Resolution Professional : Balancing the Interests of Stakeholders under IBC – By Vrinda Agrawal

Resolution Professional : Balancing the Interests of Stakeholders under IBC

Role of Resolution Professional in Balancing the Interests of Stakeholders under the Insolvency and Bankruptcy Code, 2016

Authored by: Vrinda Agrawal,
5th year Student of Vivekananda Institute of Professional Studies, Delhi

ABSTRACT

Bankruptcy and Insolvency are the two terms which we come across frequently these days. Nationwide lockdown imposed by the government further added to its popularity. The country was shut for the past 6 months due to which many of the companies could not generate enough revenue and therefore they became either bankrupt or were dissolved. In India, the procedure of Insolvency and Bankruptcy has been governed by the Insolvency and Bankruptcy Code since 2016. It is a landmark development in the area of law, where a unified law for Insolvency and Bankruptcy was introduced to resolve the problems of Insolvency. This Code brought all the insolvency laws under one umbrella so that it can overcome all the troubles and shortcomings regarding Insolvency and Bankruptcy in the country. The main purpose of the code is to maximize the value of assets of the insolvent corporate people, assure entrepreneurship, obtain credit as well as to balance the interest of all the stakeholders. To balance the interests of stakeholders, there must be a fair and justifiable obligation on the part of both the stakeholders and the entity. Code provides provisions for resolution and reorganization of individuals, corporate persons and partnership firms on time. Today the authority of Bankruptcy and Insolvency has shifted from the debtors to the creditors, where a third person is appointed as Interim Resolution Professional by the National Company Law Tribunal (NCLT) to resolve Insolvency of the corporate debtor. It can be done by handing over the corporate debtor to a purchaser, who is also called the Resolution Applicant with a consideration through which the creditors can recuperate their levy. If the authorities do not resolve, the corporate debtor will have to go into the process of liquidation. The Resolution Professional plays a very vital role in the whole Corporate Insolvency Resolution Process (CIRP) while the Insolvency and Bankruptcy Code gives guidelines for the Resolution Professional to be fair, independent and unbiased with its conduct during this process. The resolution, liquidation and the bankruptcy process must be independent of any external influences. The primary focus of the resolution and liquidation process is to lower the loss of the stakeholders. The code strikes a balance between resolution and liquidation, where it prefers to provide resolution so that creditors at-least get an equal value as in the case of liquidation. This essay studies the role of the Resolution Professional in Balancing the Interests of the Stakeholders.

BACKGROUND

When an individual, corporation, or any organization is not able to meet its obligation to pay off their debts, in such cases they are said to be in a state of Insolvency. Whereas, when the insolvency is determined by the court of law and legal order is given so that insolvency can be resolved, is termed as Bankruptcy. Insolvency is a state where an individual debtor is not able to meet its liability while bankruptcy is a scheme where the debtor asks for relief from the court.

The origin of Insolvency Law in India was through the legislation of the Government of India Act, 1800 which gave the jurisdiction of insolvency disputes to the Supreme Court. In 1848, the Indian Insolvency Act was enacted, distinguishing traders and non-traders. This act transferred the jurisdiction of matters to the High Court. However, after the enactment of Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 which dealt with personal insolvency, these acts were pertinent to individuals, sole proprietors and partnership firms. The Presidency Towns Insolvency Act only had its jurisdiction over provincial states namely Kolkata, Mumbai and Chennai while the Provincial Insolvency Act had its jurisdiction all over India.

Initially in India, there was no single law in the country which dealt with Insolvency and Bankruptcy. So the government instituted different committees time and again to evaluate the prevailing laws of insolvency in India.

  • In 1964, the Third Law Commission chaired by Justice J.L. Kapur submitted the 26th Law Commission Report to bring changes in the Provincial Insolvency Act, 1920.
  • In 1981, the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was legislated by the Government of India to observe the sickness of industrial companies timely and to provide solutions as well as measures to prevent it, after the recommendation of the Tiwari Committee.
  • In 1991 and 1998, enactment of Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 after the recommendation of Narasimham Committee I and Narasimham Committee II
  • The Eradi Committee in 1999 suggested setting up a National Company Law Tribunal (NCLT) and submitted for the abrogation of SICA.
  • The NL Mitra Committee (2001) suggested an extensive code for bankruptcy.
  • The JJ Irani Committee (2005) was of the view to fasten the process of restructuring and liquidation efficiently and effectively.
  • Improvements and changes in the Credit Infrastructure and the Indian Financial Sector were brought in by Raghuram Rajan Committee (2008) and Financial Sector Legislative Reforms Commission (2013)
  • Finally, in 2014 the Bankruptcy Law Reform Committee proposed a uniform and comprehensive Insolvency and Bankruptcy code after assessing the previous legislation related to Insolvency and Bankruptcy.

Several Laws which governed the Insolvency process in India before the enactment of Insolvency and Bankruptcy Code, 2016 are :

  1. Indian Partnership Act, 1932
  2. Provincial Insolvency Act, 1920
  3. The Companies Act, 1956 (for winding up the Companies)
  4. The Companies Act, 2013
  5. The Presidency Towns Insolvency Act, 1909
  6. The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA, 1985)
  7. The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDDBFI Act, 1993)
  8. The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002)

These legislations could not give any satisfactory results due to its in-efficacious enforcement and delays in court proceedings. Earlier the legal framework of Insolvency and Bankruptcy was not adequate and effective, thus causing delays in giving a decision.

INTRODUCTION TO INSOLVENCY AND BANKRUPTCY CODE

Thus, the Insolvency and Bankruptcy Code[1] (hereinafter referred to as IBC) Bill was initiated by the Bankruptcy Law Reform Committee under the Ministry of Finance. The bill was introduced in the Lok Sabha on 21 December, 2015 which after the recommendation and modification by the Joint Committee of Parliament was finally passed on 5 May, 2016. On 11 May, 2016 it was passed by the Rajya Sabha and finally, it received the President’s assent on 28 May, 2016.

The Preamble of the code states the purpose of IBC, 2016 is to encourage entrepreneurship, availability of credit and to balance the interest of the stakeholders ( the term ‘stakeholder’ is defined in the International Standards ISO 26000[2] which provides guidelines on social responsibility on clients, investors, employees and shareholders mainly) by integrating and modifying laws of reorganization and insolvency resolution of corporate persons, partnership firms and individuals promptly also maximizing the assets of that person and matters which are connected to it. With the enactment of the code, a sense of security lies amongst various stakeholders.

The subject of ‘Insolvency and Bankruptcy’ comes under List III i.e. Concurrent List provided under Entry 9 in Seventh Schedule of the Constitution of India, here both the State and Central Government have the power to make laws on this issue.

There has been a rapid change in the financial system of India over the past few decades. Various reforms have been taken by the Government of India to accelerate economic development by improving its efficiency in resources. Today, India is recognized at the world level for investment of money and to set up a business, it is because of the incentives taken by the Government for the foreign investors to invest in the Indian Economy. An efficient framework and well-timed resolution of insolvency and bankruptcy have encouraged entrepreneurship as well as improved the ranking of Ease of Doing Business, which encouraged investment leading to high economic growth. As per the World Bank’s Ease of Doing Business (EDB) Index, 2019 India has shown perceptible improvement, ranking 63rd among 190 countries. The ranking shows how easily an individual can run and set up its business in that country. In New Zealand and Singapore, a business can be started and run easily as per the EDB Index.

There are 10 parameters that the World Bank takes into consideration for calculating the EDB ranking. India’s ranking in terms of ‘Resolving Insolvency’ has improved remarkably from 137 in 2014 to 52 in 2019[3] majorly because of the adoption of IBC in 2016. India took various reform measures for the improvement in this issue; setting up professional institutes for effective restructuring and insolvency proceedings, speedy resolutions and also gave the right to the creditor to question the decision of the liquidator. These steps taken by the Government of India reduced the level of difficulty for an individual who wants to set up a business in India.

With the world facing its biggest fight from the global pandemic inflicted by the COVID-19, the corporates and all the co-related stakeholders and creditors faced the impending threat of financial crisis after the Government of India imposed a nationwide lockdown for nearly a month. To confront this financial crisis, an ordinance[4] was passed, which suspended the filing of fresh applications by the creditors or companies under Section 7, 9 and 10 of IBC, 2016 to prevent the companies from being forced to face insolvency in such times. The Insolvency and Bankruptcy Board of India also amended its regulations, which excludes the limitation period during the time of lockdown for the Corporate Insolvency Resolution Process.

Indian Prime Minister Mr. Narendra Modi, also announced a package of almost ₹20 Lakh Crores in his speech on 12th May, 2020 which is intended to bring relief to the economy as well as protect the interest of stakeholders.

Although the Government took various effective steps for the relaxation of corporate debtors and to protect the business from falling into insolvency, certain other measures should have been considered by the Government. The consequences after the relaxation of suspension shall be monitored carefully otherwise it would hamper the purpose of this code.

The need of the hour is that the Resolution Professional must properly execute the legal framework, maintain the position of the creditors and corporate debtors while also bringing an equilibrium amongst the stakeholders.

A Resolution Professional is appointed by an Adjudicating Authority, who is responsible to govern the affairs of the whole Insolvency and Bankruptcy procedure. Resolution Professional is also known as Insolvency Professional who regulates Insolvency Resolution Process, which also include Interim Resolution Professional (IRP) who take requisite steps to revive the company.

The Bankruptcy Law Reforms Committee[5] recognized the Resolution Professional(RP) as:-

“The RP plays a key role in the life-cycle of the insolvency resolution process – from the time of the acceptance of the application, the design and agreement of the repayment plan, to the final execution of the plan – it is possible that unfair conduct of the RP jeopardizes the interests of either party”.

Such individuals have to follow a certain code of conduct that is given under the First Schedule of the Insolvency and Bankruptcy Board of India (IP Regulations) which was established on 1st October, 2016. Any restraint while discharging the duty of the RP as an officer of the court would amount to contempt of court[6].

An IRP is appointed by the NCLT within 14 days of the commencement date of insolvency[7], before the formation of CoC (Committee of Creditors) whose role is to look after the company until RP is appointed. It is the CoC who takes decisions about the feasibility of the company.

The Resolution Professional plays a very complicated role. It must not be biased, have any conflicts of interest, or any kind of undue influence or coercion, with its decision towards any party whether associated directly or indirectly, during CIRP. The process must be done transparently. The RP has to take control of the situation, operate the company and complete all the statutory processes and in the end, it has to find a resolution. As a part of this process, there are a lot of critical challenges that the individual faces, first and foremost is the management of stakeholders. When the RP enters into a situation, the individual tries to handle :

  1. Promoters or Existing Promoters
  2. Employees,
  3. Vendors, and
  4. Customers

Handling these situations is very critical. The RP is bound to keep the company operational along with the corporate debtor during the CIRP.

Section 22 of the IBC, 2016 states provisions for Appointment of Resolution Professional. The Committee of Creditors within 7 days of its formation, in its first meeting, must either appoint Interim RP as the RP or replace the Interim RP with another Resolution Professional. If the IRP is appointed as the RP, the CoC must obtain the eligibility certificate along with written consent from the Interim RP after receiving approval from 66% of the financial creditor at the meeting of CoC. Such decision shall be communicated to the corporate debtor, adjudicating authority and to the Interim RP. In case the IRP is replaced, the CoC has to convey the same to the adjudicating authority who will further propose the name of the RP to the board. After the board confirms the name of the RP, the new RP will be appointed.

Section 29 of the Code defines Information Memorandum, it is the information which the potential Resolution Application wants to make a Resolution Plan for corporate debtors. Regulation 36(2) gives the information that is required to be given. When the Resolution Applicant makes the Resolution Plan following the Information Memorandum, it is given to the RP.

Duties of the Resolution Professional:-

  • The RP must be careful such that the prospective resolution applicant fulfills the conditions laid by the CoC; provisions of section 29A and other requirements as mentioned.
  • It constitutes the CoC to decide whether the company is required to be resolved through a resolution plan or liquidating it.
  • Determination of fair value and liquidation value of the corporate debtor need to be done by the valuers, who are appointed by the RP within 7 days of its appointment.
  • An Information Memorandum is required to be submitted in the electronic form to every member within 2 weeks of his appointment but not more than 54 days from the date of commencement of insolvency so that RP can make a Resolution Plan. All the necessary information needs to be conveyed to the Resolution Applicant.
  • The RP must keep the company operational, generate enough cash and working capital because if it keeps the company operational, its value will maximize; if the company is not operational then it would not get the going concern value which is the major challenge for the RP. It should not only be kept operational initially but for his entire tenure i.e. 6-9 months.
  • The Resolution Plan must give priority to the payment of the Insolvency Resolution Process cost, to the corporate debtor and then the operational creditor. In the case of liquidation, the amount would be distributed to the creditors according to the order of priority.

If the Resolution Plan confirms the above-mentioned specifications, it further has to be approved by the CoC. If the plan is approved with not less than 60% of the votes by the financial creditors. This Resolution Plan would then be submitted to the Adjudicating Authority, who if satisfied will approve the plan and would create an obligation on the corporate debtor, employees, members, and stakeholders to follow it. If the Adjudicating Authority is not satisfied, it can reject the same[8].

  • The IRP has to manage the affairs of the company for which the managers and officers of the corporate debtors are required to grant access to the documents, account books, statements, etc. according to the requirement. All the deeds, receipts and documents need to be executed by the IRP on behalf of corporate debtors as mentioned by the Board.

Section 28 of the IBC puts certain restrictions on the acts of RP, which it can not do without taking the approval of CoC during the Corporate Insolvency Resolution Process (CIRP). Under the IBC the position of the RP is administrative and not adjudicatory. The responsibility of the RP is to put his point of view in front of the CoC, although the decision taken by the majority of the CoC would prevail in any case. The RP is responsible to manage the affairs of the corporate debtor as a going concern, appoint and convene meetings of the CoC [9]. The Supreme Court in the case of Swiss Ribbon Pvt. Ltd. v. Union of India[10], believed that RP only acts as a facilitator in the resolution process, it has to act as per the CoC.

There have been a lot of actions taken by the jurisprudence in the last 18 months in the terms of the Resolution process that have been taken at both the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT).

The hon’ble NCLAT, New Delhi in State Bank of India vs. Ram Dev International Ltd.[11], in which the issue was whether the Adjudicating Authority can reject the proposal of appointment of Resolution Professional by the CoC, on the ground that the name of proposed RP is one of the members of CoC. The Tribunal laid down the principles on which an RP can be disqualified. In the matter the proposed RP was the member of CoC of the corporate debtor in State Bank of Hyderabad which was later merged with State Bank of India. The NCLT held that the name of the proposed RP was not eligible to be appointed as the Resolution Professional of the corporate debtor. However, the SBI contended that the proposed RP was neither paid by the bank nor was an employee, he was just in the panel of lawyers who are maintained by the banks, government and public sector and are not to be treated as the employee. Therefore the Appellate Tribunal held that if any RP is an employee or is paid by any financial creditors or it has some personal interest in the matter or if there is any kind of biasness or if there is any disciplinary action taken against him, such an individual will be disqualified from being appointed as an RP.

In another matter of State Bank of India vs. M/s Metenere Ltd.[12] given by the hon’ble NCLAT, the question was whether an ex-employee of Financial Creditor be appointed as an RP of the corporate debtor or not. The Appellate Tribunal decided on the independence of Interim RP or RP during the CIR Process. In this case, there was an apprehension that the IRP would be biased and act unfairly. The tribunal examined the facts and believed that the appointment of the RP was valid even if the IRP is taking a pension from the appellant, it would not make the matter in its interest, the matter remains independent according to the Regulation which states that the RP must be independent of the Corporate Debtor. The SC in a matter observed that to test the likelihood of bias it is necessary to look upon whether there was any reasonable apprehension in the mind of the party.

This case gave a new outlook for the creditor friendly nature of the code, wherein all the decisions are approved by the Committee of Creditors, the necessity for the independence of RP from the financial creditor is also required as in the case of Corporate Debtor. However, the presumption of biases must be taken into consideration from case to case.

The Code has a particular regime, according to which as soon as the insolvency commences the balance sheet along with the past liabilities are frozen, but in reality, some creditors threaten the Corporate Debtor or the RP with disruptions or injury or the statutory authorities who have coercive power, here the RP as well as the CoC face a major challenge where they have to analyze the payouts which can further lead to maximizing the value of their assets.

The need to give a voice to the Operational Creditor[13] in the Resolution Process according to their debts and also must be given voting rights[14]. Regulation 38 (1) of the IBBI[15] was of the view that the Operational Creditor must be given priority over the Financial Creditor in the matter of payment.

CONCLUSION

The need of the hour is to give independence to the RP not only from the Corporate Debtor but also from the Financial Creditors. Attempts have been made to bring about a change in the legal framework. Under the Insolvency Professional Regulation, the facts of the IP being an ex-employee of the Financial Creditor need to be disclosed, although it would not lead to disqualification but it can affect the independence of the RP. The law must provide a comprehensive disqualification rules to maintain the independence of the Financial Creditor as it is given for the Corporate Debtor. The RP must be independent and impartial with its conduct.

The question before the judiciary is to decide whether there is any moral or legal duty of the Financial Creditor to balance the interests of the stakeholders, if yes then it would affect the position of the CoC, whereas if the financial creditor has no duty towards the interest of the stakeholders, the stakeholders would have no other option rather than going to the NCLT. There is a little difference in the letter of the law and the spirit of the law, where the court may freeze past liability of the Operational Creditor whereas now the operational creditor has the right to involve itself in the discussion of the Resolution Plan. The fundamental aim of the code is to remove the obligations of debt from the Corporate Debtor and to look after the interests of the stakeholders with equity.

BIBILOGRAPHY

  1. Ankit Sharma & Sanjivani Biswas, BALANCING INTERESTS OF STAKEHOLDERS UNDER IBC, 2016 AND IMPACT OF COVID-19, IJOSLCA, (July, 2020)
  2. Anuj Pandey, Know all about Resolution Professional under Insolvency and Bankruptcy Code, 2016, Tax Guru (Nov. 03, 2019)
  3. Dr. Sanjay Kumar Yadav et al Syamantak Sen et al Vivek Badkur, Independence and Impartiality of Resolution Professionals Under Indian Law: Filling the Gaps or Creating Law? , Harvard Law School (Oct. 20, 2020),
  4. ICSI, Insolvency – Law and Practice 28-33
  5. Insolvency and Bankruptcy Board of India
  6. MS Sahoo, Moving up in ‘ease of resolving insolvency’, The Hindu Business Line (Mar. 05, 2020)
  7. Rohin Goyal, Role of Operational Creditor in Corporate Insolvency Resolution Process, Tax Guru (May 15, 2019)

Reference

[1] Insolvency & Bankruptcy Code, 2016, No. 31 Act of Parliament, 2016

[2]  ISO 26000 defines ‘stakeholder’ as , “individual or group that has an interest in any decision or activity of an organization

[3] MS Sahoo, Moving up in ‘ease of resolving insolvency’, The Hindu Business Line

[4] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, No. 9 of 2020

[5] The report of the Bankruptcy Law Reforms Committee, Volume I: Rationale and Design (November 2015)

[6] Asset Reconstruction Company (India) Pvt Ltd v. Shivam Water Treaters Pvt Ltd., (2018) C.P. No. (IB) 1882 (MB) /2018 NCLT

[7] Section 16(1), Insolvency and Bankruptcy Code, 2016

[8] Section 31 of the Insolvency and Bankruptcy Code, 2016

[9] Committee Of Creditors, Essar Steel India Limited, Through Authorised Signatory v. Satish Kumar Gupta & Ors., [2019] ibclaw.in 07 SC

[10] [2019] ibclaw.in 03 SC

[11] (2018) ibclaw.in 144 NCLAT

[12] [2020] ibclaw.in 114 NCLAT

[13] Section 5(20) of the Insolvency and Bankruptcy Code, 2016

[14] JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors., [2020] ibclaw.in 217 NCLAT

[15] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Fourth Amendment) Regulations, 2018 (Amendment Regulations)

 

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