Bankruptcy: IBBI asks IPs to disclose their relationship with parties

After closely monitoring the functioning of insolvency professionals (IPs) over the last one year, the Insolvency and Bankruptcy Board of India (IBBI) has started streamlining their functioning. Through a series of circulars, the regulator has asked IPs to disclose their relationship with the parties associated with their respective case, be it the financial creditor or the debtor company. It has also issued directions regarding the functions that can be outsourced by an IP while discharging his/her duty.
 
Some IPs feel that the IBBI is trying to micro-manage by laying down  communication norms.
 
The regulator, on the other hand, argues such a measure as necessary to ensure confidentiality and make verification easy in case of an investigation.  A senior official from the insolvency board said: “All the stakeholders must be able to identify the resolution professional. It is important for him to use one e-mail address and one constant address for all communications.”

 

Pavan Kumar Vijay, an insolvency professional and founder of Corporate Professionals, noted there have been cases of IPs delegating their work to team members who then were issuing instructions. “That is not the mandate of the Code. It is the IP who replaces the board and not his team,” said Vijay.
 
Industry players agreed that instructions should flow from the IP.
 
The insolvency board also issued a circular regarding the responsibilities that cannot be outsourced. It stated the IP is responsible for inviting, examining and taking a decision on the resolution plan.
 
“It has been observed that a few insolvency professionals are advising the prospective resolution applicants to submit a certificate from another person to the effect that they are eligible to be resolution applicants. This requirement amounts to outsourcing responsibilities of an insolvency professional to another person. Further, this adds to cost of the resolution applicant and delays submission of resolution plans. The Code read with regulations do not envisage such a certification from a third person,” the circular stated.

 
Sumant Batra, the managing partner of Kesar Dass B & Associates, viewed the recent regulations as a two-edged sword.  “The circulars add to the bureaucratic process for the resolution professional. But it is a necessary evil as the industry has not acted with speed to establish best practices and self-regulation,” he said.
 
The IPs  conceded that the IBBI circulars were a result of lack of self-regulation. 
 
According to Vijay, several complaints have been filed, reported and adjudicated against the conduct of IPs and the level of transparency they maintain. “It is because of this that the IBBI is enhancing disclosure formalities,” he added.

 
Most stakeholders in the insolvency process felt a need for institutionalising practices and processes for maintaining transparency.  “It has to be ensured an IP does not appoint persons connected with the case and for that disclosure becomes necessary,” said an industry player.
 
Many in the industry said that the regulator’s vigilantism would make IPs more cautious and help them stand on a stronger ground, legally, if their actions are questioned by stakeholders at a later stage.
 
Another issue where the regulator may need to step in and bring clarity relates to the valuation of assets. The regulator has mandated that there should be two valuations in every case. The IPs have pointed that they have been confused regarding the value they should adopt in cases where there is a significant difference. “We generally consider the average of both the values in such a scenario,” said an IP.

 
The IBBI also came up with a regulation stating the liquidation value of the assets should not be revealed to anybody but the Committee of Creditors. This was intended to ensure fair and reasonable bids. “If the liquidation value is made public, bids are usually low. For best bids, this regulation will help,” said an insolvency professional.