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Insolvency and Bankruptcy Code-2016 & Insolvency Professionals

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Insolvency and Bankruptcy Code 2016 is the biggest economic reform to have been enacted in our country in recent times and ranks only next to the GST. The code envisaged to bring about ease of doing business and improve our standing in the global order, where India currently ranks 136 out of 189 countries.

The Code was enacted to bring about a legal and institutional frame work dealing with debt default in line with global standards. India's weak insolvency regime, its significant inefficiencies and systematic abuses have caused the distressed state of credit markets.The code aims at early identification of financial failure and maximising the asset value of insolvent firms striking a balance between liquidation and resolution. It ensures equitable treatment of similarly situated creditors and provides timely, efficient and impartial resolution of the insolvency estate. The code ensures a transparent and predictable insolvency law that contains incentives for gathering and dispensing information besides recognition of existing creditor rights and establishment of clear rules for ranking priority of claims.

Two of the main pillars of the code are, the Insolvency Regulator & the Insolvency  Professionals.

•The Insolvency Regulator: The Code provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (Board). Its role includes:
 (i) overseeing the functioning of insolvency intermediaries i.e., insolvency   professionals, insolvency professional agencies and information utilities; and

(ii) regulating the insolvency process.

The Insolvency Professionals: The IPs are intermediaries who would play a key role in the efficient working of the bankruptcy process.
(i) In the resolution process, the insolvency professional verifies the claims of the creditors, constitutes a creditors committee, runs the debtor's business during the moratorium period and helps the creditors in reaching a consensus for a revival plan.

(ii) In liquidation, the insolvency professional acts as a liquidator and bankruptcy trustee.

However certain  developments in the insolvency eco-system have taken place which are likely to derail it in its very infancy stage. As concerned Insolvency Professionals we are bringing it to your notice, so that suitable remedial measures are initiated to ensure that the insolvency process thrives and attain global standards.

1. Undertaking of multiple assignments by Insolvency Professionals:

 In terms of the code of conduct for Insolvency Professionals, vide para 22, "An insolvency professional must refrain from accepting too many assignments, if he is unlikely to be able to devote adequate time to each of his assignments".

As per the Code, at the commencement of CIRP, the power of the Board of the debtor company are suspended and IRP / RP take charge and run the company as a going concern in addition to discharging other duties as required by the code. This is full time job where the IP is required to act as the CEO of the debtor company.

We are of the opinion that an IP handling 3 to 5 assignments simultaneously, can not do a fair job.

 2. Public Sector Banks empanelment of IPs with unreasonable conditions:

 Off late Banks have been issuing advertisements calling for empanelment of Insolvency Professionals, a recent example is the advertisement released by Punjab National Bank. From the contents of the advertisement one gets the impression that there is a lack of proper understanding of the code. The Limited Examination for IPs came into being on 31 December 2016 and IPs and IPEs came in  thereafter Thus calling for their financials for last 3 years seem to be out of place. As on date there are 1157 Insolvency Professionals and 42 Insolvency Professional Entities (of which one entity is derecognised) registered with IBBI. The advertisement seems to be aimed only at the IPEs whose numbers are inadequate at this point of time.

Recent track record of Banks show that they seem to be entrusting assignments and often in multiples only to IPs associated with large accounting firms / law firms with multi national origin.

The fee to be paid to IPs as per the PNB advertisement is detalied below:

Fees payable to the Interim Resolution Professionals, who are also appointed as Resolution Professionals by the Committee of Creditors 
Book outstanding in the accounts (PNB’s share only)
Maximum Fee payable* per borrower (not per account) (PNB’s share only)
1.Up to Rs. 1 crore Rs. 2 lacs
2. Above Rs. 1 crore to Rs. 50 crore Rs. 3 lacs
3 Above Rs. 50 crore  up to Rs. 100 croreRs. 5 lacs
4. Above Rs. 100 crore Rs. 10 lacs
 *GST will be payable over and above the fee. TDS as applicable, will be deducted.

 Fees payable to the Interim Resolution Professionals,  who are NOT appointed as Resolution Professionals by the Committee of Creditors
Book outstanding in the accounts (PNB’s share only)
Maximum Fee payable* per borrower (not per account) (PNB’s share only)
1.Up to Rs. 50 crore Rs. 1 lac
2. Above Rs. 50 crore Rs. 2 lac
*GST will be payable over and above the fee. TDS as applicable, will be deducted.

We are of the earnest opinion that with this kind of fee structure Banks are unlikely to get IPs who are required to manage these debtor companies as going concerns on full time basis.

In order that the insolvency eco-system is not derailed we earnestly request that IBBI in consultation with Indian Banks Association (IBA) formulate guidelines regarding empanelment of IPs, their fee structure and optimum assignments that an IP can handle.


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