-An article by Lavanya Goinka and Siddharth Sharma
The legislation of insolvency and bankruptcy in India was consolidated in 2016. Prior to this, there were issues with dealing with bankruptcy and bad debts. This adjustment was necessary due to the high frequency of personal and corporate insolvency proceedings in India, as well as the long average time it takes to resolve such cases. Many laws were enacted to address concerns in various industries. Presidency Towns Insolvency Act, 1909; Provincial Insolvency Act, 1920; Companies Act, 1956; Sick Industries Companies Act, 1985; Recovery of Debts Due to Banks and Financial Institutions, 1995; and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, are just a few examples. Until 1885, corporate insolvency and bankruptcy were handled by the 1956 Companies Act, which included specific procedures for company dissolution and winding up. For the dissolution of companies, some regulations provided for the resolution procedure and the appointment of a liquidator. It did not, however, address insolvency-related issues. As a result, issues and disagreements were brought before the separate High Courts. India’s rank in ease of doing business has improved since the Insolvency and Bankruptcy Code (IBC) was enacted in 2016, with exit alternatives for enterprises being a prominent component. The function of insolvency professional agencies has become essential under this legal system, which combined different sector-specific legislation, due to their contribution to reducing the number of bankruptcy cases. Part 2 of this article delves into the Code’s legislative history in 2016. Part 3 examines the importance of Insolvency Professional Agencies and their functions; Part 4 outlines the IPAs’ functions and eligibility criteria; Part 5 examines insolvency professionals; and Part 6 concludes with a recommendation for change.
History of the legislature
The legal system filled this void by enacting sector-specific legislation. For example, in the 1980s, when industrial sickness was on the rise and corporations were mass-laying off and retrenchment, the Sick Industries Companies Act (SICA) of 1985 became a lifeline. One of the biggest flaws of SICA, among many others, was that it limited its applicability to industrial activities, and Section 22 of SICA dealt with moratorium, which became a weapon for creditors manipulating the system.
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was enacted in the banking industry to recover debts and dues owed to banks and other financial institutions. Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs), both important legal machinery under the IBC, were established as a result of this legislation. The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) was passed in response to this legislation, allowing secured creditors to take possession of their securities without the participation of the courts.
The rules relating to the resurrection and rehabilitation of ill enterprises were relocated under the Companies Act, 1956 as a second amendment in 2002. This second amendment was crucial in establishing the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT), which replaced the prior law’s regulatory and judicial agencies.
Insolvency professional agencies can be found in the IBC.
“…to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximisation of value of assets to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders, including alteration in the order of priority of payment of Government dues, and to establish Insolvency and Bankruptcy Board of India (IBB) in a time-bound manner to maximise the value of assets to promote entrepreneurship, availability
IBBI was established as a regulator for insolvency professionals and insolvency professional agencies (IPA), as well as a state agency for cost control and other utilities. Under the IBC, IPA’s objective was to champion implementation vehicles with their own legal identity and corporate existence as section 8 businesses, as defined by the Companies Act of 2013. It is also expected to maintain a level playing field in insolvency resolution.
Part IV of the IBC deals with the regulation of insolvency professionals, insolvency professional agencies, and other insolvency professionals. The provisions relating to IPAs are mentioned again in Chapter III of this part.
The path for redress, registration, validation, and cancellation of IPAs and IPs is substantiated by a review of the major sections. A valid certificate of registration, for example, is required to operate as an IPA. The principles behind the registration of IPA are enumerated in Section 200. An IPA can use Sections 201 and 202 of the IBC to apply for, suspend, or cancel their registration, as well as appeal to the NCLT for help with their dispute. Sections 203 and 204 discuss the organisation and functioning of the IPA. They were supplemented by the passage of the Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies) Regulations, 2016 (Regulations, 2016) and the Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 (Model Bye-Laws 2016) notified under the Code, which added to the skeletal framework. Because it is still in its infancy, this legal regime has yet to adopt legislation defining the ownership and governance model of IPAs.
Any person who is registered with the IBBI under Section 201 of the IBC qualifies as an IPA. They are required to register with the IBBI and get a certificate of registration, with the IBBI prioritising the following principles when registering the IPA:
- Insolvency professionals’ (IP) professional growth and regulation;
- Protecting the interests of borrowers, creditors, and others; Good professional and ethical behaviour among IP;
- The provision of competent IP to handle debtors’, creditors’, and other parties’ issues; and
- The rise of IPA as a tool for resolving insolvency and bankruptcy cases under the IBC.
IPA’s functions and eligibility criteria
IPA will have a Governing Board with a board of directors, according to the 2016 Model Bye-laws (BoD). The Governing Board shall consist of at least seven directors, with at least half of them being Indian residents during their nomination and tenure. One-fourth of the directors on this Board of Directors may be insolvency professionals (IPs), with a minimum of four independent directors. The whole board of directors will elect an independent director to serve as Chairman of the Governing Board. The Governing Board will be made up of three members: I the managing director, (ii) an independent director, and (iii) a shareholder director.
The following are the functions of IPA as listed in Section 204 of the IBC, 2016:
- Providing IPs with memberships in exchange for a price;
- Establishing professional conduct standards; Protecting IPs’ rights, privileges, and interests;
- IP membership suspension/cancellation
- Resolving customer complaints around intellectual property
- Publication of information on members, functions, and so on.
The 2016 Regulations define the requirements for becoming an IPA, stating that they must be a business incorporated under section 8 of the Companies Act, 2013, with the sole purpose of carrying out the activities of an IPA under the IBC and bye-laws governed by Regulations 2016. A minimum net worth of ten crore rupees is required, as well as a paid-up share capital of five crore rupees. It should be controlled solely by Indian citizens, and no more than 49% of its share capital should be held directly or indirectly by non-Indian citizens. It should also not be a subsidiary of a corporation.
Experts in insolvency (IP)
IP is defined as a person who is a member of IPA under section 206 and is registered as an insolvency professional with IBBI under section 207. They serve as middlemen and play a critical role in the smooth operation of the insolvency and bankruptcy processes. They are governed by the Insolvency and Bankruptcy Board of India, which has also issued the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, which contains precise provisions relating to the appointment of IP.
Under the above-mentioned regulation, the following individuals will be ineligible for registration as registration IP: I is a minor; (ii) is not a resident of India; (iii) lacks the qualifications and experience required under Regulation 5 of Regulation 9; and (iv) has been convicted by any competent court of an offence punishable by imprisonment for more than six months or an offence involving moral turpitude, and the sentence has not been served for five years.
The following code of behaviour must be followed by all IPs:
- To exercise reasonable caution and diligence in carrying out his or her responsibilities;
- To follow the bye-laws of the IPA, which he is a member of, in terms of all requirements and terms and conditions;
To send a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as the IPA of which he or she is a member; and To carry out his or her duties in the manner and under the conditions as may be determined.
The IP plays a critical part in the resolution process because they are responsible for verifying the creditor’s claim, forming a Committee of Creditors (CoC), running the corporate debtor’s business during the moratorium period, and assisting the creditor in reaching a consensus on a revival plan. The IP serves as both a liquidator and a bankruptcy trustee during a liquidation.
Conclusion
IPs play a critical part in IBC procedures, and they must be regulated because they act as state agents. The IBC laid out the IPA’s existence in its regulations controlling IPAs with this goal in mind, yet it was intended to fill a void in the legal system. Instead of allowing itself to evolve organically, this agency’s regulatory framework has been written into law. The way IPs are currently regulated has become more stringent as a result of this. As a result, anticipating a scenario in which there may be a divergence between state regulation and market pressures on the performance and impartiality of IP and IPAs, a progressive evolution process is recommended.