Stricter guidelines for IPs’ conduct: IBBI releases Circulars

Vallari Dubey

resolution@vinodkothari.com

In order to ensure that IPs stick to their professional conduct in a fair and justifiable manner and to curb activities such as outsourcing of IPs’ responsibilities, the Insolvency and Bankruptcy Board (‘IBBI’) has issued three circulars, addressed towards the Insolvency Professionals fraternity, dated 3^rd January, 2018. We’ve discussed each of them at length below.

These circulars shall be in addition to obligations of IPs under Section 208 of the Insolvency and Bankruptcy Code, 2016 (‘the Code’) and the Code of Conduct for Insolvency Professionals (‘IPs’), as provided under First Schedule to the IBBI (Insolvency Professional) Regulations, 2016.

1. Circular No. IP/001/2018 dated 03/2018[1]: Insolvency professional to use Registration Number and Registered Address in all his communications.

According to this circular, following shall be ensured by IPs:

• All IPs shall use the address and e-mail address, registered with IBBI, in all their communications;
• All communications to include public announcement or any other communication;
• Only following shall be used by an IP:
  1. his name, address and email, as registered with the IBBI;
  2. his Registration Number as an insolvency professional granted by the IBBI, and

• the capacity in which he is communicating (Example: As Interim Resolution Professional of XYZ Limited, As Resolution Professional of ABC Limited, etc.)

• Use of process specific address and process specific e-mail address shall be allowed subject to the following 2 conditions:
  1. These are in addition to indicating email address, address, reg. no. and capacity, of the IP, and
  2. The IP continues to service the process specific address and email for at least 6 months from conclusion of his role in the process.

What is a process specific address? It is the address specific to a particular process under the Code, for eg. Resolution, Corporate Insolvency Resolution Process (‘CIRP’), Liquidation, Voluntary Liquidation, etc.

IPs who would be using different addresses and e-mail addresses in respect of any of the processes under the Code, will be required to stick to the addresses registered with the IBBI, in all their correspondences.

2. Circular No. IP/002/2018 dated 03/2018[2]: Insolvency professional to ensure compliance with provisions of the applicable laws.

A Corporate Person, undergoing any of the processes under the Code, namely, CIRP, Liquidation, Fast Track Insolvency Resolution, Voluntary Liquidation, shall ensure compliance with the applicable laws, over and above compliance with the Code, unless otherwise exempted.

Duty of IP to ensure compliance

It shall be the duty of IP, while acting as IRP/RP/Liquidator, to ensure compliance of applicable laws. S/he shall take all necessary steps and exercise due diligence and reasonable care while performing his/her duties as IRP/RP/Liquidator.

Loss on account of non-compliance not to form part of Insolvency Cost

While undergoing CIRP or liquidation, a Corporate Person may suffer any loss (including a penalty), on account of non-compliance with any applicable law. It is clarified by the given circular, that such loss shall not form part of insolvency resolution process costs.

‘Insolvency resolution process costs’ has been defined under the Code as follows:

“5. In this Part, unless the context otherwise requires,—

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(13) “insolvency resolution process costs” means—

(a) the amount of any interim finance and thecosts incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;

(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and

(e) any other costs as may be specified by the Board;”

In addition to the above definition, Regulation 31 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’) read as follows:

“31. Insolvency resolution process costs.

“Insolvency resolution process costs” under Section 5(13)(e) shall mean-

(a) amounts due to suppliers of essential goods and services under Regulation 32;

(b) amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(1)(d);

(c) expenses incurred on or by the interim resolution professional to the extent ratified under Regulation 33;

(d) expenses incurred on or by the resolution professional fixed under Regulation 34; and (e) other costs directly relating to the corporate insolvency resolution process and approved by the committee.”

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Since no clarification is given as to who shall bear such losses, the applicant itself may bear or an appropriation between the members of the Committee of Creditors (‘CoC’) on ratification may be allowed, similar to the expenses of public announcement under Regulation 6(3) of CIRP Regulations.

Further, it is also clarified that, in case the IRP/RP/Liquidator is accounted for the loss, s/he shall be responsible for the same. S/he may however, prove his/her conduct clean. Though not clear, but given the known responsibility to ensure compliance with applicable laws by the IP, this could mean that such losses shall be borne by IP single-handedly and personally. This is prima facie very harsh on IPs, who shall already be bearing the responsibility to ensure compliance with the Code and its procedures.

3. Circular No. IP/003/2018 dated 03/2018[3]: Insolvency Professional not to outsource his responsibilities.

Section 25(2) of the Code enlists actions to be taken by RP, which inter alia provides for appointment of appoint accountants, legal or other professionals.

Section 35 of the Code enlists powers and duties of liquidator, which, inter alia provides for obtaining professional assistance from a person or appoint a professional in performing his duties as a liquidator.

Such professional assistance by an IP should not extend to a length, which would amount to outsourcing of his professional responsibilities, which is not allowed.

Certificate from a third person to amount as outsourcing

According to IBBI, some IPs have been asking prospective resolution applicants, for a certificate from a third person, validating their eligibility. IBBI is of the view that, such a practice shall amount to outsourcing of the IPs’ responsibilities, and therefore, should not be allowed.

Such certificates, as per IBBI, are meritless and serve no substantial purpose other than adding to the cost of a resolution applicant and delaying submission of an effective resolution plan, and therefore should not be commended.

Post amendment of the Insolvency and Bankruptcy Code, 2016 vide Insolvency and Bankruptcy Code (Amendment) Bill, 2017, the eligibility of a resolution applicant would be clarified at length, by virtue of Section 29A. Criteria for a resolution applicant would be decided by RP with the approval of CoC, by virtue of Section 25 of the Code. Therefore, a separate certificate, substantiating the eligibility of a resolution applicant shall not be required. It is up to the CoC and RP to decide, whether to consider the resolution plan or not.

[1] http://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jan/CIRP%20l_2018-01-03%2018:41:16.pdf

[2] http://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jan/CIRP%202_2018-01-03%2018:41:44.pdf

[3] http://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Jan/CIRP%203_2018-01-03%2018:42:53.pdf