Towards sounder insolvency resolution: IBBI amending the Insolvency Professional Regulations a good move

Published: July 15, 2020 3:50 AM

Hence, an active supervisory oversight by the regulator is a must for the success of this profession, and hence, the success of the Insolvency and Bankruptcy Code (IBC).

he process that goes into achieving this is quite complex and, understandably, requires a robust team that can support the insolvency professional who is at the helm of the affairs. he process that goes into achieving this is quite complex and, understandably, requires a robust team that can support the insolvency professional who is at the helm of the affairs.

By Ashish Rathi & Zeenath Jahaan

The Insolvency and Bankruptcy Board of India (IBBI), the regulator for all matters pertaining to insolvency and bankruptcy in India, has recently amended the Insolvency Professional Regulations where it has done away with the earlier restriction placed upon Insolvency Professional Entities (IPEs) to provide support services to only their partners and directors. It would be incorrect to look at this change as just another amendment that happens in the regular course. This brings out a very important change, which will have far-reaching implications on the insolvency profession and the prevailing market practice of providing and availing support services. With this amendment, the IPEs are now allowed to provide support services to any insolvency professional (IP), even if he is not a partner/director in that IPE.

This is a shot in the arm for the individual IP practitioners who can avail the expertise of any IPE they may want to engage, and this opens up many doors, which, earlier, were shut to individual IPs on the pretext of a high debt exposure or complex operations. Simultaneously, to set up an IPE suddenly looks promising.

For the uninitiated, an IP takes over a stressed company that was referred to insolvency by the creditors, whose dues are in default. He is broadly expected to manage the company operations, manage the insolvency process, and find an investor who can take over the company, and, thereby, resolve the “insolvency”. The process that goes into achieving this is quite complex and, understandably, requires a robust team that can support the insolvency professional who is at the helm of the affairs. That is where an IPE comes into the picture.

It is essentially a partnership or a company where IPs are either partners or directors, and it is recognised as an entity by the IBBI eligible to support its partners/directors (and now other IPs also) in the insolvency assignments taken up by them.

In the initial stages, many firms had registered as IPEs; however, some of them chose to de-register, seemingly on account of enhanced capital requirements, various restrictions on whom they could provide services to, risks inherent in the profession of insolvency that the partners of these IPEs passed on to the firm. One may reasonably foresee a number of these firms re-registering as IPEs now.

Entities which were not IPEs have also been providing support services. However, after the recent IBBI order in the month of June, in the case of Vijay Garg, which raised pertinent questions on the eligibility of the non-IPE firms to provide support services, this amendment seems imminent.

The order had cast a cloud upon using services of an entity other than an IPE and deliberated on whether such an entity qualifies as a “professional” eligible to provide support services for an insolvency mandate. The nudge towards IPEs as preferred support service providers rang clearly in the order.

The move is in line with the regulator’s constant efforts to regularise various aspects of the resolution process. Currently, these non-IPE firms, some of them who have roots outside of India and are big names in the consulting world, are outside the regulatory oversight of IBBI, despite playing a key role in the resolution process. This amendment probably would now push these firms to have their own IPEs, and the regulator finds itself in a position to exercise a much greater control on the resolution process.

The IP is the focal point in the resolution process. Hence, an active supervisory oversight by the regulator is a must for the success of this profession, and hence, the success of the Insolvency and Bankruptcy Code (IBC). However, an equally important area that calls for the attention of the regulator is to define the role and responsibilities of the IPEs, and a balance in responsibility and accountability of the IP and the IPEs in the assignment that they are handling is important. The IP is an individual and he must be entitled to reasonably rely upon the work of the professionals appointed by him, unless there are reasons that suggest otherwise. To allow an entity to support, giving it recognition in the insolvency regime without any regulatory stipulation as regards its accountability in the insolvency process would be tantamount to the IP being unfairly and unreasonably burdened.

The regulator has been active in bringing the other crucial hinges in the resolution process like valuation within its fold by setting up of Registered Valuer Organisations (RVOs), and now by this amendment, which seems to encourage IPEs as preferred support service providers, another critical piece is sought to be brought under its ambit, which is a progressive step. It would be interesting to see how the regulator balances the burden of responsibility between the IPE and the IP and a detailed stipulation on the role of IPEs would be welcome.

Rathi is an Insolvency Professional, CA and is a partner with Mazars, & Jahaan is a CA and is a senior consultant with Mazars. Views are personal

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