IBBI upholds resolution professionals' independence under pre-pack schemes

In regulations issued on the Ordinance on pre-pack resolution, the IBBI said an insolvency professional can be appointed as resolution professional if they are independent of the corporate debtor.

The Insolvency and Bankruptcy Board of India (IBBI) has ensured independence of resolution professionals (RPs) under the pre-pack scheme for micro, small, and medium enterprises (MSMEs) notified recently.  

In regulations issued on the Ordinance on pre-pack resolution, the IBBI on Friday said an insolvency professional can be appointed as resolution professional if they are independent of the corporate debtor. This means the resolution professional and all partners and directors of the insolvency professional entity, of which they are a partner or director, have to be independent of the corporate debtor.

A person will be treated as independent of the corporate debtor if they are eligible to be appointed as an independent director on the board of the debtor, are not a related party of the debtor, and not an employee or proprietor or a partner of the corporate debtor.

If the concerned insolvency professional entity or any of its partners or directors represent any of the stakeholders, the person will be ineligible for being appointed as resolution professional.

The financial creditors who are not related parties of the corporate debtor and have at least 10 per cent of the value of the total financial debt of such creditors may propose names of insolvency professionals.

The government recently amended the Insolvency and Bankruptcy Code (IBC) through an Ordinance, enabling pre-packaged resolution schemes for MSMEs and allowing corporate debtors to propose a resolution plan for the stressed company.

The Ordinance was promulgated keeping in mind the financial stress of MSMEs and is meant for “ensuring quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs”.

A pre-packaged scheme is an arrangement through which the promoter of the stressed company proposes a resolution plan to the creditors before the company goes for bankruptcy proceedings. The purpose of this scheme is not just to have a timely and fast resolution mechanism, but also to give legal sanction to a plan agreed upon between banks, promoters, and the buyer.