If one has to put a finger on the most far reaching Reform with transformative outreach of the past hundred years in the Indian economy, then probably, many of us would likely select the Insolvency Reform unleashed in 2016.

Like in 1991, when the economy was on the verge of Bankruptcy, in came the Doctor, pulled out of UGC, who presented the reformist budget of all time, in June 1991. His impassioned speech still echoes,

“I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, “no power on earth can stop an idea whose time has come.” I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”

Fast forward, about 25 years once again, it is reforms in the space of Bankruptcy, that is set to transform the Indian economy.

Visionaries like Dr Raghuram Rajan and N. Rangachary had set the ball rolling in 2014. On 26th May 2015, the lawyer turned politician Arun Jaitley took charge as Finance Minister. The legal background helped as he introduced Bill No. 349 of 2015 in the Lok Sabha on 21st Dec that eventually culminated in the Insolvency and #Bankruptcy Code (CODE) to get the Presidential assent on 28th May 2016.

It is time there is an enhanced awareness of these violent undercurrents that are changing and consolidating the foundations. This series of articles on the CODE looks at the elephant from different perspectives, to understand how the economy is changing at a deep structural level, beyond the inferno of NPAs raging all around us.

This series of articles on the CODE, looks at the elephant from the different perspectives, to understand how the economy is changing at a deep structural level, beyond the inferno of NPAs raging all around us.

The First in the series looked at the Need for Speed, and how the Code matches up to this Need for Speed.

The Second in the series, Designer Haircuts, looked at the big picture on the quality of the Insolvency Process, that the Code has set rolling, in terms of the quality of results. The initial setbacks did not result in the authorities attempting quick fix solutions to the bane of Indian economy, the unscrupulous promoters who have used every reform to their benefit, facilitated by some professional elements who flourish only on the basis of their skills to give these promoters a legal cover to their activities.

The Third, reviewed the difference between the erstwhile #SICA process and the new process, and one of the conclusion was on the key differentiator between the two processes, viz. the institution of Insolvency Professional, the TurnAround #Artist.

In this article, Fourth in the series, we look at the new profession which is an institution in the making, as it institutionalizes the legacy of the Turn Around Artist, the Insolvency Professional.

Institutions are the foundations of a well-functioning market economy. They define the contours of freedom, protect rights, enforce obligations, and penalise deviant behavior. They lend predictability of actions and certainty of outcomes.

Indian economy is also witnessing a proliferation of professions. The need for professional services has been increasing over the years, so also their influence in the making of the economy. The Code too has a number of professions that form the total ecosystem, and at the epicenter of the Code stands the Insolvency Professional (IP), an institution in the making.

She is the fulcrum; the beginning, the middle and the end of the Insolvency process. In fact it won’t be incorrect to say that the whole edifice may crumble if this pillar is taken out. Before we see how the system is working on strengthening this pillar, first let us see how does the pillar support the structure, on her role in the process, for then we would be in a better position to appreciate the kind of metal required in the making of this pillar.

An IP is implanted in the Insolvency Resolution Process by the Adjudicating Authority (AA) or the National Company Law Tribunal (NCLT), and derives her powers from the Code itself. Once appointed she takes charge of the situation and becomes the bridge between the AA with the Rest of the stakeholders, viz. debtors and creditors. She exercises the powers of the Board of Directors of the firm under resolution, manages its operations as a going concern.

To avoid any friction that may affect the continued smooth operations of the entity which is the permanent endeavor of the Code, the #NCLAT had clarified on this issue in the matter of M/s Subasri Reality Vs Mr N. Subramanian [CA (AT) (Ins) No. 290 of 2017].

After the appointment of the RP and declaration of a moratorium, the Board of Directors stands suspended, but that does not amount to a suspension of Managing Director, or any of the directors or officers or employees of the CD. To ensure that the CD remains a going concern, all the directors/employees are required to function and to assist the RP who manages the affairs of the CD during the moratorium. And if one or other officer or employee had the power to sign a cheque on behalf of the CD prior to the order of moratorium, such power does not stand suspended on suspension of Board of Directors nor can it be taken away by the RP.

She needs to understand the business dynamics of the industry, and be able to deal with all the stakeholders from a position of thought leadership, for all look up to her to provide a way out of the insolvency. Not just they look up to her, but it is in their interest to provide all the required support in her endeavor  to find a resolution to the insolvency.

The Resolution Professional is perhaps a synonym to the term, TurnAround Artist, and yes she is an artist who juggles through various vested interests to pull out a company from the ICU.

If an employee or the Director refuses to cooperate, like someone empowered to sign cheque refuses to function on the direction of the RP or misuse the power, it is always open to the RP to take away such power after notice to the person concerned.

The above order in M/s Subasri Reality Vs Mr N. Subramanian case made the role of the RP crystal clear.

With powers comes responsibilities and the RP is also liable and has to comply with applicable laws on behalf of the firm. The last part is crucial as it casts complete responsibility on her to comply with the laws, as was seen in the case of a petition filed by Jitender Kumar Jain.

The corporate entity under #insolvency resolution process was issued DeListing Notice by the BSE and NSE. The Resolution Professional sought protection u/s 14 of the Code, that details moratorium, and contended that de-listing will affect the revival of the entity. He prayed that the notices issued by the stock exchanges be declared void given that moratorium was in force.

The AA clarified that the companies are governed by various enactments and they have to run in compliance with laws of the country and it cannot be said that entities under #CIRP are free enough to flout all other laws. The AA held that the action of the Stock Exchanges is neither connected to the prohibitions of Sec 14 of the Code nor inconsistent with the non-obstante clause given u/s 238 of the Code and thereby dismissed the application of the RP.

Balancing the authority and the responsibilities, the Insolvency Pro works towards the desired outcome of the Insolvency Process in a timebound and transparent manner.

The soul of the Code is Resolution, the desired Holy Grail in every case. The onus of taking the process to its desired culmination falls on the Insolvency Professional, to the extent that the professional is termed as Resolution Professional. This involves analyzing the situation, preparing the Information Memorandum as outlined in Sec 29 (1),

“the Resolution Professional shall prepare an Information Memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan.”

The Information Memorandum forms the base document for all subsequent deliberations amongst the stakeholders in their pursuit of resolution. She relies on two Valuation Professionals for the crucial piece of information that is the fair value and liquidation value of the entity. The quality of the Information Memorandum would broadly determine the quality of the Resolution Plans.

Not just quality, but she also has to work within strict timelines to prepare the Information Memorandum. The Feb 2018 amendment to the Code now mandates, that the RP shall submit the information memorandum in electronic form to each member of the CoC within two weeks of her appointment as RP and to each prospective resolution applicant latest by the date of invitation of resolution plan, on receiving confidentiality undertaking.

It is upto the Resolution #Professional, to identify prospective #Resolution Applicants on or before 105th day from the insolvency commencement date, and get them to submit Resolution Plans. The key for the Resolution Professional is to generate alternate credible Resolution Plans, and then through deliberations with the Committee of Creditors (CoC), identify the optimal Plan.

Her experience in this matter, in terms of discerning a viable RP, is crucial and there have been instances of the Resolution Professional being taken for a long ride.

The case of Indian Bank Vs Kadevi Industries witnessed the #NCLT send out a stern message to the entire profession, on the need to exercise diligence in identifying Resolution Applicants.

In the second meeting of CoC, Mr. Prabhakar, promoter of the Kadevi Industries, the CD, had identified a certain entity, (Netiol (Singapore) Pte Ltd.) as a Resolution Applicant. The Resolution Plan submitted by the RA was duly deliberated in the CoC.

There were several rounds of modifications to the resolution proposal. However, this could not be finally approved, and an extension of 90 days was sought. The extended period of 90 days expired, but the #Resolution Plan was not approved. Everything was done as per the provisions of the #Code, in terms of conduct of CoC meetings and deliberations thereon.

Consequently, the order of liquidation was passed on 9 January, 2018. While passing the order of liquidation, the AA observed

“…This implies that all the parties involved in the entire CIRP process are hand in glove and made untruthful / wilful false submissions to the Adjudicating Authority. Therefore, the Adjudicating Authority has taken issue seriously and imposes a cost of Rs. 1,00,000/- (Rs. One Lakh only) each on the Financial Creditors/CoC and on the corporate debtor.”

Furthermore it warned the RP to be careful in all his future assignments and sent strong signals to all the resolution applicants to be genuine/ truthful in the entire Insolvency Resolution Process.

Sanjay Dongre works as a Consultant in varied areas including the exotic world of ETFs and Mutual Funds, engaged with marquee clients like Newton Investment Management Ltd (UK), Deutsche Bank AG, Strategic Investment Group (Asia), BCG Asia (China and India), Partners Group India, True North Managers LLP among others.

Specializes in Process Management, an area in which have worked extensively on the domestic and global markets. Recently he has got very much involved in the Insolvency Process, as he finds it to be one of the biggest reform of the past few decades. He routinely talks to bankers and corporates on the best course of action for maximum value generation.

After IIM, Bangalore, has worked in different mutual fund companies like HDFC, ICICI Prudential, Tata, managing operations on the asset side as well as liability side.

As Vertical Head at State Street –Syntel JV had P&L responsibilities combined with operational deliverables. In this role worked closely with international TA service providers like IFDS UK, SS Dublin, IFDS Canada and BFDS. The end clientele included the most marquee names in the global asset management business.

He was instrumental in setting up of the fund management business of Motilal Oswal. Probably the only #NASDAQ ETF in Asia ex Japan, was executed by him, from setting up the process flows, processes, service provider agreements and then day to day operations. He also set up offshore funds in Dublin, which were distributed in Europe but invested in India. As COO, he had a wide range of operations; #ETF, Offshore Funds and Separately Managed Accounts.

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