Anand Shelke, a 5th-year law student from Sandip University, Nashik has written this article about, “The resolution professional: The strong-weak pillar in the IBC”.
Abstract:
The IBC is viewed as a major reform in the Indian economic system that seeks to tackle the problem of industrial distress and establish a fundamental legal framework for insolvency and bankruptcy. An important key in the CIRP is a resolution professional, from accepting an application to the final execution of the resolution plan, a person who look up to every aspect of the whole corporate insolvency resolution process and fulfills the need. The article has laid down the duties and responsibilities of the resolution professional. The challenges faced by the resolution professional and the code of conduct, they follow. The study presented in the article highlights the impartiality of the resolution professional, the resolution professional should not be under the influence of the committee of creditors and powers given to the resolution professional.
Introduction:
The Insolvency and bankruptcy code (IBC) of 2016 aims to simplify and modify the rules and regulations related to the restructuring and insolvency resolution of various entities including corporate persons, partnership firms, and individuals. This is intended to be done within a specified time frame to enhance the value of their assets, encourage entrepreneurship and improve credit availability while also ensuring that all stakeholders, including creditors, benefit.[1] Insolvency and bankruptcy are strengthened by four pillars: Adjudicating authority(AA), Committee of Creditors (CoC), Information utility (IU), and Resolution professional (RP). The resolution professional considers as a bridge between the remaining three pillars. The “insolvency professional” means a person enrolled under section 206 with an insolvency professional agency as its member and register with the board as an insolvency professional under section 207. The “resolution professional” means an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional.[2]
In simple terms a resolution professional is an authorized expert who has passed the limited insolvency examination (LIE), is affiliated with the insolvency resolution agency, and is registered with the insolvency bankruptcy board of India (IBBI).[3] The resolution professional is regulated and governed by IBBI ( Insolvency Professional) Regulation, 2016. The ‘insolvency professional’ after the appointment is called a ‘resolution professional’ and ‘bankruptcy trustee’ in case of bankruptcy of individual persons.
Resolution professional in CIRP:
On application to the initiation of CIRP by the financial creditor or operational creditor to the NCLT. The NCLT will appoint the interim resolution professional with no disciplinary proceedings pending against the professional. The interim resolution professional will take over the management and affairs of the corporate debtor once the commencement of the moratorium period and have the authority to access the financial information of the corporate debtor. The resolution professional will release the public announcement of the insolvency proceedings against the corporate debtor. He also has access to books of account and records of the corporate debtor. The promoters and any other person related to management have to cooperate with the interim resolution professional. After passing through the information utility and claims submitted by creditors, the interim resolution professional will create a committee of creditors based on claims pending towards the different creditors. After forming the committee of creditors, in the first meeting of the committee of creditors which shall be held in seven days, the committee of creditors has to appoint the resolution professional. The interim resolution professional can be appointed as the resolution professional or the committee of creditors can change the interim resolution professional with another resolution professional. For continuing with the interim resolution professional or appointing the other resolution professional the vote should not be less than sixty-six percent and the decision about the appointment of the resolution professional shall forward to adjudicating authority.
The resolution professional shall have to conduct the whole CIRP and hand-in-hand have to manage the operations of the corporate debtor. All the meetings of the committee of creditors shall be run by the resolution professional who has to give notice of every meeting to each creditor and member. The appointed resolution professional at any time can be replaced by another insolvency professional in the meeting of the committee of creditors by a vote of sixty-six per cent and have to notify the proposed resolution professional to the adjudicating authority. The adjudicating authority confirmed the proposed resolution professional with the IBBI and appoint the new resolution professional. There is a certain set of things for which the resolution professional have to seek approval from the committee of creditors which is given in section 28 of the code.
The resolution professional will prepare the information memorandum as may be specified by the board that will contain the relevant information regarding the formation of a resolution plan. The resolution professional will distribute the memorandum to the resolution applicant and those resolution applicants will prepare the resolution plan and submit it to the resolution professional. Its the duty of the resolution professional to present every plan before the committee of creditors. After approval of a plan by the committee of creditors, the resolution professional will submit the plan to the adjudicating authority (NCLT). The resolution professional will forward all information and records relating to the CIRP and plan to the IBBI and should be pinned on its database. If the adjudicating authority or the committee of creditors confirms the liquidation of the corporate debtor, the resolution professional on submission of written consent to the adjudicating authority can act as a liquidator in the liquidation process. [4]
Duties of the interim resolution professional and resolution professional:
Duties of the interim resolution professional:-
a) Gather all the information regarding finances, operations, determining the financial position, assets, and all other information of the previous two years of the corporate debtor,
b) Collating creditor’s claims which are submitted following the public announcement made,
c) Establishment of the committee of creditors,
d) Supervise the property of the corporate debtor, oversee its functioning until a resolution professional is selected by the committee of creditors,
e) Take charge over any asset on which the corporate debtor has ownership rights as listed in the balance sheet of the corporate.[5]
Duties of the resolution professional:
a) Safeguarding and preserving the asset and property of the corporate debtor, including the ongoing business,
b) Taking control and custody of the management and asset related to the corporate debtor including business data,
c) Acting on behalf of a company with third parties and exercising rights in legal and arbitration matters,
d) Raising short-term finances which are subject to the approval of the creditor’s committee
e) Appointment of the legal, accountant, and other professionals which are stated by the board,
f) Maintaining a revised register of claims,
g) Attending and organizing all the meetings of the creditor’s committee,
h) Preparation of information memorandum,
i) Put forward every resolution plan before the creditor’s committee,
j) Applying avoidance of transactions,
k) Invitation to the expected resolution applicant,
l) And any other duty that the board thinks fits.[6]
Challenges faced by resolution professionals:
The role of resolution professionals in the CIRP is crucial as they are responsible for managing the affairs of the corporate debtor. However, resolution professionals face several challenges in carrying out their duties, some of which are:
Lack of cooperation from stakeholders:
The resolution professional may face resistance or non-cooperation from the existing management, employees, creditors, or other stakeholders of the corporate debtor. This can create difficulties in implementing the resolution plan and achieving the objectives of the CIRP.
Limited funds:
The corporate debtor may have limited cash flow or may be unable to raise interim finance in the period. This can make it difficult to continue the operations of the company or to implement the resolution plan.
Legal and regulatory compliance:
The resolution professional needs to comply with various legal and regulatory requirements during the CIRP, such as filing reports, maintaining records, and complying with tax and other laws. This can be a complex and time-consuming process and failure to comply with these requirements can lead to penalties or legal action.
Operational challenges:
The resolution professional may face operational challenges in managing the affairs of the corporate debtor such as maintaining the supply chain, ensuring quality control, managing inventory, and meeting contractual obligations. These challenges can impact the performance of the company and its ability to generate revenue.
Time constraints:
The CIRP process has strict timelines and the resolution professional needs to complete the process within the prescribed period. This can create pressure on the professional to complete various tasks within a limited time frame, leading to errors or omissions.
Inadequate infrastructure:
Resolution professionals may not have access to the necessary infrastructure such as office space, equipment, and staff to effectively manage the affairs of the corporate debtor.
Lack of information:
The resolution professional may face challenges in obtaining accurate and timely information from the corporate debtor and other stakeholders. This can make it difficult to assess the financial position of the company and develop an effective resolution plan.
Code of conduct for resolution professional:
Resolution professionals play a crucial role in the CIRP and are subject to a code of conduct outlined in the Insolvency and Bankruptcy Board of India (IBBI) ( Insolvency Professionals) Regulations, 2016:
Integrity:
Resolution professionals must maintain integrity and high ethical standards in their professional conduct. He must be straightforward, honest, and forthright and should avoid any conduct that may harm the reputation of the profession.
Independence:
Resolution professionals should maintain independence and impartiality in their work. They should avoid any conflict with all stakeholders. The professional should not undertake the process if he is a related party to directors or partners, if he is related he should disclose it to the board within 3 days.
Professional competence:
Resolution professionals must possess the necessary professional competence to carry out their duties effectively. They should also maintain and update their knowledge and skills to remain competitive.
Confidentiality:
Resolution professionals must maintain the confidentiality of all information received during the insolvency process unless required by law to disclose it.
Disclosure of interest:
Resolution professionals must disclose any pecuniary or personal interest in the outcome of the insolvency process.
Duty of care:
Resolution professionals must exercise due care and diligence in their work and take all reasonable steps to ensure that the interests of all stakeholders are protected.
Gift and hospitality:
An insolvency professional and their relatives are prohibited from accepting gifts or hospitality that may compromise or influence their independence while performing duties. Similarly, an insolvency professional is prohibited from offering any form of gifts, hospitality, or other benefits to public servants to secure work for themselves or gain an advantage in their professional conduct.
Communication:
Resolution professionals must maintain effective communication with all stakeholders and provide timely and accurate information on the progress of the insolvency process.
Compliance:
Resolution professionals must comply with all applicable laws, regulations, and guidelines related to the insolvency process.
Conflict resolution:
In the event of any dispute or conflict, resolution professionals should take all necessary steps to resolve them fairly and impartially.[7]
Resolution professional must be impartial:
The role of the resolution professional is significant in the CIRP and they need to be impartial, just, and transparent in their conduct. The Bankruptcy Law Reform Committee (BLRC) acknowledged this and noted that, as the resolution professional plays a key role in the life-cycle of the insolvency resolution process- from the time of the confirmation of the application, the draft and agreement of the repayment plan, to the final execution of the plan, it is possible that biased conduct of the resolution professional jeopardizes the interest if either party.[8]
In the case of State Bank of India vs. Ram Dev International Ltd.,[9] The NCLAT Delhi examined whether the adjudicating authority can reject the appointment of a proposed resolution professional by the committee of creditors if the proposed resolution professional is a member of the committee. The NCLAT established guidelines for disqualifying a resolution professional, including if the resolution professional is an employee or is paid by any financial creditors, has a personal interest in the matter, is biased, or has faced disciplinary action. The case involved a proposed resolution professional who was a member of the committee of creditors of the corporate debtor and was maintained by banks, the government, and the public sector as a member of a panel of lawyers but was not an employee of the bank. The NCLAT held that the proposed resolution professional was ineligible to be appointed as the resolution professional of the corporate debtor due to his association with the committee of creditors.
Resolution professional puppet of CoC:
As the resolution professional may be influenced by the fear of being replaced by the committee of creditors and may act under the committee of creditor’s preference. This is because the committee of creditors has the authority to make decisions regarding the resolution process and the resolution professional may feel pressured to align with their interests to maintain their position. However, it is important to recognize that the committee of creditors is usually comprised of financial creditors, and their priorities may differ from those of other types of creditors involved in the process.
In a recent case State Bank of India vs. M/s Metenere Ltd,[10] NCLAT had to decide whether an ex-employee of a financial creditor could be appointed as the Resolution Professional of a corporate debtor. The corporate debtor argued that there was an apprehension of bias as the proposed resolution profession had worked with SBI, the financial creditor initiating the Corporate Insolvency Resolution Process, for 39 years before retiring in 2016. The corporate debtor further contended that the proposed resolution professional was still receiving a pension from SBI, making him an interested person and ineligible to act as a professional. SBI, on the other hand, argued that the IBC did not prescribe any disqualification for an ex-employee of a financial creditor to act as a resolution professional and that the professional had no adjudicatory powers, acting only as a facilitator in the CIRP. After considering the arguments, the NCLAT agreed with the corporate debtor and upheld the decision of the NCLT to substitute the proposed resolution professional to ensure a fair and unbiased CIRP.
Adjudicatory power of the resolution professional:
The code specifies the responsibilities of an interim resolution professional and a resolution professional. However, the IBC does not explicitly require the resolution professional to verify, accept, or reject claims. Moreover, regulation 13 of the CIRP regulation mandates the professional to verify the claims submitted during the CIRP. There have been instances where the power of the resolution professional has been challenged before the tribunal, particularly concerning their acceptance or rejection of creditor claims. In the case of Swiss Ribbons Pvt. Ltd vs Union of India,[11] the Supreme Court clarified that the resolution professional does not have the power to make legal judgments under the code. The court compared the role of the professional to that of a liquidator and noted that a liquidator has the authority to assess the value of claims which is a quasi-judicial task. The resolution professional cannot act without the approval of the committee of creditors and the committee has the power to replace the professional. The resolution professional is simply a facilitator in the CIRP and their administrative duties are supervised by the committee of creditors and NCLT.
The recent decision by the Supreme Court in Essar Steel India Limited vs Satish Kumar Gupta & Ors,[12] observes that the role of the professional is administrative rather than adjudicatory. It was set up that in the CIRP, all claims must be lodge to and assured by the resolution professional so that a permitted resolution applicant can determine the amount required to take over and operate the business of the corporate debtor. It should be noted that a professional does not have the statutory power to adjudicate a claim during the CIRP unlike the power of a liquidator to verify, accept or reject a claim made by a creditor. However, the resolution professional has substantial power to make decisions regarding which claims and how many claims should be accepted or rejected by the creditor during the CIRP.
Conclusion:
The Insolvency and Bankruptcy Code (IBC) of 2016 aims to simplify and modify the rules and regulations related to the restructuring and insolvency resolution of various entities. One of the key pillars of the IBC is the resolution professional, who is an authorized expert appointed to conduct the corporate insolvency resolution process. The resolution professional also plays a crucial role in creating the committee of creditors and managing the operation of the corporate debtor throughout the entire Corporate Insolvency Resolution Process. In case of liquidation, the resolution professional can also act as a liquidator with the submission of written consent to the adjudicating authority. Resolution professionals face several challenges while carrying out their duties in restructuring and resolving the insolvency of entities. The IBBI also governs the code of conduct of the resolution professional. The resolution professional’s key role in the insolvency resolution process, from application acceptance to planning execution, means that their unfair conduct can harm either party’s interests. The resolution professional acts as a quasi-judicial authority in the CIRP, ensuring compliance with the IBC and safeguarding the interests of all stakeholders involved.
Also Read: Winding Up of Company
[1] The Insolvency and Bankruptcy Code, 2016, Act No.13 of 2016, Preamble.
[2] The Insolvency and Bankruptcy Code, 2016, Act No.13 of 2016, sec 5 (27).
[3] Role and Duties of Resolution Professional under the IBC, 2016, https://www.google.com/amp/s/blog.ipleaders.in/role-and-duties-of-resolution-professional-under-the-insolvency-and-bankruptcy-code-2016/%3famp=1
[4] The Insolvency and Bankruptcy Code, 2016, Act No.13 of 2016
[5] The Insolvency and Bankruptcy Code, 2016, Act No.13 of 2016, sec 18.
[6] The Insolvency and Bankruptcy Code, 2016, Act No.13 of 2016, sec 25.
[7] https://ibbi.gov.in/en/legal-framework/updated
[8]https://www.google.com/url?sa=t&source=web&rct=j&url=https://ibbi.gov.in/BLRCReportVol1_04112015.pdf&ved=2ahUKEwiRvoiu9fH9Ahx
[9] Company Appeal (AT) (Insolvency) No.302 of 2018.
[10] Company Appeal (AT) (Insolvency) No. 76 of 2020
[11] Swiss Ribbons Pvt.Ltd & Anr. Vs. Union of India, Writ Petition (Civil) No.99 of 2018
[12] (2020) 8 SCC [ 116].
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