In its latest Discussion Paper, the Insolvency and Bankruptcy Board of India (‘IBBI’) has proposed to issue guidelines for imposing a cap on the number of assignments that an insolvency professional (‘IP’) can take up at a time. In this post, the authors argue that setting a limit on the number of assignments that can be taken up by IPs amounts to an attempt to fix a system which is not broken.
The authors begin by delineating the recommendations of the IBBI in the Discussion Paper, which is then followed by a two-pronged argument on why the prescription of limit on the number of assignments that can be taken up the by the IPs is unwarranted and even harmful.
The Problem Statement
The central argument of the Discussion Paper is that time bound completion of the corporate insolvency resolution process (‘CIRP’) is the foundation of the Insolvency and Bankruptcy Code, 2016 (‘Code’). Consequently, if an IP takes up too many assignments at the same time, then it will not be able to devote the same time and energy to each CIRP. This would further result in a failure to achieve the goal of maximisation of the value of the assets of the corporate debtor (‘CD’) as the monetary value of the CD only erodes after the commencement of the CIRP.
In its proposal, the IBBI has used a turnover based criterion to prescribe limits on the number of assignments that can be taken up by an IP in the following manner:
|Turnover of the CD
|No. of Assignments[i] Permitted
|<= 1000 crores
|>1000 crores but <= 5000 crores
|>5000 crores but <= 10000 crores
The authors contend that the manner in which these limits are to operate has not been clarified by the IBBI and will create a lot of confusion for the relevant stakeholders. That is to say, it is not clear whether an IP who is managing the CIRP of a CD whose turnover is more than 50,000 crores will be able to take up the responsibility for the CIRP of a CD whose turnover is less than 1,000 crores. Furthermore, in a case where an IP has ongoing assignments from two or more categories, the threshold to decide when the prescribed limit is breached shall be difficult to ascertain. Therefore, in the event the recommendation under the Discussion Paper takes the shape of law, a clarification in this regard would be warranted.
The Two-Pronged argument against IBBI’s Proposal
The authors contend that the concerns raised by the IBBI in its Discussion Paper, based on which the aforementioned limit is proposed, are unfounded. This is because sufficient safeguards already exist under the Code to prevent inordinate delays in the completion of the CIRP. Furthermore, introduction of a cap on assignments that can be undertaken by the IPs would result in a problem of IPs consenting to only those CIRPs which deem lucrative to them.
The Code contains multiple safeguards to ensure that the objective of speedy and time-bound completion of the CIRP is not thwarted. For instance, at the time of appointment, form 2 under rule 9 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 requires an IP to give a written communication of consent which contains a disclosure of the number of assignments being worked on. Moreover, clause 22 of the Code of Conduct for Insolvency Professionals as provided in Schedule I of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations 2016 (‘the Code of Conduct’)provides that an IP must refrain from accepting too many assignments at the same time. The authors contend that these two provisions operate as a self-check mechanism for the IPs to examine whether it would be able to perform its duties commensurate with the standards prescribed under the Code.
In addition to this, the Adjudicating Authority also takes note of the existing engagements of the IP before approving its appointment as an Insolvency Resolution Professional (‘IRP’). In IDBI Bank Limited v. Lanco Infratech Limited, the Adjudicating Authority had refused to approve the appointment of the IP proposed by IDBI Bank as the IRP on grounds that the concerned IP was already engaged in the CIRP for three large corporations (at paragraph 19). Therefore, IDBI Bank was directed to propose another IP to act as an IRP.
Another factor which allows the IPs to exercise self-restrain while taking up a new engagement is that they would be censured by the Adjudicating Authority or the Insolvency Professional Agency (‘IPA’) in the event they fail to fulfil their obligations. In this regard, it is important to note that the IPA is the frontline regulator which enrols, educates, monitors, regulates and guides the IPs in India. As per clause 16 of the Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016, the IPA regularly monitors the ongoing assignments of the IPs. Furthermore, as per clause 23 of the same Regulations, disciplinary proceedings may also be initiated in the event the IPs fail to adhere to the time limits prescribed under the Code.
In Electrosteel Steels Limited, when the IP Dhaivat Anjaria failed to follow the prescribed timelines, a penalty equal to a tenth of the total fee payable to him was imposed (at paragraphs 6 and 10). The IBBI takes matters of IPs displaying negligent attitude towards an assignment by not following the timelines prescribed therein very seriously by imposing penalties. Such actions automatically build towards inspiring confidence of all stakeholders towards the profession. Furthermore, the concern that an IP may be able to take on more work and delegate its function to other persons was addressed by the Disciplinary Committee in an order dated April 20, 2020. In the disciplinary proceedings against Mr. Koteswara Rao Karuchola, it was held that the IP, in case of being overburdened, does not have the option of outsourcing his duty to third parties.
The Committee of Creditors (‘CoC’) also keeps a check on the IPs in this regard. Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 allows the CoC to fix the remuneration of the resolution professional (‘RP’). Given that the CoC has a vested interest in expeditious completion of the CIRP, regulation 34 acts as an incentive for the RP to complete its ongoing engagements before taking up another assignment as an RP.
Thus, there are sufficient safeguards in place to ensure that the IP completes its duties on time in the manner provided under the Code at all times. Failure to do so would mean the IP would have to face repercussions in disciplinary proceedings.
Problem of pick and choose
It is a recognised fact that the volume, nature and complexity of work involved in every CIRP or liquidation process is not the same. Limiting the number of assignments that an IP can take shall result in the problem of ‘pick and choose’ as the IPs would want to take on only those assignments which they deem as more lucrative. This problem of ‘pick and choose’ was also recognized in chapter 4 of the Report of the Insolvency Law Committee (February 2020), wherein it was noted that the IPs are already inclined to undertake cases under parts II and III of the Code as they receive higher remuneration than cases involving fresh start process (at p. 96).
While the authors recognize the problem which prompted the IBBI to release the Discussion Paper, the authors do not agree with the mechanism proposed by the IBBI to remedy the problem highlighted therein. The purported objective of IBBI’s proposal to limit the number of assignments is to avoid delays caused due to an overburdened IP which agreed to undertake assignments beyond his capacity. As highlighted above, there are sufficient safeguards, in the form of self-check mechanisms and oversight by the Adjudicating Authority and the CoC, which ensure that this does not happen. Any measure which restricts the manner in which the IPs take up assignments would cause a detrimental effect to the flexibility offered by the Code and to the objective of allowing the development of a free market for IPs (at paragraph 4.4). One should never fix what is not broken and IBBI’s Discussion Paper seems to be doing just that.
– Ragini Agarwal & Mayank Udhwani
[i] Reg. 2(1)(a), Insolvency And Bankruptcy Board Of India (Insolvency Professionals) Regulations, 2016: The term ‘assignment’ herein refers to appointment of an IP as interim resolution professional, resolution professional and liquidator.