Insolvency regulator moots incentives for resolution professionals | The Financial Express

Insolvency regulator moots incentives for resolution professionals

The move comes at a time when inordinate delays in resolution has been blamed for asset value erosion and consequent poor recovery for creditors.

Insolvency regulator moots incentives for resolution professionals
Resolution professionals will get 1% of the realisable value in incentive if the resolution of the toxic asset takes place within 165 days of the commencement of the insolvency proceedings

The insolvency regulator has proposed to incentivise resolution professionals for making all-out efforts for maximisation of the value of stressed assets beyond their liquidation value, and for their timely resolution. The move comes at a time when inordinate delays in resolution have been blamed for asset value erosion and consequent poor recovery for creditors.

The Insolvency and Bankruptcy Board of India (IBBI) has suggested that the performance-linked incentive fee for value maximisation be paid to the resolution professional at 1% of the amount by which the realisable value (recovery) is higher than the liquidation value of the stressed asset.

Also Read: IBBI moots separate insolvency framework for home buyers

Similarly, resolution professionals will get 1% of the realisable value in incentive if the resolution of the toxic asset takes place within 165 days of the commencement of the insolvency proceedings. There is a provision for a graded reduction in such incentives according to the time taken for resolution. So, if the resolution takes place between 166 days and 270 days, the incentive will be 0.75% and if it is done between 271 days and 330 days, the incentive will be to the tune of 0.5%, according to the IBBI.

For instance, a corporate debtor having liquidation value of Rs 20 crore was resolved and the realisable value to creditors was Rs 100 crore. In this case, if the resolution plan was submitted to the NCLT on the 170th day of the insolvency commencement date, the resolution professional will get incentive of Rs 75 lakh for timely resolution (at 0.75% of Rs 100 crore) and another Rs 80 lakh for value maximisation (at 1% of the Rs 80 crore).

The regulator has also stipulated a fee of Rs 1-5 lakh for interim resolution professional for handling the resolution process of assets where claims are worth Rs 50 crore and above.

At the same time, the regulator has barred insolvency professionals from accepting any fees or charges from or sharing them with any professional or support service providers who are appointed under the insolvency processes. This will prevent any conflict of interests. These changes are part of the changes to the IBBI’s regulations.

Also Read: No stigma should be attached to business failures: IBBI chief

Recovery for financial creditors from the resolution of toxic assets has remained far below par in recent quarters. It stood at just 10.7% of their admitted claims in the June quarter, having barely improved from a record low of 10.2% between January and March. Given that about 61% of stressed firms that are undergoing resolution have exceeded the 270-day limit and another 10% have crossed 180 days, the recovery prospects in these assets are far from bright, analysts have said. The IBC stipulates a maximum of 270 days (including an extension of 90 days with NCLT approval) for resolution of toxic assets.

IBBI voices concern over being unrepresented in IBC cases

Separately, in a circular, the IBBI has expressed concern that the corporate affairs ministry and the regulator remain ‘unrepresented’ in critical cases involving legal questions on the Insolvency and Bankruptcy Code (IBC) at the Supreme Court and high courts, since both the government and the IBBI were not made a party to the proceedings.

In light of this, the regulator has now asked insolvency professionals to ‘proactively provide prompt information and papers to IBBI to enable it to examine the provision of statute under question with a view to implead itself for appropriate defence’.

Accordingly, the IBBI has advised insolvency professionals to inform it ‘without any delay about any important issues relating to vires, interpretation and applicability of the provisions of the code, rules and regulations made thereunder’ being contested before the high courts or the Supreme Court in respect of any assignment handled by them. The information, IBBI has stipulated, will be submitted by insolvency professionals as and when any such case is filed before the courts. Mani Gupta, partner at Sarthak Advocates and Solicitors, said: “This is a good move by the IBBI to ensure its participation in matters of public importance involving constitutional validity of IBC and its delegated legislation. (However) It is also likely that insolvency professionals would err on the side of caution and report even trivial issues pursuant to the circular leading to an information overload with IBBI.”

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First published on: 15-09-2022 at 06:05:00 am
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