Regulatory ire on insolvency professionals over breaches
3 min read . Updated: 05 Mar 2023, 11:20 PM IST
PremiumExperts said IBBI orders indicate a drive against violations in how rescues are attempted
New Delhi: The Insolvency and Bankruptcy Board of India (IBBI) has sent a strong message to professionals who have allegedly erred while steering sinking companies through the bankruptcy resolution process by taking action against a dozen such officials since January.
The bankruptcy rule maker, which has also been authorized to administer the valuation rules under the Companies Act, has issued a total of 14 disciplinary orders this year, including one each against an industry body of valuers, and a valuation firm, in addition to the orders against the dozen insolvency professionals. Disciplinary orders were issued in 23 cases since October, publicly available data showed.
The orders issued against the professionals hired by lenders to administer bankrupt businesses have held them guilty of a host of violations ranging from procedural breaches to serious ones. These include delays in the verification of claims and in the submission of resolution plans, breaches in estimating the fair value of businesses and the liquidation value of assets and failures in estimating the value of trade receivables, inventory, cash and cash equivalents.
Experts said the orders indicate a drive against breaches in the way rescue of bankrupt firms was attempted by these professionals, as successful bankruptcy resolutions are critical in improving the financial health of banks and in facilitating the re-deployment of investments that have gone wrong. Outcomes of bankruptcy resolutions are keenly watched by Parliamentarians and policymakers, as repairing the balance sheets of banks and companies is critical to economic growth.
Experts also said that given the bankruptcy code is a new law, regulations are fast evolving, and the resolution professionals have to work under immense pressure, the regulator could be more lenient in disciplinary proceedings.
The Economic Survey for 2022-23, too, said that gains in this area have led to a fresh credit cycle.
An email sent to a spokesperson for the ministry of corporate affairs on Friday seeking comments for the story remained unanswered.
“Unfortunately, a lot of misutilization of powers by insolvency resolution professionals have taken place, which points to a weakness in the bankruptcy resolution ecosystem," said Pavan Kumar Vijay, founder of consulting firm Corporate Professionals. He said the areas of misuse of powers have to be identified, and remedial action taken.
Erring professionals face financial penalties, suspension of their professional registration for a specified period, and warnings in certain cases. In some cases, their registrations have been cancelled too. The warnings mandate the professionals to be “cautious and transparent while conducting a valuation."
“Exemplary financial penalties should be imposed on the guilty. Debarring professionals is not a solution," Vijay said.
Experts also said there might be a case for the regulator to be more lenient in certain cases. Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co., said the Supreme court had observed earlier that there should be room for experimentation in bankruptcy resolution given that IBC is a new law. “So, when resolution professionals, who are under pressure to maintain businesses in distress as going concerns, take difficult decisions depending on the facts and circumstances of the case in consultation with the committee of creditors based on what is commercially wise, leniency should be observed. They also need to be encouraged to continue in the insolvency resolution profession," Rawat said. Otherwise, it will be hard to attract talent to this profession, he said.
The committee of creditors acts as a check and balance while approving the professional fee. Therefore, enough flexibility in hiring the right talent at a market-driven price should be maintained, Rawat said.
Recognizing that these professionals may have certain limitations in handling insolvency of large and complex cases, the authorities last year allowed entities to act as resolution professionals.
Organized growth of insolvency resolution professionals as an institution received a fillip when India embraced the new bankruptcy code in 2016.
Administrators of sick companies have to deal with several stakeholders with conflicting interests while maintaining their professional independence. Their job includes admission of claims from creditors, getting the company’s assets and liabilities valued, raising finances, hiring accountants and lawyers and inviting bids from fresh investors. Their decisions have an impact on the value realized by creditors and hence on the financial system as a whole.