[Himanshu Mene is an L.L.M Candidate (Specialization in Corporate Law) at Maharashtra National Law University, Nagpur]
Introduction
In the interest of transparency, Insolvency and Bankruptcy Board of India (“IBBI”) by way of a notification dated January 16, 2018 has issued a circular mandating that Insolvency Professionals (IPs) and all other professionals that are appointed by the IPs for the purpose of resolution process must disclose their relationship with all the associated parties, including the corporate borrowers and creditors.
The Insolvency and Bankruptcy Code, 2016 (Code) provides for the appointment of IPs.[1] It shall be the duty of the IPs to perform functions and obligations in accordance with section 208 of the Code. The Code authorises IPs to conduct the resolution process including the Corporate Insolvency Resolution Process and the Fast Track Resolution Process and it shall be the function of the IPs to take such actions as may be necessary under the liquidation and bankruptcy process. The Code also authorises the IPs to appoint registered valuers, accountant, legal and other professionals to assist him in discharge of his duties in the resolution process.[2]
As per the circular of January 2018: “It has been decided that insolvency professional and every other professional appointed by the IPs for a resolution process shall make specified disclosures.”[3] Hence, if an IPs holds any kind of relationship with the corporate debtor, i.e., the company under the insolvency proceedings, it shall be their duty to disclose the same within three days of appointment.[4]
Meaning of Relationship
IBBI has clearly defined the meaning of ‘relationship’. It states that if the IPs has any relationship with, the corporate debtor, other professionals engaged by the IPs, financial creditors, interim finance providers, and prospective resolution applicants to the insolvency professional agency of which he is a member at any time during the three years preceding his appointment, then the disclosure is mandatory.
The nature of relationship is categorised into four types:[5]
(A) Where the Insolvency Professional or the Other Professional, as the case may be, has derived 5% or more of his / its gross revenue in a year from professional services to the related party.
(B) Where the Insolvency Professional or the Other Professional, as the case may be, is a Shareholder, Director, Key Managerial Personnel or Partner of the related party.
(C) Where a relative (Spouse, Parents, Parents of Spouse, Sibling of Self and Spouse, and Children) of the Insolvency Professional or the Other Professional, as the case may be, has a relationship of kind A or B with the related party.
(D) Where the Insolvency Professional or the Other Professional, as the case may be, is a partner or director of a company, firm or LLP, such as, an Insolvency Professional Entity or Registered Valuer, the relationship of kind A, B or C of every partner or director of such company, firm or LLP with the related party.
It is mandatory for all the ongoing and subsequent resolution processes to make the aforementioned disclosures. As per the circular, any disclosures that are due on date in respect of an ongoing process it should be made to the respective Insolvency Professional agency by January 31, 2018.[6]
Specific Disclosures
The circular has provided separate disclosure requirements for IPs and other professionals. For the purpose of the Code, other professionals have been defined as registered valuers, accountants, legal professionals, and other professionals appointed by the IP.
The disclosures are to be made to the Insolvency Professionals Agency of which the IPs or other professionals are members. The disclosures are to be made within a period of three days of having such relation. If IPs and other professionals have relationship with the corporate debtor, then they need to disclose the same within three days of their appointment.
Similarly, they need to disclose their relationship with the financial creditors within three days of the constitution of Committee of Creditors. The disclosure has to be made if there is an agreement with the interim finance providers or if there is supply of information memorandum to the prospective resolution applicant.[7]
Duties of Insolvency Professionals & Agency
Further, it shall also be the duty of the IP to provide a confirmation to the Insolvency Professional Agency that all the appointments of the other professionals are made at arm’s length only.[8] It shall be the duty of the IP to ensure that all the disclosures by him and the other professionals are made in time and true in nature. In case of any wrong disclosures appropriate actions would be taken.
As per the circular, it shall be the duty of the Agency to facilitate the receipt of the disclosures of both IPs and other professionals and to mandatorily publish such disclosure in its website within the period of three working days of the receipt of the information.
Conclusion
This is one of the important circulars issued by the IBBI, as the. IP plays a key role in the efficient and effective implementation of the resolution process. He has major role in monitoring the resolutions passed by the Committee of Creditors and also acts as liquidator in case of liquidation. In both the cases, the control and management of the company is transferred in the hands of the IP. Hence, the need to have a fair and transparent process to protect the interest of the creditors and employees. This is sought to be achieved through disclosures of relationships, which acts a virtuous measure.
– Himanshu Mene
[1] Section 206 of the Code.
[2] Section 25 of the Code.
[3] Para 2 of the Disclosures Circular Dated Jan. 16, 2018.
[4] Para 3 of the Disclosures Circular Dated Jan. 16, 2018.
[5] Para 5 of the Disclosures Circular Dated Jan. 16, 2018.
[6] Para 8 of the Disclosures Circular Dated Jan. 16, 2018.
[7] Para 3 of the Disclosures Circular Dated Jan. 16, 2018.
[8] Para 9 of the Disclosures Circular Dated Jan. 16, 2018.