This article is written by Shannu Narayan, pursuing Certificate Course in Insolvency and Bankruptcy Code from LawSikho.
This article has been published by Abanti Bose.
Table of Contents
Introduction
Indian law relating to insolvency and bankruptcy was consolidated in the year 2016. Before this, problems were witnessed in addressing bankruptcy and bad debts. This revision was quintessential considering frequent personal and corporate insolvency cases and the high average time taken for resolution of such cases in India. We had many legislations to address issues sector-wise. Such as; Presidency Towns Insolvency Act, 1909; Provincial Insolvency Act, 1920; Companies Act, 1956; Sick Industries Companies Act, 1985; Recovery of Debts due to Banks and Financial Institutions, 1995; and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Until 1885, corporate insolvency and bankruptcy matters were governed under the Companies Act, 1956 which had dedicated provisions for dissolution and winding up of companies. Some provisions provided for the resolution process and appointment of a liquidator for the dissolution of companies. However, it did not address insolvency-related matters. Therefore, cases and disputes were brought within the jurisdiction of the respective High Courts. After the enactment of the Insolvency and Bankruptcy Code (IBC), 2016, India’s rank in ease of doing business has increased considering exit strategies for businesses as a key component for the same. Within this legal regime, which consolidated various sector-wise laws, the role of insolvency professional agencies has become elementary in the light of its contribution in reducing the number of bankruptcy cases. In this article, the author discusses the legislative history of the Code, analyses the relevance of Insolvency Professional Agencies and their functions, mentions the functions and eligibility criteria of the IPAs, and suggests the necessary changes to be incorporated.
Legislative history
The legal system addressed this gap by enacting sector-wise laws. For instance, with industrial sickness increasing exponentially and mass laying off and retrenchment in companies during the 1980s, the enactment of the Sick Industries Companies Act (SICA), 1985 became the saviour. Among many contributions, one of the major drawbacks of SICA was that it restricted the applicability to industrial undertakings and Section 22 of SICA dealt with moratorium which became a tool for misusing the system by the creditors.
In the banking sector, to recover the debts and dues owed towards the banks and other financial institutions, the Recovery of Debts due to the Banks and Financial Institutions Act, 1993 was enacted. This legislation paved the way for the establishment of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs), which are also significant legal machinery under the IBC. After this legislation, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) was passed to give relief to the secured creditors for taking possession of their securities without the court’s intervention.
In 2002, SICA was repealed and the provisions relating to revival and rehabilitation of sick companies were shifted under the Companies Act, 1956 as a second amendment. This second amendment was instrumental in constituting National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) replacing the regulatory and judicial bodies under the previous law. In the absence of Gazette notification, SICA continued until it was fully notified as repealed during the passage of IBC.
Locating insolvency professional agencies in the IBC
The objective of IBC, 2016 is: “…to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish Insolvency and Bankruptcy Board of India (IBBI).”
IBBI was constituted as the regulator for registering insolvency professionals and insolvency professional agencies (IPA) and also function as state agents in controlling the costs and other utilities. The vision for IPA under the IBC was to champion implementation vehicles having a separate legal identity and independent corporate existence as section 8 companies as per Companies Act 2013. It also is expected to maintain fair competition in insolvency resolution.
The IBC consists of 5 Parts and 11 Schedules, wherein Part IV deals with the regulation of insolvency professionals, insolvency professional agencies, etc. Again, chapter III of this part mentions the provisions related to IPAs.
A perusal of the key provisions substantiates that trajectory for redressal, registration, validation, and cancellation of IPAs and IPs. For instance, a valid certificate of registration is a must for functioning as an IPA. Section 200 enumerates the principles behind the registration of IPA. For application, suspension, and cancellation of registration of IPA and appealing to NCLT for addressing their grievance, an IPA can approach through Section 201 and 202 of the IBC. On structure and functions of IPA, Section 203 and 204 are elaborated. Beyond this skeletal framework, they were complemented by the passage of Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies) Regulations, 2016 (Regulations, 2016) and Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 (Model Bye-Laws 2016) notified under the Code. Being in the nascent stage, this legal regime is yet to develop regulations elaborating the ownership and governance model of IPAs functioning.
IPA would be any person registered with the IBBI under Section 201 of the IBC. They are mandated to be registered and obtain a certificate of registration from the IBBI, which shall give primacy to the following principles while registering the IPA, such as promoting:
- Professional development of and regulation of insolvency professional (IP);
- Good professional and ethical conduct amongst the IP;
- Protecting the interest of debtors, creditors, etc;
- The service of competent IP to address the concerns of debtors, creditors, etc; and
- The growth of IPA for the effective resolution of insolvency and bankruptcy process under IBC.
Functions and eligibility criteria of IPA
According to Model Bye-laws, 2016, IPA will have a Governing Board with the board of directors (BoD). The Governing Board must be of a minimum of seven directors, of which at least half of the directors must be a resident of and in India during their appointment and tenure. Among this BoD, one-fourth of the directors could be insolvency professionals (IPs) and a minimum of four independent directors. All the directors will collectively elect an Independent director as the Chairman of the Governing Board. The composition of the Governing Board will consist of (i) Managing director, (ii) independent director, and (iii) shareholder director. Section 204 of the IBC, 2016 enumerates the functions of IPA as the following:
- Granting memberships to IPs on payment of a fee;
- Laying down standards of professional conduct;
- Safeguarding the rights, privileges, and interests of IPs;
- Suspending/cancelling membership of IPs
- Redressing grievances of consumers against IPs
- Publishing information about members, functions, etc.
The eligibility criteria for getting registered as IPA is specified under the 2016 Regulations, which says that they shall be a company registered under section 8 of the Companies Act, 2013 whose sole object is to carry on the functions of an IPA under IBC and bye-laws regulated by Regulations 2016. IPA must have a minimum net worth of ten crore rupees with a paid-up share capital of five crore rupees. It should be controlled only by resident persons and not more than 49% of its share capital should be directly or indirectly held by persons’ residents outside India. Further, it should not be a subsidiary of a body corporate.
Insolvency professionals (IP)
IP is defined as a person enrolled under section 206 within IPA as its member and registered with IBBI as an insolvency professional under section 207. They act as intermediaries who would play a key role in the efficient functioning of the insolvency and bankruptcy processes. They are governed by the Insolvency and Bankruptcy Board of India has also issued the regulations namely Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 wherein detailed provisions relating to the appointment of IP has been provided.
The following persons will not be eligible for registration as registration IP under the above-mentioned regulation: (i) minor; (ii) not a person resident in India; (iii) who does not have the qualification and experience as per Regulation 5 of Regulation 9; and (iv) has been convicted by any competent court for an offence punishable with imprisonment exceeding six months or for an offence involving moral turpitude, and five years has not elapsed from the date of expiry of such sentence.
Every IP shall abide by the following code of conduct:
- To take reasonable care and diligence while performing his/her duties;
- To comply with all requirements and terms and conditions specified in the bye-laws of the IPA of which he is a member;
- To allow the IPA to inspect his/her records;
- To submit a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as to the IPA of which he/she is a member; and
- To perform his/her functions in such manner and subject to such conditions as may be specified.
The role of the IP is very significant because, in the resolution process, they are required to verify the claim of the creditor, constitutes a Committee of Creditors (CoC), runs the corporate debtor’s business during the moratorium period, and help the creditor in reaching a consensus for a revival plan. In liquidation, the IP acts as a liquidator and bankruptcy trustee.
Conclusion
IPs play a crucial role in IBC processes and because they act as agents of the state, they need to be regulated. With this objective, IPA’s existence was charted out by the IBC read with their regulations governing IPAs, however, it was created to fill up a vacant jurisdiction. The regulatory framework of this agency has been described in the law instead of allowing itself to evolve organically. This adds a certain rigidity to how IPs are regulated today. Hence, foreseeing a scenario where there may be a disconnect between state regulation and market forces on performance and impartiality of the IP and IPAs, it is advisable to have a gradual evolution process. So, it is necessary that lack of trust in IPA’s and IP’s services should be dealt with effectively if it ever arises in the future, otherwise it might lead to an erosion of trust in the overall insolvency resolution process.
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