Vijaykumar Iyer and Abhishek Sood
Ensuring financial stability of an economy hinges on an effective enforcement of creditor rights, duly supported by procedures that afford efficacious, transparent and predictable mechanisms for debt recovery. Insolvency processes establish such comprehensive procedures wherein legal and administrative policies and rules are put into play by different economic agents. The Cork Committee Report,1 advocated that successful administration of any insolvency resolution process hinges chiefly upon the economic actors who conduct it. These actors, widely known as Resolution/ Insolvency Professionals/ Practitioners play diverse roles in the socio-legal milieu and make the revival process operational. In this way, they turn around the fortunes of financially distressed firms and ensure value maximisation for all stakeholders. At this juncture, it is relevant to take note of the role of Resolution Professionals (designated as Insolvency Practitioners in the UK) as underlined by the Centre for Economics and Business Research, 2 viz.:
‘The role of the Insolvency Practitioner is to administer an insolvency outcome within the legislation and to ensure a fair, efficient and quick redistribution of assets. In doing this, the regime itself, and the individual practitioners within it, need to strike an appropriate long-term balance between the interests of debtors and creditors [the people who are owed money]. An often overlooked part of the industry is its role in helping businesses and individuals avoid insolvency in the first place, both through providing advice to individuals and businesses as well as through instigating formal ‘rescue procedures’.’
In the Indian legal context, Insolvency Professionals (IPs) constitute a new class of professionals accredited under the Insolvency and Bankruptcy Code, 2016 (Code). They are regulated by the Insolvency and Bankruptcy Board of India (IBBI). Sub-section 27 of section 5 of the Code defines a Resolution Professional (RP) as ‘an insolvency professional appointed to conduct corporate insolvency resolution process and includes an interim resolution professional.’
Essentially, the RP is tasked with facilitating the entire resolution process while attempting to address and balance the interests of all stakeholders. In this regard, section 23 of the Code requires that:
`Section 23(1): The resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period.
Section 23(2): The resolution professional shall exercise powers and perform duties as are vested or conferred on the interim resolution professional.’
From an appraisal of the provisions of the section, one can safely deduce that an enormous responsibility is placed on the shoulders of a RP. This encompasses much more than what the responsibilities and duties of the RP. The practical challenges and case-to-case variations are however beyond the scope of such legislation and regulations. Such challenges and variations are where significant trials for the RP arise from, and this article will discuss a few practical nuances to the role a RP.
SUPPORT FROM DIRECTORS AND ERSTWHILE MANAGEMENT
One of the primary legal duties of the RP is to assume the powers vested in the board of directors and manage the operations of the corporate debtor (CD) as a going concern. However, the intent of the Code is not that the directors cease to remain in office (which is still a common misconception). It is also not envisaged by the Code that the RP individually carries out all the activities being performed by the board of directors and the erstwhile management. The Code provides for suspension of powers of the board of directors and vests such authority in the RP. For any RP to step in and replace the entire board and its experience and wisdom in managing the CD is not practical. The RP assumes overall responsibility for the CD and approves key decisions. The directors continue to discharge their duties and responsibilities, as called upon by the RP, in order to support and assist him in discharging his role and in order to protect the interests of the CD.
Similarly, while the responsibility for the management of affairs of the CD as a going concern vests in the RP, the duties of the management, employees and workmen of the company and their day to day functions are not extinguished.
Thus, the RP has to fullfil his statutory duty to the CD, and the Code, with the support of the directors, key managerial personnel, officers and other employees of the CD, while retaining overall responsibility for key decisions.
When an RP steps in, it takes time for him to develop an understanding of the business of the CD before any meaningful decisions are taken. However, the ongoing nature of operations do not afford him such luxuries and it is crucial for the RP to rapidly surmount the steep learning curve. At this stage, if the directors and employees do not actively support and assist him, the RP can only have a limited impact, and the RP may even become a bottleneck leading to disruption of operations which could lead to an adverse impact on the resolution process. Human compulsions may also come to play for the erstwhile management of the CD in trying to deter the RP from succeeding. The more the RP is dependent on the erstwhile management and is not able to take independent decisions, larger is the threat of the RP getting inadvertently compromised.
UTILITY OF ACCURATE DATA IN CIRP
The key duties of the RP with respect to the conduct of the corporate insolvency resolution process (CIRP) include verification of claims, preparation of the Information Memorandum (IM), conduct of the valuation, facilitate of diligence by potential resolution applicants.
For verification of claims, the RP would require updated books of account, along with support from the finance and operations teams of the CD for resolution of queries that he may have. In absence of such updated books of account and support, the RP would be forced to verify the claims basis only on the submissions by the claimant. This may not be an accurate or complete representation of facts, which the RP will have no means to crosscheck.
The preparation of the IM, conduct of valuation by registered valuers, and diligence by potential resolution applicants are data-based activities. The quality of data determines the quality of the diligence, which, in turn, has a direct impact on the outcome of the resolution process. In absence of relevant data, the RP will not be able to capture the accurate financials, accurate statement of assets and liabilities in the IM – which would be a key input for any audience of the IM. The registered valuer is required to determine liquidation value and fair market value of the CD. Both these values would depend upon data regarding the assets and the operations of the CD. The collation of this data would require active support from the employees of the CD. The resolution applicants usually have a multitude of queries regarding the operations of the CD. The long serving directors and employees of the company would be better placed to answer such queries. In case they are not forthcoming with their support, the ability of the RP to enable the resolution applicants to submit the best possible resolution plan will be adversely affected.
Each of these activities has a significant dependency on data provision, requiring active assistance by the officers and employees of the CD. Accuracy and inclusiveness of data in a corporate insolvency resolution process is a big deal.
BALANCING CONFLICTING INTERESTS
It has been observed that the support from the erstwhile promoters, directors, officers and employees may not be forthcoming in several situations. In cases where the operational cash flows are not sufficient to meet operating expenses such as raw materials, pending repairs and employee salaries, the RP is forced to prioritise expenditure. In such a scenario, it is not possible to meet all requirements of the CD. The inability to pay employee salaries becomes a sore discussion point between the RP and the employees of the CD. In this regard, a common refrain heard is ‘why do we work when we ourselves are not paid?’
Again, there is normally a high degree of wariness of the erstwhile management of the CD to be transparent or forthcoming with information, insight and support. They may have a skeleton or two to hide or are not sure how any such information would be used against them. Protecting one’s self-interest does, at such times, take supremacy for the officers, over the interests of the company. The CD is in stress and desperate times lead people to take desperate measures.
Often, as the CD might have been under stress for some time prior to commencement of CIRP, and salaries of employees would have been delayed, employees may have already left or be looking out for other opportunities. In such a scenario, the dedication level of employees is adversely affected and the support that the RP receives is minimal.
In some cases, the employees, especially at the higher levels of the hierarchy may have a certain sense of loyalty for the erstwhile promoter(s). This could be attributable to their long and close association with them. Due to such loyalty they may also be less enthusiastic and forthcoming in their support to the RP.
In each of these cases, the RP faces significant challenges in fulfilling his duties under the Code. In many of the above cases, due to the powers vested in the RP, there is no active opposition. However, the support that should be provided to a court appointed officer‘ is not forthcoming and it hampers his activities and fulfilment of his duties. In India, it is not unusual for stakeholders to render all assistance short of actual help.
ENFORCEMENT OF MORATORIUM
As per section 14 of the Code, a moratorium is declared by the Adjudicating Authority (AA), on the insolvency commencement date, prohibiting any new suit, or continuation of existing suit, against the CD. This provision would enable cessation of ongoing matters ‘against’ the CD. Yet it allows the RP to pursue matters initiated by the CD, as a successful resolution in these may benefit the CD.
A CD with ongoing operations having a wide scope, inevitably, has multiple litigations. Further, it has been observed that despite the moratorium, new proceedings and suits are initiated against the CD in various fora. One challenge the RP faces is that there is no automatic imposition of the moratorium. Representations are required to be made to individual regulatory authorities and to courts for imposition of moratorium in each matter.
While the enforcement of the moratorium is an administrative issue, it requires effort and cost on part of the RP that could be potentially avoided. Having to make representations also opens potentially continuing pursuit of such litigations. In several cases, the court having jurisdiction may take a view that the moratorium does not apply to the matter in hand.
One is optimistic that as the awareness of the Code becomes more pervasive, such litigation or actions by the regulatory authorities or the courts would reduce.
MANAGING STATUTORY COMPLIANCES
As per section 17(2)(e) of the Code, the RP is responsible for complying with the requirements under any law for the time being in force on behalf of the CD. The RP is responsible for all compliances, and requires significant on-ground support from the existing directors and employees in meeting such compliances.
There are certain compliances where there remains some ambiguity on account of commencement of insolvency and appointment of the RP. One such instance is of the ambiguity regarding ‘factory occupier’ under the Factories Act, 1948 wherein the occupier is defined, amongst other things, as any of the directors of the CD. There is lack of clarity regarding the position of the occupier, especially given the suspension of the powers of the board of directors (being misread as suspension of directors) and imposition of such duties on the RP. Such a scenario leads to unwarranted personal exposure, and is an additional imposition on the RP, who has oversight of and limited involvement in the day to day activities at a factory. RP faced with such a situation is then required to actively engage with the relevant authority to ensure that the CD continues to comply. Support from the concerned directors and key managerial personnel at the plant becomes critical.
There are certain matters which require past compliances to be completed. Due to pending past compliances, the RP is also not able to fulfil the ongoing compliances which are due during the CIRP. An example is the ACTIVE-(INC-22A) requirement of Ministry of Corporate Affairs (MCA), which requires all past compliances with Ministry to be fulfilled prior to filing of ACTIVE. In such a case, where the past compliances are not completed, the RP is hindered from fulfilling his duty and meeting all compliances of the CD due within the CIRP period due to factors beyond his control.
In addition to ongoing compliances, the RP has to deal with multiple government and statutory authorities such as various tax authorities, environmental boards, specific industry regulators, etc. In most cases, the RP, in addition to informing such authorities of the commencement of insolvency, also has to guide them regarding the implications of the commencement of insolvency (especially on the de-prioritisation of government dues) and the claim filing process. There have been cases that despite such information and education, the authorities have not filed claims with the RP in a proper form or within the requisite timelines, resulting in potential losses to the exchequer. The RP is again required to extend effort in ‘managing’ such authorities as they have significant influence that they can choose to exert and potentially cause disruptions in operations.
It has been our experience that if one is transparent and is willing to have an open dialogue, the government and regulatory authorities in this country will walk more than halfway to support. The competence of our officers across the bureaucracy and more particularly, their empathy, has been compelling.
While the above are practical challenges any RP may face, he has to find a way to overcome such challenges as he is not, prima facie, protected from failure to discharge his duty due to such challenges.
To meet his primary responsibilities under the Code, and to overcome the issues faced, the RP requires the support from all stakeholders such as directors, employees, creditors, etc. especially to get a holistic view of the CD and all available information and insights. Such stakeholders can also play a key role in highlighting risk factors and peculiarities associated with the operations and functioning of the CD, enabling the RP to plan for, and implement strategies to overcome such potential risks. However, being the officer in charge, the RP is more often than not, held responsible for failing to achieve certain objectives instead of being provided support by such stakeholders.
It is a simple matter for any stakeholder to raise a finger against the purported ineptitude of the RP without even being cognisant of the challenges being faced by him. To overcome this threat, the RP must cease to have delusions of grandeur or any misconceived belief of having a monopoly of knowledge. There is a lot he or she may learn if the RP is willing to collaborate, particularly with the committee of creditors (CoC). This approach of consultation, in addition to placing on record the challenges being faced by him, would also enable the RP to gain guidance from the members and other participants who would have had a much longer relationship with the CD and may be aware of certain challenges which may have also been faced in the past. The presence of directors in the meetings will help understand their perspective on such challenges. As the Indian ‘karmic’ working philosophy states – ‘for every man-made problem there is a man-made solution, provided you are willing to find it!’
The Code, through section 19, enables the RP to seek assistance from any person associated with the CD. In case such assistance is not received, the provision authorises the RP to make an application to the AA seeking directions to such person from whom assistance is required. While this is a tool available to the RP, it has several practical challenges associated with it. Firstly, this is a legal process and would require valuable time from the AA. Considering the excessive load on the judiciary there may be a delay before the appropriate directions are passed. Given the strict timelines envisaged in the recent amendment to the Code, for completion of the CIRP, the benefit of such a time-consuming legal procedure may be limited. Secondly, the RP may be reluctant to seek directions against such personnel as he is required to work with them daily. A coerced support is not as valuable and expedient as a voluntarily-given support. Also, the RP may be receiving limited support from the personnel.
He may have a concern that making a section 19 filing for specific support could even adversely impact whatever little support he is receiving currently.
To garner support from the requisite personnel, the RP has to utilise a fine mix of personal inter-relationship skills. Particularly, the attribute of sensitivity, while engaging with the personnel, and also pro-actively seek support from all participants at the meetings of the CoC. In this context, some lines by Jeffrey Pfeffer‘seem relevant:
‘….being sensitive to others does not mean that one is necessarily going to act in their interests, in a friendly fashion, or on their behalf. Sensitivity simply means understanding who they are, their position on the issues, and how best to communicate with and influence them.’
As a last resort, in case the RP is still not able to gather the requisite support, he/she must not hesitate to file an application under section 19 of the Code and seek the necessary directions from the Court.
CHALLENGES POST-COMPLETION OF CIRP
Ongoing Litigation – the Twilight Zone
We have discussed some practical challenges that a RP faces during CIRP. Given the evolving nature of the Code and the nascent maturity level of the insolvency ecosystem, the challenges faced by a RP do not cease with his demitting office with respect to a particular CD.
Even after the completion of CIRP process and handover of the CD to the successful resolution applicant, there are various stakeholders with respect to the CD who make certain applications at various fora for grievances. The RP is inevitably a defendant in such applications. The applications may vary and may seek redressal on issues such as allegations against the CIRP process; claims not admitted by the RP ; statutory dues for the CIRP period but claimed post completion of CIRP, etc.
The RP is an officer of the court, who comes into existence for a specific purpose, and on completion of his defined duties and responsibilities, ceases to exist. However, due to the post-CIRP litigation, and him being made a defendant in such matters, the RP is required to continue to act.
It may also be noted that the Code provides specific forums and limitations of time for filing any grievances. However, it has been seen that RPs are being made parties to litigations in forums beyond those specified in the Code. Such suits are being filed beyond the limitation periods specified under the Code. The RP has to respond to, and defend against such litigations despite being a creation of, and being governed by the Code itself.
Involvement of RP in post-CIRP litigation opens him up to personal liability for any
adverse ruling. It involves not only effort but also a cost on the part of the RP – which is not compensated or reimbursed. The legal expenses may be covered in case the RP was able to avail an appropriate insurance product. However, his own efforts and costs may not be covered by insurance policy as well.
The RP should ensure that the resolution plan clearly addresses all claims, disputes and litigation, particularly of statutory authorities to limit the level of such post-CIRP litigation. He may choose to remain in active dialogue with the successful resolution applicant to follow through on such litigation.
To summarise, an RP has an overarching responsibility for the CD and the insolvency process. The Code also defines specific duties and responsibilities. Having said that one should recognise that there are several practical challenges that he may face, which may or may not be explicitly envisaged under the Code. An RP has to overcome all these challenges in order to effectively discharge his duties during the CIRP, using the tools available to him under the Code. There are no clear readymade solutions to practical challenges and a RP is required to use his discretion on most occasions.
The guidance provided by Chester Bowles, an American diplomat and ambassador, is quite apt in this case- ‘When you approach a problem, strip yourself of preconceived opinions and prejudice, assemble and learn the facts of the situation, make the decision which seems to you to be the most honest, and then stick to it.’
1 Report of the Review Committee on Insolvency Law and Practice (Cork Committee) (1982). This led to the enactment of the UK Insolvency Act, 1986.
2 Insolvency Practitioners: An Essential Part of the UK Economy (2019). https://www.r3.org.uk/media .
3 Asset Reconstruction Company (India) Pvt. Ltd. v. Shivam Water Treaters Pvt. Ltd., (CP (IB)-1882/MB/2018)
4 ‘Jeffrey Pfeffer (1993). Managing With Power: Politics and Influence in Organizations. Harvard Business Review Press.
(Mr. Vijaykumar Iyer is an Insolvency Professional and a Partner at Deloitte India. Mr. Abhishek Sood is an Associate Director at Deloitte India.)