate Tribunal’s judgment holding that an Insolvency Professional who was in service and getting pension from a financial creditor was disentitled to be a Resolution professional has been rejected by the Supreme Court. In an order passed by a 3-judge bench on 19th August, 2020, the Supreme Court has categorically held that the approach adopted by NCLAT is not correct “that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution professional” .

The Court held that since the order of NCLAT does not reflect correct approach, the same shall not be considered as a precedent. Incidentally, following its own judgment, NCLAT, in another case, also followed it and removed another past banker who was drawing pension.

Who Wins – Equitable Consideration or Commercial Wisdom of CoC?


This piece deals with the jurisprudence whether the Adjudicating Authority or the Appellate Authority has the authority to reject a resolution plan approved with requisite majority by the Committee of Creditors (CoC) which is lower than liquidation value in quantitative terms.

Resolution Plan should typically mirror the Insolvency and Bankruptcy Code, 2016 (Code) objectives in maximizing the value. The Code, the way it is derafted, puts all its faith in the Committee of Creditors (CoC) in protecting the commercial interest of stakeholders of the corporate debtor while they determine the feasibility and viability of the rival plans placed before them. Maximization of value probably weighs prominently on the minds of collective wisdom of the CoC while they carry the burden of expectations from other stakeholders. It is a tough job. It is about making a difficult choice keeping everyone’s faith intact while ensuring that maximum recoveries are made for their dues as well while the corporate debtor gets a chance to be rehabilitated.

The job of CoC is hard enough to select the suitable resolution plan amongst the available ones. The hardest part surfaces when a resolution plan lower than the liquidation value is received. No one would want to be in that position for taking a call either to approve or reject such a plan as it affects everyone and allegations are likely to fly thick and fast, if such a plan is approved.

Resolution Plan lower than Liquidation Value

One question that begs answers is whether the CoC can consider and approve a plan which is lower than the liquidation value? On the face of it, such an approval looks incongruous as it would seem as defeating the interest of stakeholders while upsetting the objectives of the Code. Practicalities apart, does the provisions of Code in any way bar the CoC to approve such a plan? The Apex Court had the occasion to examine this aspect in Maharashtra Seamless Limited vs. Padmanabhan Venkatesh & Ors[1] particularly whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not. In this case, NCLAT has directed that amount in resolution plan should match the liquidation value and this was challenged before Supreme Court. 

The Supreme Court noted that that “the object behind prescribing such valuation process is to assist the CoC to take decision on a resolution plan properly. Once, a resolution plan is approved by the CoC, the statutory mandate on the Adjudicating Authority under Section 31(1) of the Code is to ascertain that a resolution plan meets the requirement of sub-sections (2) and (4) of Section 30 thereof.” The Court further opined that the Appellate Authority has proceeded on equitable perception rather than commercial wisdom. The Court felt that “the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis.” While recognizing the primacy of commercial wisdom of the CoC, the Apex Court rejected the idea of matching the value of the resolution plan to the liquidation value.

In another judgment[2] rendered on 28th February, 2020, the Apex Court has relied upon the Maharashtra Seamless judgment and set aside the judgment of NCLAT whereby the matter was remitted to NCLT after finding that Section 30(2) of the Insolvency and Bankruptcy Code together with the principle of maximization of assets of the corporate debtor, a resolution plan which is lesser than liquidation value cannot be accepted. The Supreme Court held that since this issue has been decided in Maharashtra Seamless judgment, the Appellate Tribunal cannot reject resolution plans approved by the CoC, which are lower than liquidation value. 


There is no provision in the Code that justifies a view that resolution plans should carry a value higher than liquidation value. A closer look of the provisions tells us that the Resolution Applicant is not aware of the liquidation value as determined by the Registered Valuers though they may have their own assessment of value. In fact, CoC members also do not know the liquidation value unless the resolution plans are placed before them. Liquidation value, at the most, works as a guidance for the CoC; it cannot be considered as a benchmark and resolution plans offering lower value than liquidation value ought not to be rejected on this ground alone. Of course, the resolution plan must pass the test of feasibility, viability and must be implementable besides satisfying the legal provisions. New lessons are being learnt everyday.

[1] Civil Appeal No. 4242 of 2019 decided on 22nd January, 2020.

[2] State Bank of India vs. Accord Life Spec Private Limited, Civil Appeal No. 9036 of 2019.

4 Critical Questions Relating to Avoidance Transactions in Voluntary Liquidation

The law relating to voluntary liquidation has been moved from the Companies Act, 2013 (or erstwhile Companies Act, 1956) to Insolvency and Bankruptcy Code, 2016 (Code or IBC). Voluntary liquidation is the option available to solvent corporate persons having committed no default. The voluntary liquidation, interalia, requires a special resolution of the members of the company and approval of such resolution by the creditors representing two-thirds in value of the debt of the company within seven days of special resolution.

Liquidation Commencement Date 

The Adjudicating Authority is not involved at this stage of voluntary liquidation and with no order of liquidation necessary, the date of passing of special resolution by the members of the company is considered as the liquidation commencement date[1]. The Adjudicating Authority comes into picture after the affairs of the company have been completely wound up when the liquidator is under an obligation to make an application to the Adjudicating Authority for dissolution of the company[2]. The voluntary liquidator may, however, approach the Adjudicating Authority during the liquidation process in case of non-cooperation of personnel of the company or for determination of any question of law or fact.

Applicability of Section 35 to 53 of Liquidation Process

For conducting the voluntary liquidation, no separate process has been provided in the Code. The Code provides for adoption of liquidation process from sections 35 to 53 with such modifications as may be necessary[3]. Equally the provision of cooperation of personnel of the company provided in CIRP process apply to voluntary liquidation process[4]. The liquidation process chapter contains sections from 33 to 53. Section 33 provides for initiation of liquidation of a corporate debtor which has undergone the process of Corporate Insolvency Resolution Process (CIRP). Section 34 provides for appointment of the liquidator and fee to be paid. Logically these two sections have no applicability to the voluntary liquidation process as no order of Adjudicating Authority is required and the fee of voluntary liquidator gets decided by the members appointing the liquidator. But rest of them apply with necessary modifications.

4 Critical Questions Remaining Unanswered relating to Avoidance Transactions

So far so good but applicability of sections 43 to 51 dealing with avoidance transactions leaves following 4 questions unanswered: –

  1. Is it incumbent upon the voluntary liquidator to identify and determine the avoidance transactions and make application to the Adjudicating Authority?  
  2. If yes, what will be the starting point of look back period?
  3. Is it possible to dissolve the company while avoidance applications are pending for adjudication?
  4. What will be the treatment of any recoveries made out of avoidance transactions?

First Question: Is it incumbent upon the voluntary liquidator to identify and determine the avoidance transactions and make application to the Adjudicating Authority?  

Plain reading of section 59(6) with conjunctive reading of avoidance transactions sections from sections 43 to 51 suggests that it is incumbent upon the liquidator appointed for voluntary liquidation to form an opinion and make a determination to identify the transactions under sections 43, 45, 49 and 50 of the Code. The use of the word liquidator in avoidance transaction sections includes the liquidator appointed for voluntary liquidation and hence the liquidator is under a duty to determine the avoidance transactions and file appropriate applications before the Adjudicating Authority. A crucial question relates to payment of fee of forensic auditor, if appointed by the liquidator. Who pays it? Can the liquidator claim it as part of liquidation cost? The answer to this pertinent question depends on negotiated fee of the voluntary liquidator. No separate fee can be charged if the liquidator has not factored it in the negotiated fee. In other words, if negotiated fee provides for separate payment to be made for this effort, then it may be charged, else the voluntary liquidator will have to bear expenses of this effort out of his/her fee.

Second Question: If yes, what will be the starting point of look back period?

This question has no straight answer and it calls for application of interpretation rules. All the relevant sections dealing with avoidance transactions, namely, sections 43, 45, 49 and 50 provide the starting point of look back period as insolvency commencement date. In voluntary liquidation, there is no insolvency commencement date as it is not a consequential step arising out of CIRP process. The voluntary liquidation, as we are aware, is meant for solvent companies with no default and hence there is no question of CIRP process. The look back period for avoidance transactions is as under:

SectionNature of TransactionLook Back Period for non- related party transactionsLook Back Period for related party transactions
43Preferential Transaction1 year prior to insolvency commencement date2 years prior to insolvency commencement date
45Undervalued Transaction1 year prior to insolvency commencement date2 years prior to insolvency commencement date
49Transactions defrauding creditorsNo look back periodNo look back period
50Extortionate Credit Transactions2 years prior to insolvency commencement date2 years prior to insolvency commencement date

In all cases of avoidance transactions, the look back period is to be determined with reference to insolvency commencement date. In CIRP process and possible consequential liquidation of the corporate debtor, there is an insolvency commencement date and it can be the reference point.  But for the purposes of voluntary liquidation, insolvency commencement date is irrelevant as it is not a process arising out of or as a result of CIRP process.

Literal application and construction of these avoidance transaction provisions in the context of voluntary liquidation is leading to absurdity. The literal construction has, thus, to be eschewed and the phrase insolvency commencement date has to be construed in accordance with the context. The text and context must match. Here being a mismatch, the interpretation is necessary. We need to apply golden rule of interpretation. When literal interpretation leads to an irrational result that is unlikely to be the legislature’s intention, a departure can be made from literal meaning. A preferred meaning can be chosen. 

In voluntary liquidation, there is non-existence of insolvency commencement date. There exists only the liquidation commencement date. Hence, insolvency commencement date should be read as liquidation commencement date for the purposes of construing look back period and for determination of avoidance transactions in voluntary liquidation process. This interpretation gets strength from Section 59(6) which makes provisions of sections 35 to 53 of liquidation process applicable to voluntary liquidation with such modifications as may be necessary. Replacement of insolvency commencement date with liquidation commencement date for the purpose of construing look back period for avoidance transactions partakes the character of ‘necessary modification’ being reasonable, judicious and rational . Even the purposive approach of interpretation can be applied. The purpose of determining avoidance transactions is to provide equitable treatment to the creditors as provided in section 53 of the Code. The transactions carried out by the erstwhile management are put under the lens. From the insolvency commencement date, it the insolvency professional who takes control of the management and affairs of the company. Prior to the insolvency commencement date, the company remains under the control of erstwhile management and it is imperative to identify avoidance transactions. Hence the cut-off date for look back period is the insolvency commencement date. In voluntary liquidation, the liquidator assumes control over the company and its assets from the liquidation commencement date. Prior to this date, it is the management of the company which remains in charge of the affairs of the company and the possibility of avoidance transactions cannot be ruled out.  To conclude, in voluntary liquidation, the cut off date for look period would be liquidation commencement date instead of insolvency commencement date.

Base upon the interpretation, the look back period for avoidance transactions under voluntary liquidation should be considered as follows:

SectionNature of TransactionLook Back Period for non- related party transactionsLook Back Period for related party transactions
43Preferential Transaction1 year prior to liquidation commencement date2 years prior to liquidation commencement date
45Undervalued Transaction1 year prior to liquidation commencement date2 years prior to liquidation commencement date
49Transactions defrauding creditorsNo look back periodNo look back period
50Extortionate Credit Transactions2 years prior to liquidation commencement date2 years prior to liquidation commencement date

Third Question – Is it possible to dissolve the company while avoidance application/s is/are pending for adjudication?

In the context of liquidation process, this question is easy to answer. Regulation 44(1) of the Liquidation Regulations reads as under: 

“The liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under Chapter III of Part II of the Code, before the Adjudicating Authority or any action thereof.”

Conjunct reading of Regulation 44(1) of the Liquidation Regulations with Form H, where details of pending avoidance application are to be stated, it can be concluded that regardless of pendency of the applications for avoidance transactions, the company can be dissolved by the Adjudicating Authority after completing all other activities under liquidation.

One is persuaded to apply the same rational to voluntary liquidation and arrive at the same conclusion. Before it is done, let us consider Regulation 38(b)(iii) of Voluntary Liquidation Regulations, which reads as under: 

“38 (1) On completion of the liquidation process, the liquidator shall prepare the Final Report consisting of – 


(iii) No litigation is pending against the corporate person or sufficient provision has been made to meet the obligations arising from any pending litigation.”


This Regulation has caused confusion as in the final report, the liquidator has to make an affirmative statement that no litigation is pending. If avoidance application is pending for adjudication, the liquidator cannot make this kind of affirmative statement as pending avoidance application is in the nature of a pending litigation. The Bankruptcy Law Reforms Committee Report, which happens to be the genesis of the Code, dealt with distribution of realization made on account of avoidance transactions. It is useful to reproduce relevant portion of Para 5.5.7:

“The Committee recommends that all transactions up to a certain period of time prior to the application of the IRP (referred to as the “look-back period”) should be scrutinized for any evidence of such transactions by the relevant Insolvency Professional. The relevant period will be specified in regulations. At any time within the resolution period (or during the Liquidation period if the entity is liquidated) the relevant Insolvency Professional is responsible for verifying that reported transactions are valid and central to the running of the business. There should be stricter scrutiny for transactions of fraudulent preference or transfer to related parties, for which the “look back period” should be specified in regulations to be longer.

The Code will give the Liquidator the power to file cases for recovery. Some jurisdictions set such recoveries aside for payment to the secured creditors. Given the extent of equity financing in India, all recoveries from such transactions will become the property of the trust, and will be distributed as described within the waterfall of liabilities.”

The BLRC recommended formation of trust for recoveries made through vulnerable transactions (termed as avoidance transactions in the Code). The BLRC preferred providing discretion power to the Adjudicating Authority to close liquidation case inspite of the fact that application for recovery from the vulnerable transactions is pending. Relevant extract of Para 5.5.10 from BLRC Report is reproduced hereunder: 

“The Liquidator may apply to the Adjudicator to close down the case with estimates of the time to recovery and possible value of recovery from the vulnerable transactions. If the Adjudicator rules in favour of the application, an order to close the Liquidation case will be issued. This will trigger a set of accompanying orders as follows:

1. An order to the relevant registration authority to remove the name of the entity from its register.

2. An order releasing the Liquidator from the case.

3. An order to submit all records related to the case to the Regulator.

If the Adjudicator does not rule in favour of the application, the Liquidation case remains open. The Code permits the Liquidator to apply for the closure again after a reasonable period of time has passed.”

Coupled with the recommendation of the BLRC and the provisions contained in Liquidation Regulations, it can be safely concluded that the principle applicable for liquidation can be applied in voluntary liquidation cases. There is no justification as to why a different treatment should be afforded in case of voluntary liquidation. In so far as Regulation 38(1)(ii) is concerned, the liquidator can mention in Final Report that no litigation is pending except application for avoidance transactions. It is left to the discretion of Adjudicating Authority to decide whether to close the liquidation or to keep it open till the final decision in these applications is made.

Fourth Question: What will be the treatment of any recoveries made out of avoidance transactions?

This aspect has not been dealt in by the Code or the Regulations framed thereunder. However, relying upon the suggestions of the BLRC (relevant extract reproduced hereinabove), it is judicious to distribute the recoveries made in accordance with the distribution waterfall under section 53 of the Code.


The conclusion to each question has been stated hereinabove adopting interpretative approach. It is fair to expect a suitable amendment in the Code and Regulations framed thereunder to set at rest any doubt and interpretative difficulties that are likely to arise amongst the benches of the Tribunal and Appellate forums while dealing with these pertinent questions. 

[1] Section 59(5) read with section 5(17) of the Insolvency and Bankruptcy Code, 2016 

[2] Section 59(7) of the Insolvency and Bankruptcy Code, 2016 

[3] Section 59(6) of the Insolvency and Bankruptcy Code, 2016 

[4] Section 19(3) of the Insolvency and Bankruptcy Code, 2016 

#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:

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:

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



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.


[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] grpp_sourcebook_chap12.pdf, para 12.3

[4] Adapted from OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris.

[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