Ethics of Insolvency Professionals

Ashu Kansal | December 2021

BACKGROUND:

The Insolvency and Bankruptcy Code, 2016 (“IBC”) envisages an insolvency regime with a paradigm shift in jurisprudence of procedure for insolvency under IBC i.e. from a debtor in control regime to creditor in control regime for timely revival of the business of the debtor companies and limited liability partnerships as well as for individuals and unlimited liability partnership.

The IBC lays down an effective ecosystem for implementation of the provisions of the IBC which consists of four pillars viz. Adjudicating Authority, Insolvency Professionals, Information Utilities, Insolvency Professional Agency and the Insolvency and Bankruptcy Board of India.

The Insolvency Professional is an important element of the ecosystem, who performs a wide range of functions with the objective to maximise the value of the assets of the Corporate Debtor during the Corporate Insolvency Resolution Process. Insolvency Professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process.

The Insolvency Professionals are required to maintain a balance between evading the conflicts of interest and adhering to rules and ethical conducts while discharging their functions for avoiding any misconduct. Therefore, a professional member / Insolvency Professional (IP) is expected to act in good faith in discharge of his duties with utmost objectivity, integrity, independence, impartiality and should make an effort to maximise the value of the assets of the debtor.

CODE OF CONDUCT FOR THE INSOLVENCY PROFESSIONAL

IBC envisages two layer regulatory regimes for the Insolvency Professional – firstly, Insolvency Professional Agencies which are regulated by the Insolvency and Bankruptcy Board of India (“IBBI”) and secondly, IBBI itself. The Insolvency Professional Agencies are the first level regulator for the Insolvency Professionals and are mandated to promote good professional and ethical conduct between the Insolvency Professionals / ethical conduct of the Insolvency Professionals. The Insolvency Professional develops code of ethics, professional standards and provides memberships to the persons who qualify limited insolvency examination and may cancel the membership of the Insolvency Professional on the grounds as provided in the bye-laws.

On the other hand the IBBI frames regulations governing the quasi-judicial and executive functions of the Insolvency Professional. However, IBBI also plays the additional role of addressng complaints against the Insolvency Professionals. IBC envisages three circumstances wherein complaints against the Insolvency Professional may come before the IBBI:

A complaint against the Insolvency Professional can be made in cases when he has been discharged of his role as a Resolution Professional either after the insolvency is resolved or it has been moved to liquidation.
The IBBI may suo-moto take cognizance that a given Insolvency Professional has performed poorly in the resolution process or statistically received a large number of recorded complaints against him.
A complaint during an insolvency/ bankruptcy resolution process seeking a removal of the Insolvency Professional.

Regulation 7(2) of Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (“IP Regulations”) provide for five fundamental principles of conduct of the Insolvency Professional after registration with the Board. It provides that the registration of an Insolvency Professional is subject to the conditions that the Insolvency Professional shall:

at all times abide by the IBC, rules, regulations, and guidelines thereunder and the bye-laws of the IP agency with which he is enrolled;
at all times shall continue to satisfy the requirements under Regulation 4;
undergo continuing professional education, as may be required by the Board;
Not outsource any of his duties and responsibilities under the IBC, except those specifically permitted by the Board and abide by the Code of Conduct specified in the First Schedule to Regulations.

The first schedule of the IP Regulations provides detailed code of conduct for Insolvency Professionals which are provided herein below:

Integrity and Objectivity- Every Insolvency Professional is required to maintain integrity by being honest and straightforward in his professional dealings / relationships, thereby acting without any undue influence, biasness, conflict of interest, coercion and shall refrain from acquiring assets of the Corporate Debtor. He is also required to mention any conflict of interests to the stakeholders, whenever he comes across such conflict of interest during an assignment.
Independence and Impartiality: The Insolvency Professional shall maintain independence in his professional relationships and in conducting insolvency resolution, liquidation or bankruptcy process as the case may be, free from external influences. No giving and accepting of gifts or hospitality or a financial or any advantage to a public servant or any other person by an Insolvency Professional which undermines or affects his independency. When a valid authorization for assignment is held by IP, no engagement in any other employment shall be acceptable. No appointment or engagement of any relative, person by Insolvency Professional to assist until time period of 1 year has elapsed from the date of his cessation from such process
Professional Competence: The Insolvency Professional must be well versed with the amendments, regulations and updated with his professional knowledge in order to perform his functions in a competent manner.
Representation of correct facts and correcting misapprehensions: An Insolvency Professional is required to inform persons as mandated under the IBC, of any misapprehension or wrong facts as soon as it comes to his/her knowledge. In the light of this, he is not required to conceal any material information or to state wrong or misleading facts to the Board, Adjudicating Authority or any stakeholder.
Timelines: The utmost essential requirement of an Insolvency Professional is to adhere to the timeline as prescribed under the IBC. However, he shall not act with a mala fide intention or acting negligently while performing his functions and duties as per IBC.
Occupation, employment and Restriction: An insolvency professional must refrain from accepting too many assignments, if he is unlikely to be able to devote adequate time to each of his assignments. An insolvency professional must not conduct business, which, in the opinion of the Board is inconsistent with the reputation of the profession.

As per the new regulation, an IP shall not accept or undertake any new assignment unless he or she holds a valid ‘Authorisation for Assignment’ issued by the insolvency professional agency concerned. This would be applicable for any individual acting as an interim resolution professional, resolution professional, liquidator, bankruptcy trustee, authorised representative or in any other role under the IBC.

Remuneration and costs: Disclosure shall be made in respect to the fee payable to him/IP entity and professional engaged by him to the Insolvency Professional Agency of which he is a professional member. Disclosure by Insolvency Professional in respect to costs incurred in conducting Insolvency resolution process, liquidation, bankruptcy process, shall not be unreasonable in nature.
Gifts and hospitality: An Insolvency Professional or any of his relative should not accept any gifts or hospitality in his profession dealings which lowers or affect his/her independency. In view of this, he is not supposed to offer any gift or hospitality or advantage to any public servant in order to obtain or retain work or advantage for himself.

CONSEQUENCES OF NONADHERENCE TO THE CODE OF CONDUCT BY AN INSOLVENCY PROFESSIONAL

Section 220 of the IBC read with Regulations 11 of IP Regulations provide for the formation of the disciplinary committee by the IBBI and punishment which may be imposed on Insolvency Professional for contravention of any provisions of the IBC or rules and regulation made under IBC which are as follows:

The appointed disciplinary committee may also impose a penalty three times the amount of the loss caused, or likely to have been caused, to persons concerned on account of such contravention or three times the amount of the unlawful gain made on account of such contravention, whichever is higher.
Suspension or cancellation of authorisation for assignment;
Warning; and
Cancellation or suspension of the registration of the Insolvency Professional.

Orders of IBBI (Disciplinary Committee)

In the matter of Mr Manmohan Jhawar (IP)2 before the IBBI (Disciplinary Committee), the Disciplinary Committee vide order dated 06.11.2020 while taking notice that the Insolvency Professional did not put in any material efforts to identify and to take control of assets of Corporate Debtor and also did not file any application under Section 19(2) for Non-Cooperation of promoters/ director of the Company, held that an action under IBC may be taken against him as his act reflected his personal incompetence.

In the matter of Mr Arun Kumar Gupta3 before IBBI (Disciplinary Committee), the Disciplinary Committee vide order dated 13.03.2020, observed that the interim resolution professional failed to appoint the registered values within the required timeline and thus violated Regulation 7(2) (a) and Regulation 7(2) (h) read with clause 13 of IP regulations, warned the Resolution Professional to be extremely careful and diligent while performing his duties under the IBC.

Orders of judical authorities

In the matter of Tirupati Jute Industries Ltd.4 Hon’ble NCLT observed that RP did not give correct advice when he submitted the resolution plan for approval of CoC. The NCLT recorded that in such situation it would not be proper to appoint the present RP as the Liquidator and hence replaced the Liquidator.

In the matter of Indian Overseas Bank v. Gopala Krishna Raju ( Apna Scientific Suplies Pvt. Ltd.)5 , Hon’ble NCLT observed that despite of issuing directions thrice, there is no compliance by the Resolution Professional and further, the appointed Resolution Professional is an unfit person for being given any assignment under the provisions of the IBC as Resolution Professional. Hence, the NCLT directed IBBI to remove the name of the appointed Resolution Professional from the panel of the insolvency professional list.

CONCLUSION

An Insolvency Professional is an individual who acts under a fiduciary relationship between a debtor and a creditor. However, any misconduct on part of the Insolvency Professional would adversely affect the judicial and economic efficiency. Thus, an Insolvency Professional at every stage while performing its functions shall be complying with the ethics as envisaged under the IBC. However, there have been various orders passed by the Disciplinary Committee and NCLT and NCLAT wherein it has been observed that an Insolvency professional has performed its duties in violation to the set rules of standards under the IBC. Thus, any small negligence on part of Insolvency Professional undermines the whole Corporate Insolvency Resolution Process. Therefore, time and again, IBBI is regulating the conduct by imposing strict penalties so that no hindrance in the process can take place and operate in a transparent manner.

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About Author

Ashu Kansal

Ashu Kansal is a Partner at Adhita Advisors, having more than fifteen years of experience. His main areas of expertise are banking and finance laws, securitization - related matters, recovery of debts, suits, and arbitration matters. Apart from drafting various pleadings, he also advises/ gives opinions and strategies to clients on various litigation matters in various forums including the Supreme Court, High Courts and various other Tribunals across the Country. He has also briefed top Senior Counsels across the country for multinational clients.