Corporate insolvency resolution process (CIRP) can be commenced when a corporate debtor commits a default – section 4(1) of Insolvency and Bankruptcy Code, 2016 (IBC). The default should be minimum Rs. one lakh. The amount can be increased by Central Government but shall not exceed Rs. one crore – proviso to section 4(1).

‘Default’ means non-payment of debt when whole or any part of instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be – section 3(12).

Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under Chapter II of Part II – section 6.

After commencement of corporate insolvency resolution process under section 7, 9 or 10 of Insolvency Code, 2016, further action will commence before Adjudicating Authority (NCLT). The Adjudicating Authority (NCLT) shall appoint an interim resolution professional within fourteen days from the insolvency commencement date – section 16(1). His appointment shall continue till the date of appointment of the resolution professional under section 22 of Insolvency Code – section 16(5).

“Resolution professional”, for the purposes of Part II of Insolvency Code, 2016 (which relates to Corporate Persons), means an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional – Section 5(27).

1. Management of affairs of corporate debtor by interim resolution professional (IRP)

Section 17(1) of the IBC provides that from the date of appointment of the interim resolution professional,—

(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;

(b) the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional;

(c) the officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional;

(d) the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional.

In terms of Section 17(2) of the IBC the interim resolution professional vested with the management of the corporate debtor shall—

(a) act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any;

(b) take such actions, in the manner and subject to such restrictions, as may be specified by the Board (i.e. IBBI);

(c) have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor;

(d) have the authority to access the books of account, records and other relevant documents of corporate debtor available with government authorities, statutory auditors, accountants and such other persons as may be specified; and

(e) be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.

2. Signing of Financial Statements

Section 134(1) of the Companies Act, 2013 states that the financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by:

  • the chairperson of the company where he is authorised by the Board; or
  • 2 directors out of which 1 shall be managing director, if any; and
  • the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the company secretary of the company, wherever they are appointed.

In case of listed companies, Regulation 33(2) of SEBI-LODR provides that the approval and authentication of the financial results shall be done by listed entity in the following manner:

(a) The quarterly financial results submitted shall be approved by the board of directors. However, while placing the financial results before the board of directors:

♦ the chief executive officer (CEO) and

♦ the chief financial officer (CFO)

of the listed entity shall certify that the financial results do not contain any false or misleading statement or figures and do not omit any material fact which may make the statements or figures contained therein misleading.

(b) The financial results submitted to the stock exchange shall be signed by:

♦ the chairperson; or

♦ the managing director, or

♦ a whole time director or

♦ in the absence of all of them it shall be signed by any other director of the listed entity who is duly authorized by the board of directors to sign the financial results.

(c) The limited review report shall be placed before the board of directors, at its meeting which approves the financial results, before being submitted to the stock exchange(s).

(d) The annual audited financial results shall be approved by the board of directors of the listed entity and shall be signed in the manner specified in clause (b) of sub-regulation (2).

2.1. Powers of directors vest with IRP during CIRP: As noted above, section 17(1) of the IBC provides that from the date of appointment of the interim resolution professional,—

(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;

(b) the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional

Thus, the signing of financial statements of a company which is undergoing CIRP is the responsibility of the IRP. In other words, upon initiation of the CIRP, the powers of the Board of Directors of the Company are suspended and are to be exercised by IRP. This implies that the financial statements of companies under resolution process would have to be approved and signed by IRP.

2.2. IRP as CEO of the Company undergoing CIRP: MCA vide its Circular 4/2020 and 8/2020 clarified that:

♦ Once the INC-28 form is approved, only the IP (IRP/RP/Liquidator) shall thereafter be allowed to file any form on behalf of the company. For all subsequent filings, the IP shall choose his designation as “Chief Executive Officer”(CEO), for the purpose of filing e-forms, in various e-forms;

♦ The Master Data for the company shall, after the approval of Form No. INC-28 clearly display that the said company is under CIRP or Liquidation, as the case may be, and the name of the IP so appointed shall be displayed in the CEOcolumn;

♦ The IP shall be responsible and will be able to file all necessary documents/disclosures/returns for the purposes of compliances under the Companies Act, 2013;

2.3. CFO resignation before signing of financial statements: In a matter, Chief Financial Officer (CFO) of corporate debtor company had resigned without signing detailed financial statement for year ending 31.03.2017 in respect of transactions which were undertaken by company during his tenure. Thus, resolution professional (RP) was not able to finalize financial statements to be placed in Annual General Meeting, delaying whole insolvency process. In Punjab National Bank v. James Hotels Ltd. – CP (IB) NO. 15/CHD/2017; NCLT-Chd., it was that RP could appoint a new CFO for purpose of same and in case any fraud was detected in accounts while finalizing financial statements, matter with regard to proceeding against earlier CFO would remain open and for that purpose, RP would be at liberty to place matter before Committee of Creditors.

In Sri Vinayaka Paper & Board Ltd. v. Union Bank [CP(IB) NO. 173/10/HDB/2017] while hearing the matter, the NCLT-Hyd. without any rebuttal also considered the fact where a Resolution Professional has written a letter to Statutory Auditor for Audited Financials stating that as per the provisions of Sec 17(b) of the Insolvency and Bankruptcy Code, 2016, “the powers of the board of directors shall stand suspended and be exercised by the interim resolution professional or resolution professional”. However as per the best of knowledge and prevailing practices, the financial statements should be signed by both Directors (suspended) and also the interim resolution professional or resolution professional as the case may be.

2.4. Can IRP sign by putting the words “taken on record”: The entire proceedings including the documents and materials produced by various parties constitute records. It implies something  officially noted or written down. Considering the fact that under section 17 of IBC, upon initiation of the CIRP, the powers of the Board of Directors of the Company are suspended and are to be exercised by IRP, it would be implausible to put the words “taken on record” while the IRP signs the financial statements as it would signify that IRP has noted something which is carried out or discharged by the suspended board of directors.

3. What ICSI indicated

Section 17(1)(b) of the Code provides that the powers of the board of directors or the partners of the Corporate Debtor, shall stand suspended and be exercised by IRP. It may be noted that though the powers of the Board of Directors (Board) are suspended, they are bound to provide all assistance to IP as only the powers of the Board are suspended and not their duties. Further, section 19 (1) of the Code provides that the personnel of the Corporate Debtor, its promoters or any other person associated with the management of the Corporate Debtor shall extend all assistance and cooperation to the IRP as may be required by him in managing the affairs of the corporate debtor. In the aforesaid context, it appears that IRP/RP along with existing Directors of Corporate Debtor shall sign the financial statements of Corporate Debtor undergoing CIRP.

By:

CA. Kamal Garg, Insolvency Professional

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