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
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