The government has been quick in strengthening the newly introduced Insolvency and Bankruptcy Code 2016 by framing draft regulations for insolvency process and liquidation of corporate entities, registration of insolvency professionals and insolvency agencies, rules for applications to the adjudicating authority and draft model by-laws for insolvency agencies.
Business Standard takes a look at the brief background and progress of the Code, as well as some key features of the recent proposals which have been put up for public discussion till October 31.
When was the Code introduced, and with what objective?
The Code came into force on May 28, 2016. The objective was to revamp the scenario of asset reconstruction and streamline the process of corporate liquidation. Still in its nascent stages, the legislation has already been lauded as a path-breaking development from the earlier framework of insolvency, governed primarily though the erstwhile colonial statutes - The Presidency Towns Insolvency Act 1909 and The Provincial Insolvency Act 1920 - alongside the Sick Industrial Companies Act 1985.
What do draft model by-laws for insolvency professional agencies say?
The objectives of the model by-laws are to educate, promote and safeguard the interests of all parties in an insolvency process conducted by insolvency professional agencies. In this regard, the by-laws enumerate the powers and duties of these agencies and lay down conditions for membership. The by-laws have also proposed a mechanism for redressal of grievances against the workings of the agencies and/or their members, such as the formation of a governing board with a minimum of six members (half of whom must be independent experts), grievance redressal cell (and policy), disciplinary panel and appellate panel. These internal bodies provide an additional layer of checks and balances, to aid in the adherence and application of the general scheme of the Code and its allied laws.
What are the responsibilities of the insolvency professionals?
The regulations lay down the powers and duties of insolvency professionals while conducting a resolution process for corporate persons. They require interim insolvency professionals to make public announcements and appoint valuers to calculate liquidity values of corporate debtors. They list the powers of resolution professionals to manage the affairs of the concerned entity, including the undertaking of contractual commitments and execution of all deeds. Insolvency professionals also prepare resolution plans, which are to be approved by the adjudicating authority.
How are remunerations of bankruptcy professionals determined?
The expenses incurred by the interim resolution professionals shall be paid for by the applicants initiating the resolution process. Thereafter, the remuneration of resolution professionals will be determined by the committee of creditors with due consideration of complexity of the case, level of responsibility, effectiveness of the professional and value of the assets of the debtor. In case of liquidators, the remuneration is to be determined by the committee of creditors in proportion to the assets realised in the liquidation process. "If the value of assets is made a factor for fixing the fees, it is reasonable to expect that the insolvency professionals/liquidators will not be motivated to take up small or mid asset value companies. This may ultimately impact the sense of responsibility and the conduct of these practitioners," says Satyajit Gupta, principal M&A/Corporate, Advaita Legal.
How far has the Code come in achieving its objective?
The common consensus among professionals is that the Code has achieved its initial objective of providing certainty to bankruptcy proceedings and in changing the general mindset towards insolvency.
However, experts have also raised concerns about the strict timeframes for completion of proceedings, which may not be achievable in the present scenario and might require re-examination in the future. According to Amit Vyas, founder, Vertices Partners, the Code has been successful in ensuring that the failure of a business does not act as a personal stigma for promoters, but instead as a means for a fresh start.
What are the next steps for actualising the Code?
As of now, the model by-laws and draft regulations only deal with the functioning of insolvency professionals (and agencies) and the procedure for insolvency and liquidation of corporate persons. The introduction of similar guidelines for companies is yet to be framed, and is an essential step in the completion of the framework. The final efficacy of the Code can only be gauged once these regulations and guidelines are framed (and finalised) and become part of the statutory mechanism for conducting future insolvency proceedings.
