1. Creating a competent insolvency professionals’ pool

Creating a competent insolvency professionals’ pool

The draft Insolvency and Bankruptcy Code must go further in equipping Insolvency Professional Agencies to complement the other reforms envisaged

By: and | Published: December 21, 2015 1:43 AM

The finance ministry constituted a Bankruptcy Law Reforms Commission (BLRC) to draft a unified new insolvency law which replaces all existing law on insolvency and bankruptcy. The draft Insolvency and Bankruptcy Code (IBC), proposed by BLRC, creates a streamlined process which funnels all insolvency resolution processes into one overarching specialised law. The Bill envisages three critical pillars of institutional infrastructure—a regulator, a competitive industry of information utilities and a competitive industry of insolvency professionals (IP). In India, we have experience with regulated professionals including chartered accountants, company secretaries and lawyers. IPs are envisaged as a new kind of regulated professionals.

The IP plays a pivotal role in managing both the rescue and liquidation processes envisaged under the Bill. In the rescue process, the IP is the Resolution Professional. In this role, the IP will gather financial information about the debtor, verify the claims of the creditors, constitute a committee of creditors on the basis of credit exposure, safeguard the estate, run the business of the debtor and help in reaching and administering a consensual rescue plan.

In a liquidation proceeding, the IP is the Liquidator. Here, the IP will gather and sell the assets of the insolvency company and use the proceeds to pay off all its creditors in satisfaction of their debt. The IP will play an equally important role in bankruptcy proceedings against individual debtors and sole proprietors as the Bankruptcy Trustee. In all cases, the IP’s role is central, given the complexity and criticality of their functions.

The crucial role that the IP plays raises questions about how best to develop and regulate a cadre of competent IPs.

The draft Bill proposes that an IP will be registered by the bankruptcy regulator, if the IP is a member of an IP Agency (IPA), a Self-Regulatory Organisation (SRO) of IPs. The present draft Bill, however, does not provide sufficient clarity on what standards the regulator will enforce in regulating an IP. The Indian approach towards regulating professionals has been to recognise certain professions as special, and to grant recognition to one national SRO. This SRO has monopoly power to set and enforce standards of conduct for all concerned professionals. In theory, SROs are a good model for regulating professions, as they allow for greater dynamism in the creation of professional standards and transmission of expertise while regulating a smaller group of members better than a state regulator. However, as with other monopolistic operators, Indian SROs have paid inadequate attention to the protection of consumers.

For example, existing SROs such as the Bar Council of India (BCI) and Medical Council of India (MCI) are considered to have consistently failed in adequately enforcing standards of conduct and ensuring a high quality of service to consumers. This is because the institutional and legal framework of existing SROs create poor incentives for good self-regulation. Their incentives are, instead, designed towards protecting their members. For example, there are few, if any, disciplinary actions taken by BCI or MCI against errant lawyers and doctors. There is little emphasis on regular examination or evaluation of professional skills, or redressing grievances of consumers.
While devising an institutional structure for the IPs, regulation should endeavour to create a cadre of IPs with high standards of professional and ethical conduct. A new approach towards SROs is needed where SROs have higher accountability towards consumers. This may be achieved by ensuring multiple SROs are licensed and compete amongst themselves for having competent IPs as members.

Additionally, the disparate functions of SROs need to be broken down for better regulation, and minimum standards for each must be in the primary law. SROs, in principle, function like mini-states. Like the state, SROs exercise legislative (standard setting), executive (conducting examinations, imparting skills and investigating complaints), and judicial (imposing penalties) powers, all of which need to be appropriately regulated.

This can be achieved by ensuring that regulation clearly defines internal legislative, executive and judicial powers at the IPAs that are in the best interests of consumers. Regulation needs to define offences and prescribe penalties for errant IPs, and ensure a competitive market for IPAs. These provisions are absent from the present draft of IBC. The absence of any provisions for offences of IPs and IPAs, and related penalties, is particularly glaring. The objective of consumer protection cannot be met if IPs, IPAs and the regulator do not know what not to do.

Simultaneously, IPAs must be given leeway to compete on parameters such as quality of members, entry requirements, codes of conduct and quality of grievance redressal mechanisms. Excessive state intervention can retard, if not inhibit this process. A key feature of the regulatory design that positively incentivises SROs is competition. The relevance of an IPA, and the revenues of its members, would depend on its reputation, and consequently the reputation of its members. For example, the UK has multiple SROs for insolvency professionals, differentiated by the quality of their codes of conduct, their entry barriers, and consequently the quality of their members.

The market would be better served if the primary law provided minimum governance structures, and the performance requirements from IPAs, rather than delegate it to an insolvency regulator that has also been created under the draft Bill. Critically, the draft Bill also fails to place any emphasis on the independence and efficacy of the judicial function of disciplining member IPs. If consumer trust in IPs is to be developed and maintained, the law must mandate IPAs to conduct disciplinary actions against errant members impartially and efficaciously. The significance of a competent cadre of IPs for an efficient insolvency and bankruptcy regime cannot be overemphasised. Their services are both complex and critical for the economy. The draft Bill must go further in equipping IPAs to complement the other reforms envisaged.

Anirudh Burman is with NIPFP Macro/Finance Group; Suharsh Sinha is with Covington & Burling law firm

  1. P
    Prasad Kulkarni
    Jul 26, 2016 at 3:57 pm
    Is it for commercialization of medical profession?
    Reply

Go to Top