Feedback to Board - Multiple Assignments with Insolvency professionals

Insolvency & Bankruptcy Board of India has invited public comments on the proposed restrictions on the number of assignments an insolvency professional can handle at a given point of time..

To examine the issue in detail, let’s look into various provisions of the IBC, 2016 (Code) & The Companies Act,2013.

Provisions of the Code; (IBC, 2016);

# Section 17. Management of affairs of corporate debtor by interim resolution

professional . -

(1) From the date of appointment of the interim resolution professional, -

- (a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional ;

- (b) the powers of the board of directors or the partners of the corporate debtor , as the case may be, shall stand suspended and be exercised by the interim resolution professional;

(2) The interim resolution professional vested with the management of the corporate debtor, shall-

- (e) be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.

# Section 18. Duties of interim resolution professional. -

The interim resolution professional shall perform the following duties, namely: -

(a) collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to -

- (i) business operations for the previous two years;

- (ii) financial and operational payments for the previous two years;

- (iii) list of assets and liabilities as on the initiation date; and

- (iv) such other matters as may be specified;

(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;

(d) monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors;

(e) file information collected with the information utility, if necessary; and

(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including -

- (i) assets over which the corporate debtor has ownership rights which may be located in a foreign country;

- (ii) assets that may or may not be in possession of the corporate debtor;

- (iii) tangible assets, whether movable or immovable;

- (iv) intangible assets including intellectual property;

- (v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;

- (vi) assets subject to the determination of ownership by a court or authority;

(g) to perform such other duties as may be specified by the Board.

Explanation. – For the purposes of this section, the term “assets” shall not include the following, namely: -

- (a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;

- (b) assets of any Indian or foreign subsidiary of the corporate debtor; and

- (c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.

# Section 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 .

# Section 23. Resolution professional to conduct corporate insolvency resolution

process. -

(2) The resolution professional shall exercise powers and perform duties as are vested or conferred on the interim resolution professional under this Chapter.

The  Companies Act,2013;

# Section 203 (3) A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time :

Provided that nothing contained in this sub-section shall dis-entitle a key managerial personnel from being a director of any company with the permission of the Board:

Provided further that whole-time key managerial personnel holding office in more than one company at the same time on the date of commencement of this Act, shall, within a period of six months from such commencement, choose one company, in which he wishes to continue to hold the office of key managerial personnel:

(5) If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.

Key managerial personnel has been defined in Section 2(51) of The Companies Act, 2013, as under;

# Section 2(51) - key managerial personnel , in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; 

(v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and

(vi) such other officer as may be prescribed

# Section 2(53) “manager”, means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not;

# Section 2(54) “managing director”. means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

Duties of IRP detailed under section 17(1) read with section 20(1), falls within the definitions of managing director as per section 2(54) of The Companies Act,2013.

From the above it can be clearly seen that Interim Resolution Professional / Resolution Professionals (IRP /RP) are entrusted with the job of management of the company [Section 17(1)], with specific emphasis, 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 [Section 20(1)], besides handling the insolvency procedures which itself have its own share of onerous duties [Section 18]. This puts on the shoulders of IRP / RP, responsibilities and duties much greater than that of key managerial personnel of a company in the ordinary course of business.

In a going concern undivided attention of IP is must, to preserve and maximize the value of the assets of CD. Single assignment of on going concern will be in consonance with letter and spirit of the provisions of Companies Act. ( Section 203 read with 2(51) of The Companies Act, 2013).

In case of going concern the no. of CIRP should be limited to one, in other situations, like liquidation and where operations of CD have stopped before insolvency commencement date, can be two or three maximum.

Single assignment of the insolvency process of a going concern will address the basic concerns & objectives of the provisions of the Code & The Companies Act, 2013.

Besides above, as the Code does not have specific provisions on this aspect of the number of assignments an Insolvency Professional can handle at any one point of time, the provisions of Section 203 of The Companies Act,2013 shall prevail . Section 17(2)(e) of the Code provides as under;

• Section 17(2)(e) be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.

Point-wise Comments;

	Issue	Opinion
a.	Should there be any restriction on the number of cases, which an IP can handle at a given point of time?	Yes
b.	If yes, whether the proposed action at Para 9 is adequate or any change is required?	In case of going concern the no. of CIRP should be limited to one, in other situations, like liquidation and where operations of CD has stopped before insolvency commencement date, can be two or three maximum.
c.	If no, what should be the criteria for putting a threshold (for example – assets, turnover, number of claims etc?	NA
d.	What should be the minimum or maximum threshold under the Criteria for such restrictions?	Threshold for such criteria can only be, whether the CD under insolvency process is a going concern or not.

In the end, it's not the matter of one's opinion. It is the matter what is specified in the law. I don't have any problem if the company law is amended or specific provisions are made in the Code. Specific provisions in the Code, on this issue, will override the provisions of “The Companies Act” as per non - obstante clause under section 238. 

Under the present situation multiple CIRP assignments are against the law of the land & any stakeholder can move to get the IRP or RP disqualified under the provisions of section 203 of the Company act.

Though nothing has been specified in the Code, on this aspect, the Board by incorporating the following clause in the “Code of Conduct for Insolvency Professionals”, has become complicit in violation of the “Law of the Land”

• “Code of Conduct for Insolvency Professionals”

# Clause 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.

The above clause has authorised “Insolvency Professionals” to take up multiple CIRP assignments. 

I am of the firm opinion that, Board must immediately;

1. Drop clause 22 of the “Code of Conduct for Insolvency Professionals”.

2. Issue circular drawing attention of “Insolvency Professionals” towards section 203 of “The Companies Act, 2013, for compliance.

Where however, the Board is of the opinion that “Insolvency Professionals”  can be allowed to handle multiple CIRP assignments, the Board may recommend to the GOI for insertion of suitable clauses in the Code.

Other assignments of Insolvency Professionals, under the Code,  i.e. Liquidator, Authorized Representative, Bankruptcy Trustee & RP in individual insolvency etc. do not attract the provisions of the “The Companies Act”  as above.

Last year, taking plea of section 196 of The Companies Act, 2013. Board imposed age restrictions (70 years) on insolvency professionals for taking up not only CIRP assignments, but on the whole gamut of assignments under the Code, Liquidator, AR, bankruptcy trustee, RP in individual insolvency etc. etc.  Putting age restrictions on IP, for assignments other than CIRP, was quite illogical & arbitrary decision on the part of the Board.

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.