Insolvency professionals are licensed professionals, who are registered with the Insolvency and Bankruptcy Board of India ("Board") and are enrolled with an insolvency professional agency. This professional is appointed as an insolvency resolution professional to manage the resolution process and as a liquidator to conduct liquidation of a corporate debtor. He or she is appointed by the Adjudicating Authority and is given the power by the Adjudicating Authority to effectively run and manage the entity as a going concern, and assets of the entity at all times during the process of resolution. Being a new legislation, the Code is evolving with every passing day and so are the rights and duties of the insolvency professionals as interim resolution professionals ("IRP") or resolution professionals ("RP") as the case may be. The present article discusses the same and also some recent judgments by the adjudicating authority and the appellate authority and also the circulars and directives passed by the Board from time to time.
- Appointment of Interim Resolution Professional -The Code provides that the Adjudicating Authority shall appoint an IRP within fourteen days from the insolvency commencement date. The issue with regard to the appointment of an IRP is whether the appointment shall commence from the date of the admission i.e. the insolvency commencement date or from the date of knowledge of the IRP. It is apparent from the ongoing practice that IRPs consider the date of receipt of order as the date of the appointment.
In M/s. Innovative House Industries Pvt. Ltd. v. M/s. Jap Infratech Pvt. Ltd.1, an application was filed by the IRP stating the order dated 24th August, 2017 confirming his appointment was not communicated to him. It was only on 3rd October, 2017 that he learnt about the confirmation of his appointment as IRP. The NCLT held that, "Submission of the IRP merits consideration. He could not be expected to act without due intimation. Accordingly, the appointment of the IRP is being confirmed w.e.f. today i.e. 4th October, 2017."
In Velamur Varadan Anand v. Union Bank of India & Another2, the question before the NCLAT was as to how the period of 180 days is to be counted for corporate insolvency resolution process ("CIRP") i.e. from the date of admission, as per the provisions of the Code or from the date of knowledge of the Resolution Professional? Further if there is a gap between knowledge of RP and the actual date of admission, then how such period is to be treated? Whether such period should be excluded for the purpose of counting the period of 180 days or additional time is to be allowed beyond 180 days for completing the Resolution Process? In this case, the application was admitted on 16th August, 2017 and on receipt of intimation the IRP took charge on 14th September, 2017 (i.e. after 30 days of admission). Given the circumstances of the case, the NCLAT excluded the aforesaid period of 30 days for the purpose of counting the period of CIRP and thereby allowed the 'Resolution Professional' to complete the CIRP by 15th June 2018.
- Disclosures to be made by the IRP/RP – The Board vide its Circular No. IP/005/2018 dated 16th January, 2018 has made it mandatory for the IRP or the RP, as the case may be, to disclose the following to the agency with which he is enrolled:
- His relationship (if any) with the corporate debtor (after appointment);
- His relationship (if any) with the Committee of creditors, within a period of three days from the constitution of the committee of creditors;
- His relationship with any professional(s) appointed by him within a period of three days from the date of the appointment;
- His relationship with the interim finance provider, within three days of the agreement with the interim finance provider; and
- His relationship with the prospective resolution applicant (s) within three days of supply of the information memorandum to the prospective resolution applicant.
In addition to the above, the IRP or the RP, as the case may be, must make:
- disclosure of the relationship of the other professional(s) engaged by him, with himself, the Corporate Debtor, Financial Creditor(s) within three days of the appointment;
- disclosure of the relationship of the Interim Finance Provider(s) with himself, the Corporate Debtor, Financial Creditor(s), within three days of the agreement with the Interim Finance Provider; and
- disclosure of the relationship of the Prospective Resolution Applicant(s) with himself, the Corporate Debtor, Financial Creditor(s), within three days of the supply of information memorandum to the Prospective Resolution Applicant.
- Compliances on behalf of the Corporate Debtor - After passing of the Insolvency (Amendment) Ordinance, 2018, besides managing the corporate debtor and running it as a going concern, the IRP or the RP is also responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.
- Seeking Assistance from the Adjudicating Authority - While performing his duties, the IRP or the RP, as the case may be, may approach the adjudicating authority i.e. the NCLT for seeking any assistance during the CIRP. In Central Bank of India and the State Bank of India v. M/S. Ashok Magnetics Ltd.3 the IRP made efforts to take charge of the assets of the corporate debtor, but there was stout resistance from the corporate debtor. He, therefore, prayed for police assistance to discharge his functions as IRP. The NCLT directed the Superintendent of Police in whose jurisdiction the Registered Office and the factory of the Corporate Debtor were located to give proper Police assistance and personal security to the IRP to enable him to take charge of the assets of the corporate debtor and perform the functions as per the provisions of the Code. The director of the corporate debtor was also directed to furnish the books of accounts, list of assets, list of financial and operational creditors, list of documents and other relevant particulars as envisaged in the Code and extend all co-operation.
In Punjab National Bank v. Divyajyoti Sponge Iron Pvt Ltd.4 the RP sought for necessary assistance and security for himself to visit the factory premises of the corporate debtor to carry out statutory duties and obligations peacefully. Keeping in view the threats by the corporate debtor, the NCLT ordered the Superintendent of Police and the in-charge of the concerned police station to provide proper and effective assistance to the resolution professional.
In the matter of Orchid Pharma v. Lakshmi Vilas Bank & Orchid Pharma Ltd.5 the erstwhile auditor was not willing to give NoC unless the RP cleared 50% of its outstanding dues, the NCLT directed the erstwhile auditor to issue the NoC and also transfer the necessary papers to the newly appointed auditor of the corporate debtor. It was further held that the dues of the earlier audit, admitted to the extent of Rs.1,23,69,272 must be included as the operational credit with respect to the corporate debtor.
- Corporate Insolvency Resolution Process - The IRP/ RP are responsible for the following during the CIRP of a corporate debtor:
Interim Resolution Professional
(1) Choice of authorised representative – The IRP shall at first ascertain class or classes of creditors, if any. Thereafter for representation of such class of creditors, the IRP shall identify three insolvency professionals who are: (a) not his relatives or related parties; (b) eligible to be insolvency professionals; and (c) willing to act as authorised representative of creditors in the class. The IRP must also obtain the consent of each insolvency professional identified as above to act as the authorised representative of creditors in the class in Form AB of the Schedule.
(2) Public announcement – The IRP is required to make a public announcement inviting claims from creditors within three days from the date of his appointment. Where the corporate debtor has at least ten financial creditors in a class, the interim resolution professional is required to offer a choice of three insolvency professionals (who have been identified as stated above) in the public announcement.
(3) Collation and verification of claims- The IRP shall then verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims.
(4) List of creditors – The IRP is required to maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it. The list shall be filed with the Adjudicating Authority and must be available for inspection by the persons who submitted proofs of claim, by members, partners, directors and guarantors of the corporate debtor, displayed on the website of the corporate debtor (if any) and has to be presented at the first meeting of the committee of creditors.
(5) Determination of claim - The IRP shall determine the amount of claim and shall make the best estimate of the amount of the claim based on the information available with him.
(6) Appointment of authorised representative – On receiving the claims, the IRP shall select the insolvency professional, who is the choice of the highest number of financial creditors in the class in Form CA received by him, to act as the authorised representative of the creditors of the respective class.
The IRP shall then apply to the Adjudicating Authority for appointment of the authorised representative so selected, within two days of the verification of claims received.
The IRP shall provide the list of creditors in each class to the respective authorised representative appointed by the Adjudicating Authority. The IRP must provide an updated list of creditors in each class to the respective authorised representative as and when the list is updated. The IRP or the RP, as the case may be, must provide electronic means of communication between the authorised representative and the creditors in the class.
(7) Constitution of the committee of creditors - The IRP shall file a report certifying constitution of the committee to the Adjudicating Authority within two days of the verification of claims received.
(8) Convene First meeting of the Committee - The IRP shall hold the first meeting of the committee within seven days of filing the report with the Adjudicating Authority as aforesaid.
Where the appointment of RP is delayed, the IRP must perform the functions of the RP from the fortieth day of the insolvency commencement date till a resolution professional is appointed.
(1) Appointment of valuers – The RP shall appoint two valuers within seven days of his appointment to determine the fair value and the liquidation value of the corporate debtor. After the receipt of resolution plans, the RP shall provide the fair value and the liquidation value to every member of the committee in electronic form, on receiving an undertaking from the member to the effect that such member shall maintain confidentiality of the fair value and the liquidation value and shall not use such values to cause an undue gain or undue loss to itself or any other person.
(2) Preparation of information memorandum - the RP shall submit the information memorandum in electronic form to each member of the committee within two weeks of his appointment, but not later than fifty-fourth day from the insolvency commencement date, whichever is earlier. The RP shall share the information memorandum only after receiving an undertaking from a member of the committee to the effect that such member shall maintain confidentiality of the information and shall not use such information to cause an undue gain or undue loss to itself or any other person.
(3) Invite prospective Resolution Applicants - The RP shall invite the prospective resolution applicants to submit the resolution plan, by publishing brief particulars of the invitation for expression of interest in Form G of the Schedule at the earliest and not later than seventy-fifth day from the insolvency commencement date. Where the RP did not invite prospective applicants for the resolution plan and no reason was given by RP for the same and accordingly, the committee of creditors jumped into liquidation even though one month was left in the completion of initial period of 180 days. The NCLT held that the RP is violating his duties as specified in 25(2)(h) of the Code and declined the liquidation application and directed the RP to invite the expression of interest.6
(4) Due Diligence - The RP shall conduct due diligence based on the material on record in order to satisfy that the prospective resolution applicant:
- fulfils such criteria as may be laid down by him with the approval of committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified by the Board;
- complies with the applicable provisions of section 29A; and
- complies with other requirements, as specified in the invitation for expression of interest.
(5) Preparation of Provisional List of Resolution Applicants - The RP shall issue a provisional list of eligible prospective resolution applicants within ten days of the last date for submission of expression of interest to the committee and to all prospective resolution applicants who submitted the expression of interest.
(6) Request for Resolution Plan - The RP shall issue the information memorandum, evaluation matrix and a request for resolution plans, within five days of the date of issue of the provisional list to –
- every prospective resolution applicant in the provisional list; and
- every prospective resolution applicant who has contested the decision of the RP against its non-inclusion in the provisional list.
The request for resolution plans shall allow prospective resolution applicants a minimum of thirty days to submit the resolution plan(s).
(7) Submission to the Committee of creditors - The RP shall submit to the committee all the resolution plans which comply with the requirements of the Code and regulations made thereunder along with the details of:- (a) preferential transactions under section 43; (b) undervalued transactions under section 45; (c) extortionate credit transactions under section 50; and (d) fraudulent transactions under section 66, if any, observed, found or determined by him and the orders, if any, of the adjudicating authority in respect of such transactions.
(8) Submission of approved Resolution Plan - The RP must endeavour to submit the resolution plan approved by the committee to the Adjudicating Authority at least fifteen days before the maximum period for completion of corporate insolvency resolution process under section 12, along with a compliance certificate in Form H of the Schedule. Rejection or approval of a resolution plan is a right of committee of creditors and resolution professional cannot reject any plan without a decision of Committee of Creditors.7
(9) File Application for avoidance of transactions – Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution process for Corporate Persons) Regulations, 2016 provides for the timeline within which an application for avoidance of preferential, undervalued and extortionate transactions must be made.
On or before the seventy-fifth day of the insolvency commencement date the RP must form an opinion whether the corporate debtor has been subjected to any of the aforesaid transactions.
Where the RP is of the opinion that corporate debtor has been subjected to any transactions, he must make a determination thereof on or before the one hundred and fifteenth day of the insolvency commencement date, under intimation to Board.
Where the RP makes a determination as aforesaid, the RP must apply to the adjudicating authority for appropriate relief on or before the one hundred and thirty fifth day of the insolvency commencement date.
- Notice of meeting of creditors - The Board vide Circular No. IBBI/CIRP/016/2018 dated 10th August, 2018 has directed the IRP or the RP, as the case may be that he shall, in every notice of meeting of the committee of creditors and any other communication addressed to the financial creditors, other than creditors under section 21 (6A) (b), require that they must be represented in the committee of creditors or in any meeting of the committee of creditors by such persons who are competent and are authorised to take decisions on the spot and without deferring decisions for want of any internal approval from the financial creditors.
- Protection for action taken in good faith - Section 233 of the Code provides for the protection of action taken in good faith and inter alia states that no suit, prosecution or other legal proceeding shall lie against the insolvency professional or liquidator for anything which is in done or intended to be done in good faith under the Code or the rules or regulations made thereunder.
In M/s Alchemist Asset Reconstruction Co. Ltd v. M/s Hotel Gaudavan Pvt. Ltd.8, the IRP prayed for protection for all acts done by him in good faith and to save him from the frivolous allegations made against him in a FIR. The NCLT observed: "If, there is any complaint against the Insolvency Professional then the IBBI is competent to constitute a disciplinary committee and have the same investigated from an Investigating Authority as per the provision of section 220 of the Code. If, after investigation 'IBBI' finds that a criminal case has been made out against the Insolvency Resolution Professional then the 'IBBI' has to file a complaint in respect of the offences committed by him. It is with the aforesaid object that protection to action taken by the IRP in good faith has been accorded by section 233 of the Code. There is also complete bar of trial of offences in the absence of filing of a complaint by the 'IBBI' as is evident from a perusal of section 236(1) (2) of the code. Therefore, a complaint by Harenda Singh Rathore, a former director with the SHO, Police Station would not be maintainable and competent as the complaint is not lodged by the IBBI. ..the jurisdiction would vest with Investigation Officer only when a complaint is filed by 'IBBI'."
- Costs incurred by the Insolvency Resolution Professional – An insolvency professional is obliged under section 208(2)(a) of the Code to take reasonable care and diligence while performing his duties, including incurring expenses. He is thus required to ensure that not only the fee payable to him is reasonable, but also other expenses incurred by him are reasonable.
The Board vide its circular dated 12th June, 2018 has directed the insolvency professional to ensure that:-
- the fee payable to him, fee payable to an Insolvency Professional Entity, and fee payable to registered valuers and other professionals, and other expenses incurred by him during the CIRP are reasonable;
- the fee or other expenses incurred by him are directly related to and necessary for the CIRP;
- the fee or other expenses are determined by him on an arms' length basis, in consonance with the requirements of integrity and independence;
- written contemporaneous records for incurring or agreeing to incur any fee or other expense are maintained;
- supporting records of fee and other expenses incurred are maintained at least for three years from the completion of the CIRP;
- approval of the committee of creditors for the fee or other expense is obtained, wherever approval is required; and
- all CIRP related fee and other expenses are paid through banking channel.
Further, the insolvency professionals are required to disclose fee and other expenses in the relevant Form to the Insolvency Professional Agency of which he is a member, as under:
- by the IRP within seven days of his demitting office as IRP; and
- by the RP within seven days of his demitting office as RP.
- Discharge from responsibility as IRP, RP or Liquidator - The Board vide its discussion paper dated 21st June 2018 has proposed to allow an insolvency professional to seek discharge from a process only on one ground, that is, he is incapacitated to continue as interim resolution professional, resolution professional or liquidator. He can be incapacitated only in two ways: (a) physically: if he suffers from health problems which render him unable run the process, to the satisfaction of the Adjudicating Authority, and (b) legally: if he becomes ineligible under law. In either case, the approval of the Adjudicating Authority may be necessary. If an insolvency professional seeks discharge from the process on any other ground, he may be debarred from taking any fresh assignment for a period of five years.
1 Order dated 4th October, 2017 in IB No. (IB) 212(ND)/2017.
2 Order dated 16th May, 2018 in Company Appeal (AT) (Insolvency) No. 161 of 2018.
4 CA (IB) No. 570/KB/2017 in C.P (IB) No. 363/KB/17.
5 C.A. No. CA/26/IB/2018 in CP/540/(IB)/2017.
6 Vedikat Nut Crafts Pvt. Ltd, IB-40(PB)/2017, order dated 12th January 2018, NCLT Delhi.
7 Order dated 8th March, 2018 in Rural Electrification Corporation Ltd v. Ferro Alloys Corporation Ltd., NCLT Kolkata.
8 CP/CA. No. (IB)-23(PB)/2017.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.