RP's Dilemma - Collate or Verify claims of creditors

One of the  important aspects of an insolvency proceeding is the collection & collation / verification of claims of creditors and formation of the committee of creditors. Let’s look into the provisions of the law and the law laid down by the Hon’ble Supreme Court of India & rulings of NCLT / NCLAT, on this issue. 

The Insolvency and Bankruptcy Code, 2016

# Section 18. Duties of interim resolution professional. -

(b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;

(c)  constitute a committee of creditors;

# Section 21. Committee of creditors. -

(1) The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

# Regulation 10. Substantiation of claims.

The interim resolution professional or the resolution professional, as the case may be, may call for such other evidence or clarification as he deems fit from a creditor for substantiating the whole or part of its claim.

# Regulation 13. Verification of claims.

(1) The interim resolution professional or the resolution professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims, and thereupon 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.

On collation / verification of claims during CIRP, the provisions of Code & Regulations are in variance.

Hon’ble Supreme Court of India (25.01.2019) in Swiss Ribbons Pvt. Ltd. & Anr. V/s Union of India & Ors. [Writ Petition (CIVIL) NO. 99 OF 2018] held that:-

• # 58 ...It is clear from a reading of the Code as well as the Regulations that the resolution professional has no adjudicatory powers.
• # 59…..It is clear from a reading of these Regulations that the resolution professional is given administrative as opposed to quasi-judicial powers.
• # 60.....As opposed to this, the liquidator, in liquidation proceedings under the Code, has to consolidate and verify the claims, and either admit or reject such claims under Sections 38 to 40 of the Code. Sections 41 and 42, by way of contrast between the powers of the liquidator and that of the resolution professional, are set out herein below: Section 41 and 42 It is clear from these Sections that when the liquidator - “determines” the value of claims admitted under Section 40, such determination is a - decision”, which is quasi-judicial in nature, and which can be appealed against to the Adjudicating Authority under Section 42 of the Code.

Thus the ruling of the Hon’ble SCI, made it clear that during CIRP, the IRP / RP does not have the powers to determine / verify  the amount of claims of the creditors, he (IRP / RP) can only receive & collate the claims of the creditors (duly substantiated). IRP / RP does not have any powers to either admit or reject or partially admit / reject the claims of the creditors.

NCLAT in Standard Chartered Bank Vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors.[CA (AT) (Ins.) No. 242 of 2019] held that

• # 65. The Adjudicating Authority has noticed that the ‘Resolution Professional’ has no jurisdiction to decide and / or reject the claim, it is only required to collate the claim.

Recently, NCLT (PB) New Delhi (08.08.2019) in  S. A. Consultants & Forwarders Private Ltd. V/s Cargo Planners Limited [ CP No. IB-867(PB) 2019 ] while admitting the application U/s 9 of the Code directed the IRP as under:-

• # 14 There is a general complaint received against the financial creditors, banks, NBFC’s and Asset Reconstruction Companies that the amount claimed by them is far more than what is owed by the corporate debtor to them. Many a times the rate of interest is alleged to be exorbitant and allegations are levelled that a penal interest compounded monthly has been charged. We have no mechanism of rectification of claims made. However, the RP, ordinarily have professionals & experts at their disposal and in case the ex- management raises any such issue then the RP must get it settled in order to avoid any injustice to the corporate debtor.

Thus in the above case, the IRP / RP will have to collate the claims as per the supporting documents, as per the provisions of the Code and law laid down by the Hon’ble SCI, and to comply with the directions of the AA, he will have to move the application for avoidance of transactions, for exorbitant rate of interest & penal interest U/s 25(2) read with section 50. IRP / RP, does not have any powers to either rectify or reject the claim.

Now comes the amendments to the Code, notified on  16.08.2019. Amended section 30(4) of the Code reads as under:-

# Section 30(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six  per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor, and such other requirements as may be specified by the Board:

The above amendments has two dimensions

• distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53. 

• including the priority and value of the security interest of a secured creditor.

The  amended provisions of the Code now mandates that the resolution plan approved by the CoC provides for the distribution of funds as per Section 53(1) of the Code. Prerequisite to the distribution of funds of resolution plan as per Section 53(1) is the preparation of the list of creditors accordingly. In my view the said amendments, indirectly thrust upon RP, the duty to follow the provisions of Section 38 to 42 of the Code in preparing the list of creditors.

An unsecured financial creditor has 4th priority in distribution of funds u/s 53(1) and as such. Inclusion of a portion of unsecured financial credit in 2nd priority will affect the rights of employees who have 3rd priority under the waterfall. Amendments under section 30 of the code has implications to identify and determine the secured and unsecured portion, and as such the function of IRP /RP has widened from simply collecting and collating the claims of creditors in CIRP.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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Rewriting the Rules of the Game under IBC - Pari-passu charge.

NCLT Mumbai bench vide orders dated 10.05.2019 in Edelweiss Asset Reconstruction Co. Ltd.v/s. Reid and Taylor India Limited (M.A.No.1392/2019 in C.P. No. 382/IB/MB/MAH/2018)

held as under:-

# 8. “.........., only the first charge holder / the secured creditor with first pari-passu charge can stay outside the liquidation process by the Liquidator and realize his security interest in the manner provided under the above provisions of law…….”

Pari passu charge means, when more than one creditor has a charge like mortgage on the same property though created at different times, if they agree among themselves, their charge / mortgage will rank equal in enforcement. For e.g. A Bank having a charge on 1.1.2007 and B Bank has a charge on the same property on 2/2/2008, normally A Bank has the priority. Only after satisfying the dues of A Bank, B bank can claim any surplus realized over and above the dues to A Bank. But if both the banks agree that their charges are pari passu , they can have the share of the proceeds of the sale of the property in enforcement of their mortgages equally i.e. pro rata to their advances or outstandings depending upon the wording of the document under which the pari passu charge has been agreed among them.

Under the above mentioned orders AA has excluded the other pari-passu charge holders to participate in realising their security interest in the liquidation process. In my view, AA could  have allowed the first pari-passu charge holder to realise the security interest & hold the amount realised in trust for all the pari-passu charge holders, to be distributed according to the terms of document creating pari-passu charge.

Let’s look at some of the interesting provisions of “The Companies Act, 2013” & “The Transfer of Property Act, 1882”

Proviso to Section 325(1) of The Companies Act, 2013,reads as under:-

Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen‘s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debts, opts to realise his security,

- (i) the liquidator shall be entitled to represent the workmen and enforce such charge;

- (ii) any amount realised by the liquidator by way of enforcement of such charge shall be applied rate-ably for the discharge of workmen‘s dues; and…………

The Transfer of Property Act, 1882

# Section 100. Charges Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property and all the provisions herein before contained which apply to a simple mortgage shall, so far as may be, apply to such charge.;

Charges, filing of which with ROC is not necessary:

- Guarantee doesn’t require Registration;

- Charge created by operation of law need not be filed;

- Negotiable Instrument (Hundi) is not a ‘Charge’ and registration not required.

Thus, as per the provisions of The Companies Act,  the dues of the workmen have deemed pari-passu charge with all the secured creditors and accordingly they have the right to participate to realise their security interest U/s 52 of the Code.

With the recent amendments in the Code, the amended Sub-section 4 of Section 30 reads as under:-

(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:

The  amended provisions of the Code now mandates that the resolution plan approved by the CoC provides for the distribution of funds as per Section 53(1) of the Code. Prerequisite to the distribution of funds of resolution plan as per Section 53(1) is to prepare the list of creditors accordingly. In my view the said recent amendments, indirectly thrust upon RP, the duty to follow the provisions of Section 38 to 42 of the Code in preparing the list of creditors.

The only question remains as to how to deal with partly secured financial creditor (i.e. the the liquidation value of the underlying security is less than the claim amount.) The answer to the same lies under section 123(3)  of the Code (Chapter IV under Part-III of the Code), reading as under:-

(3) If a secured creditor makes an application for bankruptcy and submits a statement under clause (b) of sub-section (2), the secured and unsecured parts of the debt shall be treated as separate debts.

Accordingly, during CIRP also, the secured (on the basis of liquidation value of the underlying security) & unsecured parts of the debt of a financial creditor can be treated as separate debts and accordingly listed, for proper distribution of resolution plan funds, as per the provisions of the code 

Reference;-

1. eBook  "Claims of Creditors" by Arvind Mangla, a publication of Amazon Kindle Store.

'Disclaimer: The sole purpose of this blog is of  creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog

SBI - SOP for Punitive Action against Empanelled IP's

SBI vide circular dated 31.07.2019 has formalized Standard Operating Procedure for taking Punitive Action against Empanelled Insolvency Professionals. Now SBI Empanelled IP can be issued show cause notice by SBI also. 

The SOP covers requisite measures to be taken in a uniform manner across the Bank, and deals with the following:

(i) Grounds of Punitive Actions – Bank may initiate enquiry for investigation to proceed further, if needed, to take punitive actions against erring IPs in case bank receives any complaint or order or reporting regarding instances of misconduct, mischief, incompetence etc.

(ii) Complaint/Adverse Report – A complaint against IP may originate from our Branch or another member of CoC (Committee of Creditors) or from any other stakeholder / whistle-blower. Anonymous complaints shall not be entertained.

(iii) Preliminary Enquiry – On having reasonable grounds to believe that IP has engaged in acts of misconduct etc., GM(Ops-I) in SARG shall direct a preliminary enquiry into the actions of IP if deemed necessary. The enquiry shall be conducted by an officer not below the rank of AGM of the Branch concerned and the factual report shall be submitted to DGM(NCLT), SARG.

(iv) Show Cause Notice by Investigating Authority – On receipt of factual report from the Branch, DGM(NCLT) SARG shall issue a show cause notice to the IP, briefly describing the allegations made in the complaint, giving 21 days’ time to respond. On receipt of reply to show cause notice, DGM(NCLT), SARG will convene a meeting of the Disciplinary Committee and shall present the matter before the Committee to consider suitable punitive actions viz., de-empanelment, filing of civil/criminal action, reporting the act of misconduct etc to IBA, IBBI etc.

Now let’s see the provisions of the Code which deals with misconduct on the part of Insolvency Professionals.

# 217. Complaints against insolvency professional agency or its member or information utility. -

Any person aggrieved by the functioning of an insolvency professional agency or insolvency professional or an information utility may file a complaint to the Board in such form, within such time and in such manner as may be specified.

# 235A. Punishment where no specific penalty or punishment is provided. -

If any person contravenes any of the provisions of this Code or the rules or regulations made thereunder for which no penalty or punishment is provided in this Code, such person shall be punishable with fine which shall not be less than one lakh rupees but which may extend to two crore rupees.

# 236. Trial of offences by Special Court. -

(1) Notwithstanding anything in the Code of Criminal Procedure, 1973(2 of 1974), offences under of this Code shall be tried by the Special Court established under Chapter XXVIII of the Companies Act, 2013 (18 of 2013).

(2) No Court shall take cognizance of any offence punishable under this Act, save on a complaint made by the Board or the Central Government or any person authorised by the Central Government in this behalf.

The job of insolvency professional is of specialised nature, and to ensure that Insolvency Professional may work without any undue influence & pressures whatsoever, of the interested parties, the code provide for special provisions to deal with the misconduct of Insolvency Professionals.

A full Chapter IV, under Part IV of the code deals with the complaints of any person aggrieved by the actions of Insolvency Professional. Further, to avoid frivolous filing of civil/criminal action against the Insolvency Professionals, Code provides that “No Court shall take cognizance of any offence punishable under this Act, save on a complaint made by the Board or the Central Government or any person authorised by the Central Government in this behalf. Thus SBI is not empowered / authorized to initiate any civil / criminal action against any Insolvency Professional.

IRP / RP in a resolution process is appointed by the Adjudicating Authority( NCLT) & IRP / RP functions under the directions & supervision of Adjudicating Authority. Code does not delegate or grants any supervisory role on any of the creditor of the CD.

Thus the threat of filing of civil / criminal action against the Insolvency Professionals (which SBI is not empowered under the Code), under the Standard Operating Procedure, circulated by the SBI is a very crude attempt to influence & pressurize the Insolvency Professionals to submit to the dictates of SBI during insolvency proceedings, for the interests of SBI, which  the Board (IBBI) should take note of it.

To maintain the professional integrity & dignity of Insolvency Professionals, I demand SBI to immediately withdraw the said circular, and tender public apology for the same.

Remedies for Home buyers in IBC & RERA

Hon’ble SCI, in its judgement(1) dated 09.08.2019, while upholding the constitutional validity of the status of the home buyers as “financial creditors” under IBC, has added new dimensions to the maintainability of  the application of home buyers, at the time of admission of application of home buyer U/s 7 of the Code(2).

For initiation of action under IBC(2), normally  a financial creditor has to prove the existence of debt & that the default has occurred. 

The  SCI in the para # 50 of the above judgement  has held, that once prima-facie default is made out on an application under section 7 of the Code, the burden shifts on the promoter / real estate developer to point out that 

(a) the allottee is himself a defaulter and not entitled to any relief, entailing a dismissal of the application; 

(b) the insolvency resolution process has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of insolvency; 

(c) the allottee who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment; 

(d) the allottee does not want to go ahead with its obligation to take possession of the flat / apartment under RERA(3), but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it. 

Given the above, it is very difficult to accede that trigger-happy allottees would be able to ignite the process of removal of the management of the real estate project and/or lead the corporate debtor to its death.

Hon’ble SCI under  para 29 of the said judgement further ruled that:-.

# 29. As a matter of fact, the Code and RERA operate in completely different spheres. The Code deals with a proceeding in rem in which the focus is the rehabilitation of the corporate Debtor……….The object of RERA is to see that real estate projects come to fruition within the stated period and to see that allottees of such projects are not left in the lurch and are finally able to realise their dream of a home, or be paid compensation if such dream is shattered, or at least get back monies that they had advanced towards the project with interest.

Thus with the above ruling, SCI has clearly defined the objectives of IBC & RERA, which highlights  that IBC is Corporate Debtor centric, with the focus on rehabilitation, where as RERA’s prime object is to protect the interests of the home buyer.

The new dimensions added by the Hon’ble SCI, has made the task of home buyers difficult to initiate insolvency of the developer. Let’s analyse the advantages & disadvantages of initiating action under IBC / RERA.

Cost of initiation of action under IBC and expected outcome.

i). Application fee under IBC….…...Rs.25,000.00

ii). Advocate’s fee for filing of application ……...Approx. 25,000.00 to 50,000.00

iii). Usual time period for admission of application by NCLT……......14 days to 3 months. Immediately after the admission of the application by  NCLT, the applicant has to provide for the expenses of Public Notice, fee of IRP (Interim Resolution Professional) and other CIRP expenses, which may be around Rs.3 Lakh to Rs.5 Lakh. [Though these expenses will be reimbursed to the extent ratified by the CoC (Committee of Creditors)]

iv). Recovery period - As per IBC, period of 330 days have been specified for finding  the resolution of the CD (Corporate Debtor). In case no resolution is found during this period, the CD goes into liquidation. So normally the applicant (Home buyer) can expect recovery only after one year of the date of filing of application, provided resolution plan for the CD gets approval from CoC & NCLT. In liquidation process the recovery gets further delayed.

v). Quantum of Recovery - As far as the quantum of recovery is concerned, here lies the catch. Though home buyer is being treated as Financial Creditor, he is classified as the Unsecured Financial Creditor, for the purpose of distribution of funds out of resolution or the liquidation process & accordingly has 4th priority in distribution of funds under the IBC. Priority of distribution of funds under IBC is as under. 

1. Resolution process cost / Liquidation process cost

2. Worker’s salary, due for 24 months preceding resolution / liquidation commencement date &  Secured financial creditors.

3. Employees salary due for 12 months preceding resolution/ liquidation commencement date.

4. Unsecured financial debt (including home buyers) 

5. ……...etc. etc. 

As per the past experience of resolutions & liquidations under IBC, the distribution of funds had rarely crossed the third priority. So the home buyers are not likely to get any funds out of resolution / liquidation under the IBC. So, initiation of insolvency under IBC by a home buyer will be an exercise in futile.

Trigger for initiating action under  RERA Action for recovery under RERA can be initiated for any of the following reasons.

i). Cancellation of allotment by the builder - Unilateral and without sufficient cause.

ii). Loss or damage sustained by any person due to false / incorrect statement / information contained in the notice, advertisement or prospectus, or on the basis of any model apartment.

iii). Fails to complete or is unable to give possession of an apartment, plot or building, as per agreement for sale or, as the case may be, duly completed by the date specified therein

iv). Structural and other defects in workmanship, quality or provision of service or other obligations as per agreement to sale within a period of 5 years from the date of possession. Rectification of such defects without further charges, within 30 days Compensation for non-rectification of default.

Cost of initiation of action under RERA and expected outcome.
i). Application fee under RERA…………….…...Rs.1,000.00 to Rs.5,000.00, depending upon the State. (In Maharashtra it is Rs.5000.00 & in Uttar Pradesh it is Rs.1,000.00)
ii). Advocate’s fee for filing of application … …...NIL, as online application can be filed by the applicant. 
iii). Usual time period for admission of application by RERA…...NIL. online application. Processing of the application in RERA & proceedings before AA (Adjudicating Authority) are very simplified. There is no need to take the services of any Advocate. The applicant can himself handle the proceedings before AA . One can expect the decree against the developer, usually between 45 days to 3 months.
As per the provisions of RERA , the decree besides the refund of amount, provides for the interest from the date of payment by the home buyer upto the date of recovery, cost & compensation awarded by the AA.
iv). Timelines for refund. -The refund of any amount which is payable by the promoters to allottees along with the applicable interest, cost and compensation, if any, under the Act or the Rules and Regulations, shall be made by the Promoter / developer, through RTGS or NEFT or Demand Draft drawn on any Scheduled Bank to the allottee within 30 days from the date on which such refund along with applicable Interest and Compensation, becomes due and payable to the allottee, under information to the authority (RERA).
v). Further as per the provisions, If a promoter fails to pay any interest or penalty or compensation imposed on him, by the adjudicating officer or the Regulatory Authority or the Appellate Authority, as the case may be, under this Act (RERA) or the rules and regulations made there under, it shall be recoverable from such promoter, in such manner as may be prescribed, as an arrears of land revenue. So RERA offers much better chances of recovery for the home buyers.

Under IBC the claim amount, includes the interest calculated from the date, the amount becomes due, upto the date of commencement of resolution process / liquidation process. Standard agreement to purchase does not have any provision of refund except for  the cancellation of booking. So, in the absence of any repayment date under the agreement, the date promised for possession of the flat is being taken as the due date for the purpose of ascertaining default and while calculating interest in claim amount under resolution process.

There is no provision of compensation  in IBC. 

In the judgement mentioned supra above, the Hon’ble SCI has also ruled that (para -28)... Even by a process of harmonious construction, RERA and the Code must be held to co-exist, and, in the event of a clash, RERA must give way to the Code. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, the Code. 

Thus initiating action under IBC is not advisable for the home buyers. However in case the action is initiated by some other creditor of the developer under IBC, there is no escape for the home buyer, but to participate in the process, though the chances of recovery of his amount under IBC are almost negligible..

In the present environment of nearly stagnant pricing in real estate market, one should prefer ready to move in houses.

Appropriate time for initiating action under RERA

The action under RERA should be initiated immediately after the cause of action arises as mentioned above. (Trigger for initiating action under  RERA ). In one case, a friend of mine initiated the action under RERA, for not completing the project by the agreed date.The decree was granted by the AA under RERA for the refund of amount, interest from the date of payment, cost & compensation. Immediately after the grant of decree by the RERA, the concerned builder went into insolvency under IBC on an application filed by some operational creditor of the builder. The Resolution Professional handling insolvency process of the builder, while admitting the claims of allottees, adopted the following criteria.

1. Allottees with decree of RERA. Claims were admitted as per the terms of decree awarded by the RERA, i.e. (a) amount paid by the allottee. (b) interest on amount paid by the allottee, from the date of payment upto the date of commencement of insolvency, (c) cost & compensation granted by RARA under the decree .

2. Other Allottees. Claims were admitted for (a) amount paid by the allottee (b) interest on the amount paid by the allottee from the date of possession mentioned in the agreement upto the date of commencement of insolvency.

Thus my friend with RERA decree, ended in a better position, in respect of quantum of claim admitted under resolution process of IBC V/s the allottees  who had not initiated action under RERA. 

Further clause 3 of the order in the  decree awarded by AA under RERA in the above referred case provided as under:- 

# 3. The charge of the due and payable amount with interest, as ordered, be kept on the booked flat.

Here the question arises, whether such orders, as above, creates charge in the judicial process, on the concerned property / flat and effectively changes  the nature of credit from unsecured to a secured creditor, with a consequential effect on the quantum of recovery under IBC.

Reforms suggested for Real Estate Sector.

1. Model agreement to sale, as per the RERA  rules & regulations, to contain a clause, creating hypothecation charge on the concerned under construction flat / property, so that the home buyer acquires the status of Secured Creditor. This will increase the chances of recovery for the home buyers during insolvency of the developer. As the charge has to be registered under the present provisions of The Companies Act -2013, this will prevent the multiple booking of the concerned under construction flat / property. (details of charges created by a company are visible online on the website of the Ministry of Corporate Affairs) 

2. Compulsory Credit rating of the developer from two independent Credit Rating Agencies.

3. Introduce License to book under construction flat, which is to be issued by RERA Authorities keeping in view:-

i). Technical & financial strength of the Builder / Developer.

ii). Past track record of the Builder / Developer and its promoters / directors.

All the above suggested reforms can be implemented under the present set of rules & regulations.

References

(1) Pioneer Urban Land and Infrastructure Limited and Anr. Vs. Union of India & Ors. WP (C) No. 43/2019.

(2) Insolvency & Bankruptcy Code - 2016

(3)The Real Estate ( Regulation & Development) Act-2016

'Disclaimer: The sole purpose of this blog is of  creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog

An Open letter to the Finance Minister.

An Open letter to the Finance Minister.

To,                                                                                                    Dated 5th August, 2019

The Hon’able Finance Minister,

Govt. of India,

New Delhi.

Madam,

Subject :-  Systematic Strangulation of  the Institution of “Insolvency Professional”

The Board (The Insolvency & Bankruptcy Board of India - IBBI)  vide Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) (Amendment) Regulations, 2019, has imposed age limit of 70 years  on Insolvency Professional for taking up any assignment under the code ( IBC-2016)

(Though the matter of imposition of age criteria is debatable, it is not the principal subject matter of this letter. For my view on age criteria please refer my blog Authorisation for Assignment  )

While going through Discussion Paper dated 12th May, 2019 issued by the Board for “Amendments to the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016”  the following clause caught my attention.

# 12 ………It is, therefore, proposed that the IPs above the age of 70 years may not be issued CoP (Certificate of Practice) and they may not be allowed to take up processes in their own name, while they may support younger IPs or work for IPEs in employment.

What are these IPE’s ?

The Code (IBC-2016),  under its various provisions , created the following institutions.

1. The Insolvency & Bankruptcy Board of India (IBBI)

2. Insolvency Professional.( IP)

3. Insolvency Professional Agency. (IPA)

4. Information Utility.(IU)

The Board (IBBI) under the Code, was entrusted with  the task of regulating the three other institutions created in the Code.

Nowhere in the Code, there is any mention of the  IPE (Insolvency Professional Entity). This institution of IPE was created by the Board  through Chapter V “Recognition of Insolvency Professional Entities”.under Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016. Concerned clause of the IP Regulations reads as under:-

# 12.(1) A company, a registered partnership firm or a limited liability partnership may be

recognised as an insolvency professional entity, if –

(a) its sole objective is to provide support services to insolvency professionals, who are its partners or directors, as the case may be;

Now let's look towards the provisions of the Code. Section 20 of the code provides as under:-

20. Management of operations of corporate debtor as going concern. -

(1) The interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.

(2) For the purposes of sub-section (1), the interim resolution professional shall have the authority-

(a) to appoint accountants, legal or other professionals as may be necessary;

(b) to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process;

(c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property:

Provided that no prior consent of the creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt.

(d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and

(e) to take all such actions as are necessary to keep the corporate debtor as a going concern.

The provisions of the Code U/s 20 or any other section of the Code, does not envisage any  support services to insolvency professionals. Further Section 240 of the Code does not empower the Board to make any regulations on the subject matter of Section 20. 

It’s clear that Code does not provide for creation of the institution of IPE and as such these IPE's does not have any legal sanctity. The institution of  IPE is just a brainchild of the Board. The situation as it stands today is that firstly Board creates an institution ( IPE), out of thin air, without any authority or legal sanctions , and secondly is  now suggesting / forcing “Insolvency Professionals” to work for IPEs in employment. Thus the Board in the name of  regulations is Systematically Strangulating  the Institution of “Insolvency Professionals”. 

The creation of the institution of IPE by the board has brought in aberrations in insolvency ecosystem.. This has given rise to the practice of “Proxy - Insolvency Professionals”, by big IPE’s, in which IP’s are being given a very paltry percentage of the fees collected for the CIRP process and the major portion of the fees is appropriated by the IPE. The IP is only expected to perform the statutory functions i.e. Conducting the CoC meetings etc., while balance work is done by the IPE. Shareholding of IP’s in these  IPE’s is usually very nominal. Thus the major portion of fees for the CIRP process is appropriated / cornered by the promoters / major shareholders of these IPE’s.

Presently in the big ticket insolvency cases, the financial creditors (usually bankers) are calling for bids (Technical as well as financial)  from IPE’s (as evident from newspaper reports in insolvency process of Jet Airways & Reliance Communications etc.), before proposing the name of an Insolvency Professional in the application to be filed under Section 7 of the Code. In the technical bids, an IP who is not associated with any IPE usually  loses in favour of IP who is a part of an IPE (while taking into account the experience of all the partners / directors of the IPE). Thus IPE’s have in process, over the time, have gathered absolute say in dictating terms in respect of sharing of fees between IP & IPE.

One of the glaring examples of Proxy Resolution Professional, is the CIRP process of Lavasa Corporation Ltd. The fee structure approved by CoC, in this present case, is detailed below.       (Total Creditors Claims admitted Rs. 5970.48 Crores)

- The fee of RP …………….......Rs. 1 Lakh per month + OPE + Taxes

- The fee of IPE…………….......Rs.  30.50 Lakh per month.+ OPE + Taxes

- No. of support staff provided by the IPE…..19 (Average fee per support staff - Approx.

  Rs.1.50 Lakh)

- The Success fee payable to IPE ……  0.40% to 0.60% of Successful Resolution Plan

Amount + Taxes. (Upfront) 

- The fee of Legal Advisor……...Rs. 12000 per hour (Blended)

The resolutions approving the above fees were passed in the 2nd CoC  meeting dated 01.11.2018, & minutes of the said 2nd CoC meeting were approved in the 3rd CoC meeting dated 03.12.2018.

(The above information has been taken from  the MOM circulated by the RP, in the CIRP process of Lavasa Corporation Ltd.)

From the above, one can observe that the fee of the humble RP (during CIRP, Insolvency Professional is called as “Resolution Professional”) is nearly two - third of the fee charged by the IPE for the support staff provided by it. On the top of it, to emphasise the supremacy of IPE, the MOM of CoC are being circulated under the logo of IPE, as if the CIRP is being conducted by the IPE.

Similar is the situation in the CIRP of Reliance Communications Ltd.

- The fee of IRP …………….......Rs. 2 Lakh per month

- The fee of IPE…………… .......Rs. 70.80 Lakh per month.

The above information is available as per the Form-2 (Financial Disclosures) submitted by the IRP to IIIP of ICAI (Insolvency Professional Agency) I could not access the MOM of CoC, for more information.

From the above it can be observed that under this system, certain malpractices have also crept into the system of CIRP process, i.e. charging of Success fee by the IPE etc. In my feedback dated 29.06.2019, to the Board on some other issue (Text of the feedback is available on my blog Auth. Representative & CoC ), I had pointed out, without naming the case, towards the malpractice of this charging of the success fee. But to my dismay, the Board has not come back to me, to enquire about the particulars of the case. 

As per Section 208(2)(d) of the Code, the RP is duty bound to  submit a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as to the insolvency professional agency of which he is a member. When records of proceedings are being submitted to the Board under the provisions of the Code, the Board is duty bound for their timely scrutiny.

Now the question arises whether the Board is ignorant or negligent or both, in its duty to prevent and curb the malpractices in the resolution process.

- Records of every proceeding are being submitted to the Board as per the provisions of the Code.

- Board has not enquired about the details of the case, despite being pointed out by me in my feedback to the board dated 29.06.2019.

May be the Board is short of infrastructure to deal with the above. For scrutiny of the progress reports (CIRP & Liquidation process), Board can take the services of senior & willing Insolvency Professionals, not relative / related party to the CD & Professionals involved in the concerned CIRP / Liquidation process, on piece meal basis. Services of senior experienced Insolvency Professionals can also be taken for inspections & investigation of complaints etc.(for example the undersigned worked as “Chief Vigilance Officer” in a govt.organisation for four years)

The Board is overzealous in regulating ‘Insolvency Professionals’, by consistently putting tougher norms day by day, but on the other hand, I failed to find any norms / regulations to regulate the functions of IPE, except one yearly return  for submitting details of fee earned by the IPE during the financial year. 

I think , the Board  should not forget that the ‘Insolvency Professional’ is the fulcrum of the entire insolvency ecosystem and Board should while regulating the functions of the  IP’s, should also initiate steps for creating congenial atmosphere for IP’s to work, rather than Systematically Strangulating the Institution of “Insolvency Professionals”. 

Prayer:- Govt. may issue directions to the board, U/s 225 of the Code, for the following :-

- To drop the regulations concerning IPE’s [ i.e. Chapter V  “Recognition of Insolvency Professional Entities”.under Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016].

- To put in place system to scrutinize the progress reports of CIRP / Liquidation processes, for identification of malpractices in the initial stages & for timely remedial measures.

Thanking You,

Yours Sincerely,

Arvind Mangla