[Guest post by Lavanya Chawla, Batch of 2017, National Law School of India University, Bangalore]
With more than 270 days gone by since the enactment of the Insolvency and Bankruptcy Code, 2016 (the Code), the time is ripe to analyse whether the Code has proved to be the magical wand it proclaimed to be.
One of the new functionaries introduced by the Code is the Resolution Professional (RP), which includes an Interim Resolution Professional. The Code’s success (or failure) is heavily dependent on the performance of the RPs as they are responsible for turning around the fortunes of the debt-ridden company once the Corporate Insolvency Resolution Process (CIRP) is set in motion. Once the insolvency application is accepted by the National Company Law Tribunal (NCLT) and the moratorium is put in place, the RPs are required to perform multiple diverse functions like collating and verifying creditor claims, running the business as a going concern, obtaining interim finance if required, evaluating the resolution plan, etc. But do the RPs have the required capabilities to do what it takes to save a failing company?
The aim of raising this question is not to question the individual competency of the RPs appointed under the Code but instead to question the eligibility criteria prescribed by the Insolvency and Bankruptcy Board of India (IBBI) for becoming an RP.
The IBBI has prescribed criteria similar to those set under UK law for an Insolvency Practitioner. For any person to be appointed as an RP in India, the person needs to be a Chartered Accountant (CA) or a Company Secretary or a Cost Accountant or an Advocate who has passed the Limited Insolvency Examination and has ten years of experience and enrolled with the association like the Bar Council or the Institute of Chartered Accountants of India. etc. Apart from this, any graduate from a recognised university who has passed the Limited Insolvency Examination and has fifteen years of experience in management is also eligible for enrolment as an RP.
The UK law requires the person to pass the joint insolvency examination, to have experience in insolvency work through minimum hours of practical training and register with one of the multiple self-regulating regulators (ACCA, ICAEW, ICAS). Though the essence of the criteria is the same in both the countries, there are major differences in practical terms which pose some doubts on the potential of success through the CIRP in India.
First, there is no requirement of prior experience in insolvency related work for a person to be appointed as an RP. Hence, any lawyer or CA or other professionals specified by the regulations are theoretically allowed to be appointed as an RP even if they have no experience in the field. One would argue that the creditors would not agree to such an RP. It is submitted that this a lacunae in the law and prior experience should be a part of the criteria to ensure better outcome from the process. Experts who have dealt with the Sick Industrial Companies Act or liquidation under the Companies Act in the past ten years would be better equipped to deal with the Code than someone who has no prior experience in restructuring.
The above point assumes even more significance with the fact that the recent range of cases that are being taken to the NCLT under the Code are extremely complex and deal with large companies. The Reserve Bank of India (RBI) has recently issued directions to the banks to refer certain cases to the NCLT under the Code after a recent amendment to the Banking Regulation Act bestowed this power of reference on the RBI. The initial lists of reference released by the RBI relate to large companies with complex operations as the criteria for reference decided by the Internal Advisory Committee was to refer “accounts with fund and non-fund based outstanding amount greater than 5000 crore, with 60% or more classified as non-performing by banks as of March 31, 2016”.
Big companies like Essar Steel and Bhushan Steel form a part of this list. It is difficult to envisage that individual resolution professionals who are qualified as Chartered Accountants or Cost Accountants or Advocates but have no prior management experience or insolvency practice experience will be able to run companies with complicated debt structures and operations.
Second, as per the FAQs and Model Papers provided on the IBBI website, the Limited Insolvency Test consists of 90 Multiple Choice Questions out of which five questions are based on a case study. It is a closed book exam. The Model Questions provided on the website for preparation seem similar to the Learner’s Driving Licence Test questions in most Indian states which can only check the person’s rote knowledge on the subject but doesn’t test their ability to apply that knowledge to practical situations! (See here: http://www.ibbi.gov.in/model-Rev2.pdf)
In contrast to this, the Joint Insolvency Examination Board’s (JIEB) in the UK is an open book exam with a case study approach to assess the candidate’s knowledge of and ability to apply insolvency law to practice. The detailed case study questions available on the website require the candidate to describe how they will act in difficult situations during the insolvency. For instance, the candidates are required to prepare a list of issues, provide various solutions along with the solution they will recommend. Further, they are also asked to list down the important questions they will need to ask the other stakeholders as an insolvency practitioner. This means that the answers require knowledge but the candidates also need to know how to apply that knowledge to a particular situation. Hence, the candidates have to demonstrate their legal as well as commercial and ethical prowess and experience. (See sample papers of JIEB: here and here).
Ultimately, it can only be said that the eligibility criteria for an RP should be commensurate with the range and extent of responsibilities bestowed on them under the Code. Lessons from the UK law could be a starting point for the lawmakers and regulators.
– Lavanya Chawla