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Roles, Duties and Challenges of Insolvency Professionals Under Bankruptcy Code

March 18, 2017[2017] 79 200 (Article)

Hemant Sharma


The Bankruptcy Code ("Code") has revamped the bankruptcy and insolvency laws in India, and most importantly, done away with the scattered legislations that existed earlier and consolidated all laws under one umbrella. It is an overhaul of the existing law dealing with insolvency &paves a smooth passage for much needed reforms. The Code seeks to achieve certainty in recovery and enforcement proceedings and moreover it is a useful tool for creditors and investors specifically for international creditors and investors, who are generally looking at opportunities in the Indian Economy.

Global institutions are continuing to grow their investments in India and in this context they are increasing their exposure to Indian entities and laws. Over the years, many concerns have been existing and / or raised amongst international investors on the regulatory and country specific risk while transacting or doing business in India. That considering such a scenario, this code is set to provide a major boost to the India economy, especially on account of timely resolution and certainty in recovery.

The Bankruptcy Code is a unified and comprehensive piece of legislation for the resolution of insolvency in respect of companies, limited liability partnerships, partnership firms and individuals. The Code creates a new institutional framework which consists of adjudicatory bodies, a regulator, Insolvency Professionals and information utilities.

In contrast to the current regulatory landscape, the Code does not make any distinction between the rights of international and domestic creditors or between classes of financial institutions. Specific attention is drawn to the rights of unsecured and secured creditors in the priority of their claims and therefore provides level playing field for an effective insolvency resolution. The strict timelines for resolution of insolvency and liquidation proceedings are an incentive and provide the requisite impetus for the economic growth.

The code provides for the constitution of a new insolvency regulator i.e. the Insolvency and Bankruptcy Board of India ("Board"). Its role is to oversee the functions of insolvency intermediaries i.e. Insolvency Professionals, Insolvency Professional Agencies and Information Utilities for regulating the insolvency process.

As per the Code, Insolvency Professional means a person enrolled with an Insolvency Professional Agency as its member and registered with the Board as an Insolvency Professional. Insolvency Professional Agency means any person registered with the Board as Insolvency Professional Agency. As defined in section 206 of the Code no person shall render his services as Insolvency Professional without being enrolled as a member of an Insolvency Professional Agency and registered with the board.


Following individual shall not be registered as Insolvency Professional:-

(a)   Minor
(b)   Non resident
(c)   Person who does not have the qualification and experience specified in regulation.
(d)   Person who has been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude and a period of five years has not be elapsed from the date of expiry of the sentence
(e)   Person who has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more
(f)   Person who is an un-discharged insolvent or has applied to be adjudicated as an insolvent
(g)   Person who has been declared to be unsound mind
(h)   Person who is not fit and proper person

Qualification and experience required for insolvency professionals

An individual shall be eligible for registration, if he:-

(a)   Has passed the National Insolvency Examination
(b)   Has passed the Limited Insolvency Examination and has fifteen years of experience in management, after he received a Bachelor's degree from a university established or recognised by law
(c)   Has passed the Limited Insolvency Examination and has ten years of experience as:
(i)   A chartered accountant enrolled as member of the Institute of Chartered Accountants of India
(ii)   A company secretary enrolled as a member of the Institute of Company Secretaries of India
(iii)   A cost accountant enrolled as a member of the Institute of Cost Accounts of India
(iv)   An Advocate enrolled with a Bar council

Registration Procedure

An individual enrolled with an Insolvency Professional Agency as a professional member may make an application to the Board in FORM A of the Second Schedule along with the non-refundable fee of Rupees Ten Thousand only to the Board. The Board shall acknowledge the application made by the Applicant within seven days of its receipt. The Board may require the applicant to submit additional documents, information or clarification that it deems fit or may require the applicant to appear before the Board in person or through its representative.

Once the Board is satisfied after inspection or inquiry as it deems necessary that the applicant is eligible, it may grant certificate of registration to the applicant to carry on the activities of an Insolvency Professional in FORM B of the Second Schedule, within 60 days of the receipt of the application excluding the time given by the board for presenting additional documents, information or clarification or appearing in person.

If after considering an application, the Board is of prima facie opinion that the registration ought not be granted, it shall communicate the reasons for forming such an opinion and give the applicant an opportunity to explain why his application should be accepted within 15 days of the receipt of the communication from the Board, to enable it to form a final opinion.

Recognition of Insolvency Professional Entities

A Limited Liability Partnership, a registered Partnership firm or a Company may be recognised as an Insolvency Professional entity when majority of partners of the Limited Liability Partnership or registered Partnership firm are registered as Insolvency Professional or a majority of the whole time director of the company are registered as Insolvency Professional.

Eligible person may make an application for recognition as an Insolvency Professional entity to the Board in FORM C. If Board is satisfied after inspection or inquiry as it deems necessary that the Applicant is eligible, it may grant a Certificate of recognition as an Insolvency Professional entity in FORM D.

Functions and obligation of Insolvency Professional

Role of Insolvency Professional in corporate insolvency resolution process:

In the corporate insolvency resolution process insolvency professional play two roles one as an INTERIM RESOLUTION PROFESSIONAL (IRP) and other as RESOLUTION PROFESSIONAL (RP).

IRP shall be appointed by Adjudicating Authority (NCLT) within 14 days from the insolvency commencement date. Where the application for Corporate Insolvency Resolution Process ("CIRP") is made by financial creditor or the corporate debtor, the RP as proposed shall be appointed as the IRP if no disciplinary proceedings are pending against him. Where application is made by the operational creditor and no proposal for IRP is made then NCLT shall make a reference to the Board for recommendation of an IRP. The committee of creditors may at its first meeting with majority vote of not less than 75 % of the voting share of the financial creditor either resolve to appoint the IRP as a RP or to replace the IRP by another RP.

IRP shall perform following functions:-

(a)   Collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor.
(b)   IRP shall within maximum 3 days from his appointment, shall make public announcement and provide the last date for submission of proof of claim, which shall be 14 days from the date of appointment of IRP.
(c)   Receive and collate all the claims submitted by creditors to him pursuant to the public announcement
(d)   Constitute a committee of creditors
(e)   Monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee
(f)   File information collected with the information utility
(g)   Take control and custody of any assets over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor or with information utility or the depository of securities or any other registry that records the ownership of assets.

RP shall perform following functions;-

(a)   Preserve and protect the assets of the corporate debtor and continued business operations of the corporate debtor.
(b)   Represent and act on the behalf of the corporate debtor with third parties, exercise rights for the benefits of the corporate debtor in judicial, quasi- judicial or arbitration proceedings
(c)   Raise interim finances subject to the approval of the committee of the creditors.
(d)   Appoint accountants, legal or other professionals in the manner as specified
(e)   Maintain an updated list of claims
(f)   Convene and attend all meetings of the committee of the creditors
(g)   Prepare the information memorandum
(h)   Invite prospective lenders, investors and any other persons to put forward resolution plans
(i)   Present all resolution plans at the meetings of the committee of creditors
(j)   File application for avoidance of transactions

Role of insolvency professional in liquidation:-

Where NCLT passes an order for liquidation of the corporate debtor, the resolution professional appointed for the CIRP shall act as liquidator unless replaced by the NCLT.

Liquidator shall perform following functions:-

(a)   To take into his custody or control all the assets, property effects and actionable claims of the corporate debtor
(b)   To evaluate the assets and property of the corporate debtor
(c)   To take such measures to protect and preserve the assets and properties of the corporate debtor as he considers necessary.
(d)   To carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary.
(e)   Sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such as may be specified
(f)   To draw, accept, make and endorse any negotiable instrument including bill of exchange, hundi or promissory note in the name and on behalf of the corporate debtor, with the same effect with respect to the liability as if such instruments were drawn, accepted, made or endorsed by or on behalf of the corporate debtor in the ordinary course of the business
(g)   To institute or defend any suit, prosecution or other legal proceeding, civil or criminal
(h)   To investigate the financial affairs of the corporate debtor to determine undervalued or preferential transactions
(i)   Liquidator shall prepare and submit to NCLT following reports:-
(i)   A preliminary reports within 75 days from the liquidation commencement process
(ii)   An asset memorandum progress report
(iii)   Sale report
(iv)   Minutes of consultation with stakeholder
(v)   The final report prior to dissolution
(j)   He shall maintain registers and books in relation to the corporate debtor and preserve for eight years.
(k)   He shall make public announcement in FORM B within 5 days from his appointment
(l)   He shall form an estate of the assets mentioned in section 36(3) of the code which will be called the liquidation estate in relation to the corporate debtor then prepare an asset memorandum within 75 days from the liquidation commencement date.
(m)   He shall receive or collate claims of creditors within 30 days from the date of commencement of liquidation process
(n)   He shall verify the claims within 30 days from the last date for receipt of claims and may either admit or reject the claim
(o)   He shall determine the value of claims admitted in such manner as specified by the Board
(p)   He shall make list of the stakeholder on the basis of the claim submitted and accepted.
(q)   He shall appoint at least 2 registered valuers to value the assets and with the permission of NCLT distribute amongst the stakeholder, as asset that cannot be readily or advantageously sold due to its peculiar nature or other circumstances.

Role of Insolvency professional in Fresh start order process

IP may make application to the NCLT on behalf of the debtor, who is unable to pay debts and fulfils the conditions specified in section 80 of the Code for fresh start for discharge of his qualifying debt. IP shall examine the application made by corporate debtor for fresh start within 10 days of his appointment and submit a report to the NCLT either recommending acceptance or rejection of the application. IP shall consider and examine the objection made by the creditor to whom a qualifying debt is owned. On the basis of examination IP shall prepare a list of qualifying debts for the purpose of discharge order. IP may submit an application to the NCLT seeking revocation of its order on admission or rejection of application made for fresh start.

Role of Insolvency professionals in individual insolvency process:

(a)   IP may make an application for insolvency resolution process on behalf of debtor who committed default, to NCLT.
(b)   IP shall examine the Application for insolvency resolution plan by debtor or creditor within 10 days of his appointment and submit a report the NCLT recommending for approval or rejection of the Application.
(c)   IP shall register the claim of the creditors and prepare a list of creditors on the basis of information of claim of creditor registered.
(d)   IP shall submit the repayment plan along with his report on such plan to the NCLT within 21 days from the last date of submission of claims.
(e)   IP shall conduct the meeting of creditors and prepare a report of the meeting on repayment plan.
(f)   IP shall supervise the implementation of the repayment plan. IP shall within 14 days of the completion of the repayment plan, forward to the person who are bound by the repayment plan and NCLT.

Role of Bankruptcy Trustee:

(a)   Bankruptcy Trustee ("BT") shall register the claims of the creditors within 7 days of the publication of the notice then prepare the list of the creditors within 14 days from the bankruptcy commencement date.
(b)   BT shall convene the meetings of creditors and decide the quorum of the meeting then conduct the meeting of the creditors.
(c)   BT shall apply to the NCLT for a discharge order on the expiry of one year from the bankruptcy commencement date or within 7 days of the approval of the committee of creditors of the completion of the administration of the estate of the bankrupt.
(d)   BT shall perform following functions:
(e)   Investigate the affairs of the bankrupt relies the estate of the bankrupt.
(f)   Distribute the estate of the bankrupt.

Challenges for Insolvency Professional

Professionals in India have been operating in an environment that protects industrial undertakings and large commercial enterprises from closure in spite of losses and inability to pay debts, by laws such as SICA or State Relief Undertakings Act, which are still operative. From the freedom to pay the debts or other liabilities as and when you are able to do so, the law is changing to declare you insolvent, if you have no money to pay the debt when it falls due for payment. The focus of the professionals advising business enterprises has to shift to prudent cash flow forecasting and management practices.

Although the definition of IP under the Code makes no reference to chartered accountants, cost accountants, company and lawyers, it is clear, now from the regulations that only such professionals (and other eligible professionals) will have to undertake the tasks of insolvency resolution and liquidation of corporates. The task of IPs will relate to the following categories of enterprises.

1.   All companies with debt of INR1 lakh and above.
2.   Industrial undertakings and large commercial enterprises
3.   Infrastructure projects
4.   Medium, small and micro enterprises.
5.   Individuals and partnership firms (debts of INR 1,000 and above)
6.   Fresh start cases of individuals with annual income of INR60.000 or less.

IPs will have to pick the category of insolvents from among these to focus on. If individual insolvencies and fresh start cases are to be taken up, it will require different kinds of enterprise and manpower to handle such cases. The Code provides that if there is no IP suggested by the creditor, the IBBI will nominate the IP. It is presumed that a panel of IPs to be maintained by the IBBI will be different for locations and types of insolvents, otherwise the system will be difficult to operate. In any case, IPs will have to decide their respective areas of operation and indicate them in their application for registration as IPs.

In certain economics (such as the US), insolvency law has the concept of "debtor in possession" and on commencement of insolvency, a moratorium becomes operative and the debtor is allowed to remain in possession, formulate a resolution plan and obtain approval from all stakeholders. The Indian law prescribes a concept of "creditor in control", and the IP is required to take possession of all assets and take over the management of the enterprise. This is part of IPs' responsibilities is the most challenging and could be eased if the insolvency enterprise extends cooperation to the IP and facilitates the takeover of assets and management. IPs will have to decide how possession of assets will be taken; whether each and every item will be included by making an exhaustive inventory or symbolic possessions will be taken, trusting the existing personnel of the enterprise if a resolution plan is not worked out, it is expected that the company management will cooperate with the IP and ensure that all assets are accounted for, preserved and protected, that no valuable assets will be concealed or disposed of without the knowledge of the IP, and that the enterprise is allowed to be operated as a going concern.

Lastly, the IPs need to note that the Code at every stage of the appointment of an interim or final IP or approval of change of IP requires that the IBBI certify that there are no disciplinary proceedings pending against the IP and give specific approval for appointment of IP. Further, disciplinary proceedings may be initiated against the liquidator or resolution professional based on an application made by a creditor in cases where undervalued transactions are not reported by them. These provisions indicate a concern that IPs may deal with assets of the business enterprise for gaining pecuniary or other advantage for themselves or for other third parties to the detriment of other claimant and stakeholders. Professionals planning to undertake assignments as an insolvency resolution professional will have to ensure that the officials selected are independent persons with no relationship with or interest in the business enterprise and are efficient, competent and honest with good reputation and character and integrity beyond any doubt.

The code offers a time bound resolution process aimed at maximising the value of distressed businesses. This will benefit not just the creditor and debtor of the companies but also the overall economy because capital and productive resources will get redeployed relatively quickly. Further, to achieve maximum value of the distress business, the Code assigns duties and responsibilities to the Insolvency Professionals and despite the lot of challenges in their way, the Insolvency professionals are trying to achieve the same in the manner as prescribed under the Code.

However, the successful implementation of the Code depends on scrupulous planning so that the same doesn't impact the effectiveness of the code in an adverse manner and thus in pursuance of the same, the legal authorities need to have requisite planning since the same might tend to strain the nascent institutional infrastructure that is being rushed to operationalize the IBC. Hence, it of utmost importance, at this stage to look that the present IBC does not suffer from the dilemma & predicament of earlier reform attempts thereby defeating the very purpose of the IBC.

Lastly, with the present code coming in to force, it will not only ensure time bound settlement Insolvency but will also create a comprehensive insolvency legislation which will enable faster turnaround of companies & businesses and at the same time revitalise the debilitating corporate market which is much required in the present economic scenario of our country and is indeed a step forward towards the transformation in the legal era.


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