Post direction of the Reserve Bank of India (“RBI”), the banks have initiated actions against top 12 defaulters under the Insolvency & Bankruptcy Code 2016 (“Code”). Notably, the appointment of interim resolution professional (“IRP”) is prerogative of the applicant filing the petition before the National Company Law Tribunal (“NCLT”). After initial period of 30 days, the committee of creditors (“CoC”) can, if it so desires, can replace IRP with resolution professional (“RP”) by passing a resolution requiring three-fourth majority of total financial creditors. Hereinafter, IRP/RP are referred to as the Insolvency Professional.
The Code stipulates that only an Individual who is registered as Insolvency Professional with the Insolvency & Bankruptcy Board of India (“Insolvency Board”) can be appointed as IRP/RP. The Code of Conduct for Insolvency Professional prescribed in the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 states that ‘An insolvency professional must maintain complete independence in his professional relationships and should conduct the insolvency resolution, liquidation or bankruptcy process, as the case may be, independent of external influences’. Most importantly, Insolvency Professional cannot be employee of any firm except of Insolvency Professional Entity recognised by the Insolvency Board under the Code (“IPE”) but again IPE cannot act IRP/RP.
The section 220 of the Code has prescribed, the higher of the following penalty, on IRP/RP where any IRP/RP has contravened any provision of this Code or rules or regulations made thereunder:
(i) three times the amount of the loss caused, or likely to have been caused, to persons concerned on account of such contravention; or
(ii) three times the amount of the unlawful gain made on account of such contravention, whichever is higher.
Further, where such loss or unlawful gain is not quantifiable, the total amount of the penalty imposed shall not exceed more than Indian Rupees Ten Million (one crore). In case of IRP/RP is partner/director of the IPE, IPE shall be jointly as well as severally liable along with IRP/RP.
In these big 12 cases, the lenders have engaged big consultants like Grant Thornton, BDO India, EY, KPMG, PwC, A&M and Deloitte. Notably, as mentioned above, none of these consultants are entitled to become IRP/RP as only individual can act as IRP/RP. More interestingly, none of these consultants have registered themselves as IPE under the Code that can cause joint and several liabilities on them. It is understood that some of these consulting firms even did not have in-house IRP/RP and they tied-up with external IRP/RP for undertaking assignments from bank.
After appointment of IRP/RP by the Adjudicating Authority, IRP/RP will engage these consultants as his advisor to manage the affairs of the defaulting corporate debtor. Such an appointment of these consultants by IRP/RP will be a related party transaction if IRP/RP is consultant or partner/director of these consulting firm that requires approval of the committee of creditor u/s 28 of the Code. Consequently, a question does arise, i.e., is it legal and ethical for IRP/RP to engage such consultants? This is more so because in case of violation of the Code by these consultant(s), no penalty can be imposed on these consultants under section 220 of the Code as they are not even IPE. The next big question is whether IRP/IP will act independently in such cases and can he protect the confidential information of such corporate debtors because most of such big consulting firms do advise to a number of rivals of these corporate debtors.
It is an irony that the lenders have, before the IRP/RP takes the management and control of the corporate debtor, presumed that the corporate debtor does not have personnel who will support IRP/RP in performing his duties and, therefore, the engagement of such big consulting firm is necessary. Notably, the cost of these big consulting firm is ultimately to be borne by the corporate debtor which is already in losses. It is also possible that the corporate debtor might be having surplus resources. Thus, the engagement of all such big consultant is being made without examining the actual need of their support by IRP/RP but at the cost of the loss making corporate debtor where hundreds of people might lose their jobs. It is nothing but gross misuse of power by a single lender at the cost of the corporate debtor because a necessity of IRP/RP to engage the advisors has become a luxury for no reason. Notably, such an appointment by lenders shows that IRP/RP are incompetent to handle these matters without support of these big consultants resulting in IRP/RP is not working independent of external influences.
The Code is a new legislation and no person has the so called expertise under the Code. Thus, the relevant factor for selection in case of these big 12 cases is their ability to mobilise the resources to run the operations of the corporate debtor because it is duty of IRP/RP under the Code to carry on the operations of the corporate debtor on a going concern basis. The other reason to select these big firms by the lenders could be to defend their action against the corporate debtor, in case the revival of these companies under the Code fails, on the ground that the best possible resources were used but it still failed.
The process followed by these lenders to select the Insolvency Professionals and consultants is questionable and unclear. Undoubtedly, such an approach of the lenders not only helped these big consulting firms to bye-pass the regulatory framework of the Code but also raises question on the independence and impartiality of the IRP/RP that could well be challenged by the borrowers to delay the process if any of these consultants have a conflict of interest which is more than likely.
India has been a country with good legal framework and impartial & unbiased legal judiciary but the implementation of most of the laws have been ineffective that resulted in failure to achieve the desired results. The success of the Code depends not only Insolvency Board but also on Insolvency Professional(s). Therefore, the Insolvency Board is expected to act expediently to ensure that the Code is followed in letter and intent to yields the desired results. At the same time, it is equally important for the Insolvency Professional(s) to act independently and impartially and fulfil their responsibilities.
Advocate – Corporate & Litigation| Licensed Insolvency