New IBBI rule restricts bankruptcy administrators’ assignments
Premium- Neutrality and independence of an administrator hired to guide a company through the bankruptcy resolution process is paramount to ensure the best outcome for a company
NEW DELHI: Corporate turnaround professionals hired by lenders to run bankrupt companies cannot continue in the role if a colleague is found representing any of the parties in the case, says a new rule brought out by Insolvency and Bankruptcy Board of India (IBBI).
The change seeks to eliminate a potential conflict of interest that insolvency professionals, in charge of steering a company through bankruptcy process, could have if colleagues are found advising others involved in the case.
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Once a company enters bankruptcy proceedings either on its own, or following a reference made by its lenders or other creditors, shareholders are bound to try retain ownership while lenders will be on the lookout for new investors. The resolution professional appointed as the administrator of the company will have to take decisions which must be impartial. An insolvency professional’s job includes verification, accepting or rejection of claims by creditors and taking possession of assets and selling them.
A director or a partner of an insolvency professional entity shall not continue as a resolution professional in a corporate insolvency resolution process if the insolvency professional entity or any other partner or director of such entity represents any other stakeholder in that corporate insolvency resolution process, IBBI said. The norm change is part of the IBBI (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2021 the regulator has notified.
For the bankruptcy rule maker, neutrality and independence of an administrator hired to guide a company through the bankruptcy resolution process is paramount to ensure the best outcome for a company.
In March, th IBBI had brought out a handbook to highlight this and stipulated that professionals managing affairs of bankrupt companies should not accept or offer gifts. It listed a set of examples where offering or accepting gifts by these professionals could seriously impair their ability to comply with requirements of their role. It also said being officers of court, these professionals are expected to show “utmost integrity" and are entrusted with effectively managing the corporate debtor as a going concern. Their decisions could also have a bearing on the valuation of the company in distress.
The change in regulation comes at a time businesses are struggling to navigate the impact of the second wave of the coronavirus pandemic. Despite the government having lifted the one-year suspension of the bankruptcy code in March, authorities have not seen a significant jump in fresh bankruptcy filings partially because lenders are also aware of subdued investor interest for such assets.
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