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.
The Bankruptcy Law Reform Committee (BLRC) which was set up in August, 2014 under the chairmanship of Mr. T.K. Vishwanathan (former Secretary General, Lok Sabha and former Union Law Secretary) with the mandate of suggesting comprehensive in the Bankruptcy space. The BLRC extensively studied the insolvency regime within India as well as various international jurisdictions and proposed an all-encompassing law for corporate and individual insolvency, assimilating the best practices from across the globe.
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.
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, 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, particularly in terms of the HairCuts.
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.
The Fourth article looked at the role of the Insolvency Professional, in HR terms, the Job Profile.
In this article, fifth 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. To put it in two words, how to become an Insolvency Professional, Tough Luck.
The Insolvency and Bankruptcy Board lays down some stringent requirements for a person to become an Insolvency Professional. In fact it has evolved a two tier oversight structure to ensure that the right skilled persons become Insolvency Professional and thereafter there is a continued oversight on the working of the Insolvency Professional.
As such there are Five levels of requirements, so hold on to your hearts. The entry level qualifying criteria is
a. either to be a professional like CA, CS, ICWA or an Advocate (MBA is not to be considered as a professional) having ten years of experience, or
b. graduates having fifteen years of managerial experience.
This entry level criteria is to ensure that people with adequate experience and expertise enter the profession of Insolvency, as the knowledge and experience would be required to conduct the Resolution process where she would be required to interact with various stakeholders across levels, from the Board, the Creditors, the Suppliers, the Workmen and the IBBI/AA.
There is no specific age criteria, but taking into account the experience required, one can safely say that below thirty does not pass the First Level.
The next level of requirement is a thorough understanding of the Corporate legal structure and the Insolvency ecosystem as envisaged and laid out in the Code. This understanding is essential to ensure that the IP is equipped to carry out her responsibilities, in particular to ensure that she complies with all the laws.
To ensure that every Insolvency Professional meets this knowledge requirements, the IBBI has designed a rigorous MCQ exam that is administered nationally through the NSE.
The question paper carries 74 questions of 1 mark each and 13 questions of 2 marks each, to be tackled in two hours, with 60%. There is one catch as every wrong answer earns 25% of the marks for that question.
The syllabus for the exam is extremely wide, covering the Insolvency & Bankruptcy Code, the Companies Act, the Partnership Act, the LLP Act, the Indian Contract Act, Sale of Goods Act, Transfer of Property Act, Specific Relief Act, NI Act, Recovery of Debts Act, SARFESAI, CDR, SDR, S4A, Arbitration & Conciliation Act, Limitation Act, Case Laws pertaining to the Code, Finance & Accounts, General Awareness of the Economy, Financial Markets, Labor Laws, Concepts of Valuations. If this was not enough the exam includes two transactional case studies.
In the past 18 odd months, since the exams have been rolled out, the success rate has been declining, as the every six months the Board reviews the syllabus and if we go by the success rate, which is falling continuously, the exam is only getting tougher.
The Board really believes that the quality of the Insolvency Professional is the key factor for the success of the most ambitious reform of India. In short, the Board wants to make sure that the persons who enter the Insolvency Profession are not just experienced but also have the necessary expertise.
Besides the knowledge and experience aspect, the Board also puts a premium on the moral character of the individual aspiring to be a IP. On 26th Feb 2018, the Board rejected the application of DEF, after he had cleared the Examination, for registration as an IP on the ground that he is not a Fit and Proper person as criminal proceeding u/s 509 (word, gesture or act intended to insult the modesty of a woman) of IPC was pending against him in the Metropolitian Court of Mumbai. The Order made the intent very explicit,
“The integrity, conduct, reputation, character and competence of the applicant are of material consideration. It is material to note how/ what others feel about the applicant who has been charge sheeted for offence under section 509 of the …..”.
On the same day, in another case, it rejected another IP applicant, as a charge sheet had been filed against him before the Court of the Special Judge, CBI, Greater Mumbai, as it observed,
“What is material is that what others feel about the applicant who has been charge sheeted for offences such as criminal conspiracy, cheating and dishonestly inducing delivery of property, using as genuine a forged document, involved in criminal misconduct which attract imprisonment up to seven years.
Does such a person inspire confidence of the stakeholders who can entrust him with property of lakhs of crores for management under corporate insolvency resolution process? Pendency of serious criminal proceedings against the applicant adversely impacts his reputation and makes him not a person fit and proper to become an IP.”
Given the size of the Indian economy and the rapid growth it is witnessing, the Board also expects the Insolvency Profession to take off, which would need a vast army of Insolvency Professionals. If the number of GST registrations is any indicator, then there are over 10 million businesses in existence, and everyday on average, more than 10,000 new registrations are done. Given the high percentage of business casualties, there would be a huge requirement of Insolvency Professionals as the need for swift insolvency process is felt across the economy.
It would be difficult for the Board to directly interact and regulate the vast army of IPs that is expected to come up. So in a strategic structural initiative, the Code implemented a layer of semi-regulator between the Board and the IP. This layer, the Insolvency Professional Agency is strictly regulated by the Board.
Among other objectives, these Agencies are mandated to promote the professional development of and regulation of insolvency professionals and to promote good professional and ethical conduct among the insolvency professionals.
To ensure that the Agency delivers on its mandate, the Board has prepared Model Bye Laws that these Agencies have to adhere to. Sec 204 of the Code, requires the IPA to,
a. grant membership to persons who fulfil all requirements set out in the bye laws,
b. lay down standards of professional conduct for its members
d. suspend or cancel the membership of insolvency professionals on the grounds as laid in the bye-laws.
The third requirement on the way to become an IP is thus even more stringent, as the Board requires the potential IP, to register with an Insolvency Professional Agency. It is almost like a game, where one has to keep moving up the higher level.
The Fourth requirement is the need to complete a pre-registration educational course as laid out u/s 5 (b) of the Regulations. This is probably the easiest requirement, probably to give breathing time before the Fifth and Final requirement hits the aspirant.
After clearing the examination, the aspiring IP has to register online on the IBBI website. The Form A of the Second Schedule is to be submitted online to the IPA and fees to be paid.
Upon satisfaction of IPA that application submitted is complete in all respect and that the same may be forwarded to IBBI for processing of registration, an e-mail is sent by IPA to the registered e-mail ID of the user along with the payment link for depositing necessary fees to the IBBI.
Within sixty days, the Board may grant registration subject to its satisfaction, and the applicant gets the Certificate of Registration.
Thereafter there are requirements of complying with continued professional education that the Board may time to time mandate.
The Board also mandates that the IP is completely devoted to the profession and as such an IP is NOT permitted to take up any full time employment.
As of March 31st 2018, there are 1,812 Insolvency Professionals, the northern region accounting for the maximum numbers with 688, followed by Western Region 521.
The assignment of an IP to any Insolvency case that comes up before the AA, is done by the AA as we saw earlier. However, the AA is not the repository of IP database. When an Insolvency Resolution process is initiated, the initiator may or may not recommend the name of an IP.
In case there is a recommendation, then the Board simply validates the recommendation on grounds of the existing workload, the location of the IP. It also confirms that the recommended IP continues to comply with the requirements of the IPA and the Board.
In case there is no recommendation, then as per various provisions of the Code, the AA requires the Board to recommend a name. Initially there was a process inefficiency built in, as the AA would send a requirement to the Board and then the Board would send its recommendations.
However, when the case of Indian Bank Vs Kadevi Industries came up, the Board proactively eliminated this process inefficiency.
“The Insolvency and Bankruptcy Board of India vide its letter dated 01.01.2018 has recommended a panel of Insolvency Professionals for appointment of Insolvency Resolution Professional in compliance with Section 16 (3) (a) of the Code in order to cut delay.
The list of recommended Insolvency Professionals provides instant solution to the Adjudicating Authority to pick up the name and make appointment. It helps in meeting the time line given in the Code and the unnecessary time wasted firstly in asking the Insolvency and Bankruptcy Board of India to recommend the name and then to appoint such Interim Resolution Professional by the Adjudicating Authority”.
The beauty of the IP appointment sub-process in the over all Insolvency Resolution Process, is that it is agnostic to the name of the IP professional. It assumes that each and every IP, on the recommended Panel of Insolvency Professionals, is Equally qualified and can take up any Insolvency case, irrespective of the industry or the size of the Corporate Defaulter. It also means that the Board would continue to put a premium on the quality of the IP, may be going forward actively weeding out the bottom rung.
The Fifth and Final requirement to become an Insolvency Professional is a strong heart. There is no recommended syllabus for this neither any training is possible. The job of an Insolvency Professional demands him to be not just be proficient in the business, management and legal aspects, but also the human aspect.
This may sound odd, but when she is paradropped behind enemy lines in a battered company that has practically given up all hopes, she is surrounded by promoters, creditors, debtors, vendors, shareholders and employees. Each of these stake holders has emotional involvement besides financial involvement. Not long back an insolvency professional Devendra Jain was kidnapped by angry investors in broad daylight from Mumbai suburbs. Employees in a beleaguered unit, facing imminent liquidation have been reported to get violent.
In such tricky situations it is not the legal or strategy expertise that will come to the rescue but a strong heart and good human relation skills will help the Insolvency Professional to negotiate those tricky waters within the stringent timelines.