B.Ramana Kumar, Advocate & Aneetha Subramaniam, Chartered Accountant **
The Insolvency and Bankruptcy Code 2016 (Code), which became law in May 2016, is looked upon by both the business and the professionals with a lot of expectations. It is natural that like many new things, this code too is to settle down and it is one of its kinds. While the law makers have burnt the midnight oil and squeezed their grey matter to bring out a good code, there are areas of improvements as always. In such a complex environment such as India, all the situations, with its peculiar cases and issues can never be envisaged.
The Code in its corporate form known as Corporate Insolvency Resolution Process (CIRP) differentiates creditors as Financial and Operational creditors. A financial creditor is one who as given the time value of money and is exploiting the time value such as interest. However an operational creditor is one who has provided goods and services, and as the name aptly suggests, has funded the operations of the company.
The process followed to initiate the insolvency proceedings against a corporate debtor is distinct. While the financial creditor can file immediately on default, an operational creditor would have to provide one last opportunity to the corporate debtor to make the payment.
In the application, a financial creditor has to mention the name of the Interim Insolvency Professional (IRP) in the application (form 1), however an operational creditor may appoint a IRP and it is not necessary to mention the name in the application (Form5). In such cases where the operational creditor does not mention the name of the IRP, the Adjudicating Authority, i.e the NCLT, upon hearing the application and passing the order initiating the insolvency process, will have to seek the Insolvency and Bankruptcy Board of India (The Board or IBBI) to recommend the name of the IRP, who would be appointed as the interim insolvency Professional (IRP).
The IBBI, in its part sends mail to the registered resolution professionals (RP) in the vicinity of the Corporate Debtors address and seek their concurrence in the form of an ‘expression of interest’ including the suggested fee quote is requested. This mail has the copy of the NCLT order admitting the CIRP initiation application as an attachment. This form is to be duly filled and sent by the interested RP including the fee quote and sent to IBBI for further process within 24 hours. Yes, within 24 hours.
The reason for such an urgent response is due to the fact that the IBBI has to recommend the name to the NCLT within 10 days of the escalation by the NCLT to recommend per the Code.
This is where the confusion and commotion begins which has to be addressed by all especially the Board. The mail from IBBI, has the NCLT order attached where invariably the name of the corporate Debtor and the amount due to the particular operational creditor or the group of creditors who have filed such a claim is mentioned. These two are unrelated parameters for quotation of the fee by the insolvency professional to become the IRP. The scope of the IRP is to take over the management of the Corporate debtor, run the affairs for the period of appointment i.e 1 month, call for and scrutinize the claims from all the financial and the operational creditors and convene the first meeting of the Creditors called the committee of creditors. It is quite possible that a large company may default a small amount and the vice versa. Further the default to one operational creditor is no indication of the amount of creditors and the extent of scope.
Many insolvency professionals have quoted the fee to act as the Interim Resolution Professional based on the amount of default mentioned in the order. This has got absolutely no relevance to the scope of work to be done by the IRP as explained above. There is no mechanism except the extract from the MCA website to know the basic details of the corporate debtor and the extent of default, the number of claims which may arise, the extent of claim is nowhere to be found out. Neither it is possible to be found out too.
Many RPs have applied in the enclosed format and a fee without a clue, just as the 12 blind men describing an elephant.
This is not a healthy sign as a process. There has to be a mechanism which would assist the RPs to make a realistic quote and begin the work. By the by, the IBBI usually allots to the assignment to act as the IRP to the lowest quote; or that is what it seems. Just a forward of the NCLT order and allotting to the lowest bidder may be a compliance of law but definitely does not serve the purpose to its fullest intent.
There are a few suggestions to better this process. One would be that the Board makes a basic study of the Corporate Debtor, and suggest the extent and scope. This obviously would take a few days, if not weeks, for which the Board should gear to this with adequate infrastructure to assist the RPs to make a realistic quote. The Board in its wisdom may also consider to suggest a fee band, or the minimum fee based on its study and the understanding of the case on hand.
Another important issue is that the Board should desist from allotting to L1 or the lowest bidder. Professional assignment cannot work like this on such bidding, for the professional for various reasons including ignorance quote a low amount and ultimately get trapped in the Roulette. The board should come the aid of the Professionals and assist them to gauge the extent and scope of the assignment and quote the appropriate fee.
** The authors can be reached at email@example.com, firstname.lastname@example.org