IBC PMLA

This article has been written by Rajdip Das, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction 

According to a report by The Economic Times, 238 cases were admitted under the Insolvency and Bankruptcy Code, 2016 in the first quarter of FY 24. This number shows a decrease from the 347 cases admitted in the previous quarter. Among the 4,700 cases that closed until the first quarter of FY 24, 50% were initiated by operational creditors, while 45% were initiated by financial creditors. Only 15% of the cases were resolved, and 45% underwent liquidation.

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The article explores the role of a resolution professional (RP) in the insolvency resolution process for corporations under the Insolvency and Bankruptcy Code (IBC) of 2016. The Resolution Professional (RP) is an appointed insolvency expert who is responsible for verifying creditors’ claims, forming a committee of creditors, managing the debtor’s business during the moratorium period and facilitating consensus among creditors for a revival plan.

Who are Insolvency professionals

According to Section 3, Sub-section 19 of the IBC, an individual who is registered with the Insolvency and Bankruptcy Board of India (IBBI) as an insolvency professional is referred to as an “insolvency professional.” An insolvency professional must also be a member of an insolvency professional agency to qualify as an “insolvency professional.”

In other words, insolvency professionals refer to persons who supervise the insolvency resolution process of a corporate debtor.  It is mandatory for these individuals to be enrolled in an insolvency professional agency (IPA) and they must also register themselves with the Insolvency and Bankruptcy Board of India (IBBI) to qualify as an insolvency professional.

According to Section 3 sub-section 23 of the IBC, the following entities are eligible to become insolvency professional. The entities are the following:

●      Individual

●      Hindu Undivided Family (HUF)

●      Company

●      Trust

●      Partnership firm

●      Limited Liability Partnership Firm (LLP)

●      Entity established under a law

●      Non-resident person

Therefore, the persons mentioned above are eligible to become insolvency professionals. The IBBI has put in place a set of guidelines known as the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016. These rules cover the eligibility, registration and behaviour of insolvency professionals.

In the case of the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors. (2019), the Supreme Court ruled that the role of the resolution professional is not that of a judicial authority. Instead, they serve as a facilitator, for gathering and verifying the creditor’s claims. In addition to their other responsibilities, the responsibility of a resolution professional also includes creating the Committee of Creditors (CoC), scheduling and conducting committee meetings, inviting resolution proposals, and presenting them to the committee for their consideration and approval. The court emphasised that it is essential for the resolution to ensure that the resolution plan is comprehensive in all aspects. They are required to conduct a due diligence report and submit it to the committee to ensure compliance with the requirements during the resolution process. It was made clear by the court that the resolution professional does not possess any powers; they cannot independently reject any claim or resolution plan. Their actions are limited to following the instructions given by the Committee of Creditors.

Insolvency professional agency

According to Section 3 sub-section 20 of the IBC, 2016, “insolvency professional agency” means a person who has been registered with the IBBI as an insolvency professional agency (IPA).

In other words, the IPA is registered with the IBBI as a Section 8 Company. Their primary function is to regulate and enrol insolvency professionals, ensuring that insolvency professionals maintain high standards of ethics and professionalism.

As per Section 208 of the IBC Insolvency Code, professionals are required to follow all the rules and regulations set by the IPA they belong to. There are several IPAs in India, such as the ICSI Institute of Insolvency Professionals, and the Indian Institute of Insolvency Professionals of ICAI. These agencies ensure that insolvency professionals follow the necessary standards and guidelines while handling insolvency cases.

Interim resolution professional and resolution professional

In the initial stages of the corporate insolvency resolution process (CIRP), the National Company Law Tribunal (NCLT) appoints an interim resolution professional (IRP) within 14 days from the insolvency commencement date to oversee the management of the debtor’s affairs. The main tasks of the IRP include taking control of the debtor’s assets and forming a committee of creditors within 30 days of the commencement of the CIRP.

As per Section 22 of the IBC, the CoC holds its first meeting within 7 days of its constitution. In this meeting, a Resolution Professional (RP) is appointed by the committee of creditors. The CoC can either appoint the IRP as a resolution professional or appoint a different person as a resolution professional. In the meeting of COC If 66% or more votes are in favour of appointing IRP as a resolution professional, then IRP becomes a resolution professional. The Resolution professional (RP) takes charge of managing the debtor’s affairs, verifying claims made by creditors and inviting resolution plans from applicants. Additionally, it is also their responsibility to ensure that any resolution plan approved by the committee is implemented efficiently and within a timeframe.

Role of insolvency resolution professionals

Insolvency Resolution Professionals are individuals appointed to oversee and manage the process of resolving insolvency. Their role is crucial, in ensuring a transparent and efficient insolvency resolution process. They have responsibilities and duties outlined in the Insolvency and Bankruptcy Code, 2016 (IBC). The responsibilities of the IRP and RP are outlined in Section 18 and Section 25 of the Insolvency Bankruptcy Code. The responsibilities are the following:

  • They are responsible for gathering detailed information about the debtor’s assets, finances, and operations.
  • They are responsible for protecting, monitoring, and safeguarding the assets of the corporate debtor.
  • After the public announcement, they must collect and collate claims submitted by creditors.
  • They are responsible for representing the corporate debtor.
  • They are responsible for raising interim financing within the limits specified by the Committee of Creditors (CoC).
  • They are responsible for inviting potential resolution applicants who meet the set criteria of the CoC.
  • They are responsible for collecting all the information and filing it with the information utility.
  • They are responsible for keeping an updated list of claims and also for verifying and maintaining it.
  • They must disclose the cost of the insolvency resolution process and appoint legal professionals, accountants, and other experts.
  • They must present resolution plans in front of the CoC and submit the approved resolution plan to the NCLT.
  • They are responsible for any other such duty as prescribed by the IBBI.

In the case Victory Iron Works Ltd. vs. Jitendra Lohia (2021), the Supreme Court has held that the rights of a corporate debtor in assets licenced to third parties can be taken over by a resolution professional. The Court has stated that under Section 18 of the IBC, assets that belong to one party but are held by a corporate debtor through contractual agreements are not considered assets. However, it’s important to note that this exclusion does not apply to Section 25 of the IBC. This means that while assets owned by a party and held under arrangements may not be classified as assets per Section 18 of the Insolvency and Bankruptcy Code, they are still considered assets under Section 25 of the IBC.

In the case of Santanu T. Ray vs. Tata Capital Financial Services Limited & Ors. (2021), NCLAT clarifies the responsibilities of a resolution professional in the insolvency and bankruptcy process. The interim resolution professional or the resolution professional can verify all or part of the creditor’s claim or ask for evidence or clarification if required.

In the case of Rajputana Properties Pvt. Ltd. vs. Ultra Tech Cement Ltd. & Ors. (2018), the resolution professional must carefully review if the resolution plan adheres to the provisions. However, the RP cannot disclose this information to anyone, including the resolution applicant(s) who have submitted the resolution plan.

In the case of Binani Industries Limited vs. Bank of Baroda and Anr. (2018), the Court discussed the role of the Committee of Creditors (CoC) and the Resolution Professional (RP) in the CIRP process. It is emphasised that the authority to approve a resolution plan rests with the CoC, not with the RP. Furthermore, in cases where a plan is accepted but fails to address the demands of operational creditors (OCs), it is clarified that the RP cannot be deemed accountable for such an occurrence since they lack the authority to dismiss the plan.

Qualification and eligibility criteria for insolvency resolution professionals

As per Regulation 4 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations 2016, an individual can become a registered insolvency professional if he or she meets the following conditions:

  • The person must possess the necessary qualifications and experience.
  • The person must be an Indian resident.
  • The person must have no criminal record related to offences punishable by more than six months of imprisonment or offences of moral turpitude.
  • The person must be major in the eyes of the law.
  • The person must be of sound mind.
  • The person must be solvent.
  • The person should be proper and fit.
  • Every IPE is also subject to these requirements, IPE and its partners or directors must be fit and proper people to qualify to be insolvency professionals. 

According to Regulation 3 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, only if the insolvency professional and all the partners and directors of the IPA they belong to are independent of the corporate debtor are insolvency professionals authorised to act as an IRP or RP for CIRP.

To be considered independent of the corporate debtor, the insolvency professional must meet the following criteria:

  • He/ she must meet the qualifications to be appointed to the board of the corporate debtor as an independent director in CIRP.
  • The corporate debtor must not be a related party to the insolvency professional.
  • He/ she must not be affiliated with any audit, secretarial audit, or cost audit firm that has had dealings with the corporate debtor in CIRP, nor with any legal or consulting firm that has engaged in transactions with the corporate debtor that amount to 5% or more of the firm’s gross turnover in the past 3 financial years.

In the case of State Bank Of India vs Metenere Ltd. (2020), The appellant, State Bank of India, challenged the order of the adjudicating authority that rejected its proposal of appointing Mr. Shailesh Verma, an ex-employee of the bank, as the interim resolution professional for the corporate insolvency resolution process of the respondent, Metenere Ltd.

The NCLAT, New Delhi, upheld the order of the adjudicating authority and held that the appointment of Mr. Shailesh Verma as the interim resolution professional was likely to cause an apprehension of bias in the mind of the corporate debtor, as he had a long association with the financial creditor and was drawing pension from it. The tribunal observed that the interim resolution professional should be independent of both the financial creditor and the corporate debtor.

In the case of State Bank of India vs. Ram Dev International Ltd. (2018), the NCLAT held that the Committee of Creditors has the power to replace the RP at any time during the insolvency resolution process without recording any adverse opinion or reason for such replacement. The only bar for the appointment of a resolution professional is the pendency of a disciplinary proceeding or ineligibility under the Code. The NCLAT also held that the proposed resolution professional was not ineligible or interested, as he was neither an employee nor on the payroll of the bank, but only a panel lawyer. The NCLAT set aside the order of the NCLT.

Appointment of insolvency resolution professional

According to Section 16 of the IBC  process for the appointment of an interim resolution professional (IRP), the following :

  • In a situation where a company lacks the capacity to make payment of its dues, it can apply for an insolvency resolution process. In this process, an IRP is appointed by NCLT to help manage the company’s finances on a temporary basis. 
  • In the event that an operational creditor applies for this process and no IRP is proposed, the NCLT, after reviewing the recommendations from IBBI, will recommend an insolvency professional act as the IRP. 
  • The operational creditor has the right to propose the name of an IRP, given that there are no ongoing disciplinary proceedings against him/her.
  • In case the company itself or a financial creditor applies for this process, the IRP will be someone proposed by the company, given that there are no ongoing disciplinary proceedings against him/her.
  • The IBBI will suggest a skilled person to the NCLT within 10 days of receiving the order of the NCLT, given that there are no ongoing disciplinary proceedings against him/her. 

The tenure of the IRP will end when the CoC appoints the RP. 

According to Section 22 of the IBC, the process for the appointment of a resolution professional is the following:

Within 7 days of the formation of the CoC, it is imperative that the first meeting of the CoC take place.

  • The IRP can be designated as an RP or replaced by appointing another RP by the CoC.
  • In case the CoC decides to designate the IRP as an RP, then it will communicate its decision to the NCLT, RP, and other relevant parties.
  • In case the CoC wants to replace the IRP, they must apply to the NCLT for the appointment of a new RP. In the application, the written consent of the RP shall be attached.
  • After receiving the confirmation of IBBI, NCLT shall appoint the RP proposed by the CoC.
  • In case the confirmation is not received within 10 days, then the IRP will continue to act as RP until the confirmation is received.

In the case of Kairav Anil Trivedi, IRP of Parenteral Drugs India Ltd. vs. State Bank of India (Erstwhile CoC) & Anr. (2023), the NCLAT, New Delhi, has held that when the Committee of Creditors has not confirmed the appointment of Interim Resolution Professional, as per the provisions of  Section 22 of IBC, CoC has the appropriate power to replace IRP

Replacement of resolution professionals

According to Section 27 of IBC, the process for the replacement of resolution professional is the following:

  • RP can be replaced by the CoC at any time during the CIRP with a majority vote of 66%.
  • The CoC will propose the name of the new RP to the NCLT for approval.
  • After receiving the confirmation of IBBI, NCLT shall appoint the RP proposed by the CoC, given that there are no ongoing disciplinary proceedings against him/her.
  • In case any disciplinary proceedings are pending against the proposed RP, the present appointed RP will continue until another RP is appointed.

In the case of Partha Sarathy Sarkar vs. Specified Undertaking of Unit Trust of India Ltd. (SUUTI) & Ors. (2023) NCLAT, New Delhi held that under Section 27 of the IBC, the COC has the authority to replace the resolution professional if they are dissatisfied with their performance or behaviour. The resolution professional does not have the right to question or challenge the COC’s decision for replacement. His appointment is purely contractual and temporary so he does not possess any rights to continue in that role. The adjudicating authority doesn’t need to provide a hearing opportunity to the resolution professionals before approving their appointment. Additionally, Section 27 does not state that a notice is required to be issued to the resolution professional before deciding to appoint another resolution professional.

In the case of M/s Mahajagdamba Tubes Pvt. Ltd. vs. M/s Quality Steels Product Limited (2019), the National Company Law Tribunal (NCLT) in Allahabad ruled on a significant aspect of the Insolvency and Bankruptcy Code (IBC), 2016. The case centred around the replacement of a Resolution Professional (RP) in the corporate insolvency resolution process.

Section 27 of the IBC sets out the procedure for the replacement of an RP. It provides that the CoC, with the approval of at least 66% of the voting share, can pass a resolution to replace the existing RP with a new one. The issue before the NCLT was whether the replacement of the RP was complete upon the passing of the resolution or whether it required further steps.

The NCLT, in its judgement, held that the replacement of the RP is complete when the resolution is passed with the requisite majority of 66% votes of the CoC. The tribunal reasoned that the purpose of Section 27 is to ensure that the CoC has the power to remove an RP who is not performing satisfactorily or is not acting in the best interests of the creditors. The NCLT noted that the requirement of a 66% majority is a stringent one, which indicates that the legislature intended for the replacement process to be a deliberate and well-considered decision.

The NCLT’s ruling provides clarity on the procedure for replacing an RP and ensures that the CoC has the necessary authority to make this decision. It also helps to streamline the corporate insolvency resolution process by avoiding unnecessary delays and uncertainties.

Important sections of the Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code (IBC) of India is landmark legislation that provides a comprehensive framework for the resolution of the insolvency and bankruptcy of corporate debtors. IBC aims to protect the interests of all stakeholders involved in the insolvency process, including creditors, debtors, employees, and the economy as a whole.

Section 7 of the IBC defines the grounds on which a creditor or debtor can file for insolvency resolution. These grounds include:

  • The inability to pay debts as they become due.
  • The existence of a default in payment of debts.
  • The commission of an act of insolvency, such as the transfer of property with the intent to defraud creditors.

Section 8 of the IBC provides for the appointment of an interim resolution professional (IRP) by the National Company Law Tribunal (NCLT). The IRP is responsible for managing the affairs of the corporate debtor during the insolvency resolution process. The IRP’s duties include:

  • Preserving and protecting the assets of the corporate debtor.
  • Preparing a preliminary assessment of the corporate debtor’s financial position.
  • Convening the first meeting of the committee of creditors.

Section 10 of the IBC provides for the constitution of a committee of creditors (CoC) to oversee the insolvency resolution process. The CoC is composed of financial creditors and operational creditors of the corporate debtor. The CoC’s powers and functions include:

  • Approving or rejecting the resolution plan.
  • Supervising the implementation of the resolution plan.
  • Taking decisions on matters related to the insolvency resolution process.

Section 12 of the IBC provides for the preparation of a resolution plan by the CoC. The resolution plan must specify the terms and conditions for the revival of the corporate debtor. The resolution plan may include measures such as:

  • Restructuring of debt.
  • Sale of assets.
  • Merger or amalgamation with another company.

Section 17 of the IBC provides for the approval of the resolution plan by the NCLT. Once the resolution plan is approved, it becomes binding on all stakeholders, including the corporate debtor, its creditors, and its employees.

Section 31 of the IBC provides for the liquidation of the corporate debtor if a resolution plan is not approved by the NCLT. Liquidation involves the sale of the corporate debtor’s assets and the distribution of the proceeds to its creditors.

The IBC is a significant piece of legislation that has had a major impact on the insolvency and bankruptcy landscape in India. It has helped to streamline the insolvency resolution process, reduce delays, and improve the recovery rates for creditors.

In addition to the above sections, the IBC also contains a number of other important provisions, including:

  • Provisions for cross-border insolvency: The IBC provides a framework for dealing with cross-border insolvency cases involving debtors with assets or creditors in multiple jurisdictions.
  • Provisions for individual insolvency: The IBC also provides for the insolvency of individuals, such as sole proprietors and partners in a partnership firm.
  • Provisions for pre-packaged insolvency resolution: The IBC allows for pre-packaged insolvency resolution, where the corporate debtor and its creditors agree on a resolution plan before filing for insolvency.
  • Provisions for fast-track insolvency resolution: The IBC provides for a fast-track insolvency resolution process for small and medium-sized enterprises (SMEs).

Recent development

As per a recent guideline issued by IBBI on December 8, 2023, The Insolvency Professionals to Act as Interim Resolution Professionals, Liquidators, Resolution Professionals and Bankruptcy Trustees (Recommendation) (Second) Guidelines, 2023:

  • Insolvency professionals are required to meet certain requirements to be included on the panel. The requirements are the following:
  • There should be no ongoing disciplinary cases against them.
  • They have not received a conviction from a court within the last three years.
  • They should express their interest and give consent to acting as IRP, RP, liquidator, and bankruptcy trustee.
  • They should hold an Authorisation for Assignment (AFA) that is valid until the end of the panel’s validity period; the validity period could be of a certain duration.

The President gave his assent to the Insolvency and Bankruptcy Code (Amendment) Act, 2021, on August 11th, 2021. The Act aims to amend the existing insolvency law. The main objective of the Act is to create a resolution mechanism that caters to financially struggling micro, small, and medium enterprises (MSMEs). Under Chapter III A of the Insolvency and Bankruptcy Code, 2016, this amendment act introduces a packaged insolvency resolution process, for corporate debtors. The Central Government has been granted authority to specify a default amount for matters related to this packaged insolvency resolution process. This specified minimum amount will not exceed Rs. 1 crore.

Conclusion

The role of insolvency resolution professionals is of utmost importance in ensuring the successful outcome of the CIRP process. These professionals, who are regulated by the IBBI, have responsibilities including identifying assets, forming the Committee of Creditors and formulating resolution plans. The government has been making efforts to strengthen the insolvency framework. This has been supported by recent legislative changes, such as the Insolvency and Bankruptcy Code (Amendment) Act, 2021. The appointment of IRPs follows a defined procedure that emphasises their competence and independence. Ultimately, IRPs play a role in maintaining a transparent system for resolving insolvencies while ensuring fair treatment for both creditors and corporate debtors.

References

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