Resolving Bias of Resolution Professionals

[By Ishaan Saraswat]

The author is a student of Jindal Global Law School.

 

On January 18, 2023, the Ministry of Corporate Affairs, Government of India proposed certain changes in relation to the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”). These suggestions deal with the acceptance of corporate insolvency resolution process applications, the streamlining of insolvency resolution, the reformatting of the liquidation process, and the function of service providers under the IBC.

Of the plethora of proposals, a key consideration was with regard to amending Section 10 of the IBC to bring about a transparent appointment of the interim resolution professional (“IRP”). The present regime under Section 10 is adverse to the stakeholders of a corporate insolvency resolution process (“CIRP”) since on admission, the corporate debtor’s (“CD”) management is ousted, and an IRP who is nominated by the same management takes over control. The proposal encapsulates amending Section 10 to expunge the right of the CD to nominate an IRP, and that the Adjudicating Authority (“AA”) would appoint the IRP on the recommendation of the Insolvency and Bankruptcy Board of India (“IBBI”).

A brief background of CD-nominated-IRP

A corporate applicant is one who is either the CD, a member/partner of the CD, an individual managing the operations of the CD, or a person who has control over the financial affairs of the CD. This corporate applicant can approach the AA under Section 10 of the Code to admit the CD for CIRP. While doing so, the corporate applicant shall also nominate an IRP. As per Section 16 of the Code, the AA shall appoint the person nominated to be an IRP.

The IRP, on appointment, is vested with vast powers by Section 17, such as managing the affairs of the company, exercising the powers of the board, taking actions in the name of the company, accessing the internal records and books of the company and so on. The question that arises is whether such vast powers are regulated.

Prevention of abuse

Chapters VI and VII of the Code provide for extreme cases of siphoning off assets, concealment of assets, misconduct in the resolution process, and fraudulent or wrongful trading. The AA has time and again barred resolution professionals from making misleading statements, abdicating their duties and flouting the orders of the tribunal wilfully, and even for charging an exorbitant fee. Furthermore, the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (“IP Regulations”), provide for qualifications of an IRP and the code of conduct to abide by. However, all these measures may not suffice.

The vast powers vested in the IRP allow them to misguide the Committee of Creditors (“CoC”) formed subsequently, and damage the CIRP process. Instances have been recorded where IRPs have not maintained a list of claimants properly, have not verified assets of a company, have appointed suspended directors of the CD for assistance in managing operations, have handed over incomplete records of the CD etcetera.

The instances above may be more damaging and discreetly, when there are clear-cut conflicts of interest, with the potential for unfairness or bias. The IRP and their firms, for instance, may have ongoing relationships with the CD or creditors who are involved in the insolvency process in various ways; relationships with the directors of specific companies may create conflicts; personal interests and other appointments held may be relevant; the IRP’s firm may have financial interests present or future that may be impacted by recommendations or decisions relating to a troubled company; and the volume of work or compensation received by the IRPs may also be relevant.

Addressing the independence of insolvency professionals

The Bankruptcy Law Reforms Committee has observed that, “As the RP plays a key role in the life-cycle of the insolvency resolution process – from the time of the acceptance of the application, the design and agreement of the repayment plan, to the final execution of the plan – it is possible that unfair conduct of the RP jeopardises the interests of either party”.

To curb any unfair conduct, by way of bias or impartiality, tribunals have sought substitution of IRP when affiliated with a financial creditor by virtue of employment history and pecuniary interest. But when we move the gaze away from creditors, a clear case of impartiality may be observed under the current scheme of Section 10 of the Code where the CD itself nominates an IRP.

To address this, the IP Regulations’ code of conduct demands disclosure of any pecuniary or personal relationship with any stakeholders in the CIRP. Any such lack of independence warrants the IRP to be replaced.

The IP Rules provide that a relationship may be established if the resolution professional is a shareholder, director, key managerial employee, or partner of the related party, or if the related party accounts for 5% or more of the resolution professional’s gross revenue (“relationship”). Further, an instance of impartiality may also be there if a relative of the resolution professional has a relationship with the related party, or where the resolution professional is a part of an insolvency professional entity, which has a relationship with the related party.

The ‘relationship’ that an IRP may share with the stakeholders and the metrics mentioned earlier may not suffice to eradicate impartiality. The ‘relationship’ expounded in the IP Regulations seems narrow since there is no mention of an indirect interest, such as being a shareholder of an associate company or a sister concern or a company that engages in business with the CD. Furthermore, esteemed resolution professionals render services often to the same set of creditors, for instance, the big lenders. In such scenarios, there is a familiarity bias and an expectation for the IRP to work in a particular manner. This also bypasses the code of conduct since the IRP earns the revenue from the CD, not from the creditors.

Moreover, as the UNCITRAL Legislative Guide on Insolvency Law elaborates, a prior or current business relationship with the debtor (including being a party to a transaction with the debtor that could be investigated in the insolvency proceedings and being the debtor’s creditor or debtor) or a connection to the debtor’s rival may establish a conflict of interest, and the insolvency regime ought to provide for the same.

Conclusion

By way of the proposals to bring about changes in the IBC, the direction we are headed in is to protect the interest and eliminate any scope of prejudice against the stakeholders, ensure control of the CoC, and restore the balance in favour of creditors. This seems like a welcome move. By removing the CD’s ability to nominate the IRP itself, every string of pressure that the CD may put on the IRP is extinguished. In the current regime, having the CD itself nominate the IRP places the debtor-in-possession and is a big threat to the impartiality in the governance of the insolvent company. The proposal highlights the shift in the Indian insolvency regime towards a creditor-in-possession mechanism, such as that of the United Kingdom.

Still, the way forward to ensure absolute independence would be to overhaul the ‘relationship’ metric. The metric will continue applying to the IRP nominated by the Financial and Operational Creditors. The faults in the definition of ‘relationship’ have been highlighted above and need to be filled in. Further, even as outlandish as it seems, perhaps inspiration to revamp the definition could be taken from the Arbitration and Conciliation Act, 1996 and the International Bar Association Guidelines, which list out attributes resulting in a situation of non-independence of arbitrators. Since the control and management of the company are handed out to the resolution professionals, the disclosures regarding the relationships they may share need to be meticulous to prevent any unscrupulous behaviour.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in