The previous parts of this 3-part series (available here and here) of articles on the Insolvency and Bankruptcy Code, 2016 (the “Code”) analysed the substantive provisions of the Code dealing with the insolvency and bankruptcy resolution processes. However, in order to implement these provisions, the Government recognised the need for establishing a larger and more efficient regulatory and quasi-judicial infrastructure. In furtherance of this, the Code provides for the establishment of the following quasi-judicial and administrative bodies:
- The Insolvency and Bankruptcy Board of India;
- Insolvency Professional Agencies;
- Insolvency Resolution Professionals, who are registered and monitored by the above agency; and
- Informational Utilities.
The above authorities/organisations have been set up solely to deal with cases of insolvency and bankruptcy in India. The history of lengthy cases and unpaid debts in India (which this Code seeks to reverse) led the Government to set up these specialised bodies. This third part of the series will understand and analyse the above different bodies, the powers and responsibilities they have, and the different roles they play in ensuring that the processes of insolvency and bankruptcy resolution are smooth and speedy.
The Insolvency and Bankruptcy Board of India (the “Board”)
Constitution of the Board:
The Board is set-up and authorised to start performing its functions by a notification from the Central Government. In addition to the powers and responsibilities described later in the article, it also functions as a body corporate with all the powers that vest in such a body. This includes having a common seal, the power to acquire, hold or dispose of any property both moveable and immoveable, the ability to contract, and the ability to both sue and be sued. The head office of this Board is to be in the National Capital Region, though for convenience and efficiency, it may even set up as many branch offices as necessary everywhere else in India.
The Board, which will initially be appointed by a selection committee nominated by the Central Government, will consist of a Chairperson, three ex-officio members from the Central Government (one each from the Ministries of Finance, Corporate Affairs and Law), one ex-officio member from the Reserve Bank of India, and five others nominated by the Central Government. The selection committee is to consist of three experts from the fields of finance, law, insolvency etc., to ensure that the Central Government does not have complete autonomy over the appointments. Further, to ensure that the selection committee does not get arbitrary powers as well, S. 189 of the Code requires the selection committee to follow guidelines and criteria relating to ability, integrity, past experience and special knowledge while appointing individuals to the Board.
In addition to the above criteria, there are certain disqualifications for Board members, which include being an undischarged bankrupt, being physically/mentally incapable, being convicted of a crime, and being guilty of abusing his position in office in a manner that is detrimental to public interest. Interestingly, there is a caveat in the third disqualification above which states that a person convicted of a crime shall be disqualified only if the Central Government is of the opinion that the offence involves a question of moral turpitude. This seems to give an irrational amount of power to the Central Government – under normal circumstances, any individual guilty of a crime (irrespective of the nature of the offence) must be disqualified. It remains to be seen if and how the Central Government misuses this power to keep individuals on the Board.
Under S. 192, the Code has left the determination of procedures to be followed by the Board in its meetings and daily functioning, up to the Board itself. However, the method of decision making in meetings has not been left to regulations to be drafted by the Board. All questions brought before the Board must be decided by a majority vote (assuming quorum exists), and in the case of an equal number of votes both for and against the question, the chairperson shall have a casting vote. Further, any member of the Board who has a direct or indirect pecuniary interest in any matter coming up before the Board (for ex., by being a director of the company, or a creditor), shall not be allowed to take part in any meetings or voting with respect to that matter. These provisions seem to strike a good balance between giving the Board the autonomy it requires to perform efficiently daily, while also ensuring that certain critical decision-making processes are pre-decided and not left subject to the discretion of the Board members. Lastly, in order to aid in the functioning of the Board, the Board also has the power to set up an advisory/executive/any other committee that it deems necessary and fit.
Powers and Functions of the Board:
The number of powers and functions needed to be performed by the Board are vast and numerous. Here, we try to understand and analyse the most important powers/functions of the Board:
- To register, inspect, investigate, and monitor all insolvency professional agencies, insolvency professionals, and information utilities;
- To decide on the renewal or withdrawal/cancellation of the registration of such agencies and persons;
- To ensure transparency and best governance practices in its own governance. This will play a key role in ensuring that the agencies, professionals and utilities that are registered by the Board are of a high quality, and appointed on merit;
- To specify the mechanisms to be followed and available for the redressal of grievances by parties against the agencies, professionals or the utilities. This will ensure that these bodies/persons are also held accountable;
- To make regulations and guidelines on any and all matters relating to insolvency and bankruptcy, including the guidelines on timely disposal of assets;
In effect, the Board functions as the entity that regulates and supervises the Insolvency Professional Agencies, the Insolvency Professional, and the Information Utilities. At this juncture, it makes sense to look at each of these entities individually, to understand their exact roles and powers.
The Insolvency Professional Agency (the “IPA”)
As specified earlier, to be a validly existing IPA, a certificate of registration issued by the Board is required. While deciding on such registration, the Board is required to keep the following principles/criteria in mind (as stipulated under S. 200 of the Code):
- To promote the development and regulation of IPs, while ensuring that only competent and credible IPs are appointed;
- To promote ethical and professional conduct amongst the IPs;
- To take any other actions it might deem fit, to protect the interests of debtors/creditors etc. and to ensure effective resolution of the bankruptcy and insolvency processes.
When an IPA makes an application, the Board must communicate its order to accept or reject the application within a period of 15 days of making the order, while also giving the applicant an opportunity to be heard if the application is being rejected. The Board also has the power to renew the registrations or cancel them if an IPA obtained a registration by unlawful means, or against any regulations/laws/rules. Here too, the Code allows the aggrieved IPA an opportunity to be heard.
In case the Board passes an order against an IPA, whether for rejection of initial application or for cancellation of an existing registration, the IPA has the right to appeal the decision of the Board before the National Company Law Appellate Tribunal (NCLAT).
The Code also lists the specific functions to be performed by the IPA:
- Register and take on board IPs upon satisfaction of the criteria set out in the IPA’s bye-laws;
- Laying down standards of performance and professional conduct, and monitoring the IP’s on the basis of such standards;
- Redress consumer/individual grievances against any of its member IPs, and take consequential action against such IPs.
Insolvency Professionals (the “IP”)
All IPs are required to be registered with IPA’s and the Board. Their functions, as per S. 208 of the Code, include:
- Carrying out all roles and responsibilities required of it under any bankruptcy, insolvency, or fresh start proceedings (such roles and responsibilities have been described in more detail in the preceding articles);
- Adhering to a code of conduct whereby they take reasonable care and diligence in the performance of all actions;
- Complying with the bye-laws of the IPA of which he/she is a member; and
- Allowing the IPA to inspect their records.
Information Utilities (the “IU”)
All IUs also need to be registered under the Board, and have the same right of being heard on a rejection of application of cancellation of registration, as is available to IPAs. In case the order of the Board still goes against them, IUs too have the right of approaching the NCLAT.
In order to ensure that IU’s are able to function as repositories of all information related to insolvency and bankruptcy in an efficient manner, S. 214 of the Code puts a number of obligations on them:
- They must create and store all the financial information in a universally accessible format, which consequently means that they must have the capability of receiving such financial information from persons, in an electronic format;
- They must ensure that all information is first authenticated by all concerned parties;
- They must ensure that any information stored by them is accessible by third parties only for reasons and in the manner that may be specified in the relevant regulations;
The final point above seems to put some kind of an obligation of confidentiality on the IU’s. However, the exact contours/extent of such obligation, and when and how information should be made available to individuals, will become clearer only when the relevant regulations are published. Further, it is important to note that once information has been submitted and stored by the IUs, it is still possible for the person who submitted the information to rectify any errors found later on. An application to this effect needs to be made to the IU, stating the reasons for the desired rectification.
Inspection and Investigation by the Board
The Code also sets out a mechanism whereby the IPA, and IP, or an IU can be held responsible in the case of lack of performance or breach of any rules and/or regulations. The person aggrieved by the functioning of the relevant authority is to file a complaint to the Board under S. 217 of the Code. Where such a complaint is filed, or if the Board suo motu has reason to believe that an IPA, IP or IU has caused a contravention, then it may appoint any person(s) as an investigating authority.
The investigating authority shall be tasked with carrying out a detailed investigation, in a time bound manner, followed by the provision of a detailed investigation report to the Board. To ensure a thorough investigation, the Code gives this investigating authority the right to require third persons to furnish documents/records if it believes that such information is relevant; and to enter buildings/places where they believe relevant documents/information may be kept, and consequently seize such documents.
A disciplinary committee, composed only of whole-time members of Board, shall be set up to analyse the reports of investigating authorities. Such committee may decide if sufficient cause exits, and may consequently impose a penalty on the guilty body or cancel its registration. Such penalty may be either 3 times the loss caused (or likely to have been caused), or 3 times the unlawful gain made due to the contravention, whichever is higher. In case the penalty is not quantifiable, it cannot exceed INR 1,00,00,000 (Rupees One Crore only).
The basic purpose of these inspection and investigation provisions is to provide restitution to any individuals who have been affected/suffered loss to any contravention by an IPA, IP, or IU.
The Bankruptcy Code has revamped the bankruptcy and insolvency laws in India, and most importantly, done away with the scattered legislations that existed earlier and consolidated all laws under one umbrella. However, the institutional capacity-building as envisaged under the Code is critical to the overall success and implementation of the laws. Without these institutions, implementing and enforcing the Code will be difficult.
Interestingly, even after the elapse of almost seven months from the enactment of the Code, the Government has only provided for the creation of one institution – the Insolvency and Bankruptcy Board of India and only notified the relevant sections in this regard.
The Board has in turn published bye-laws and regulations to govern its own procedures, and the obligations and functions of any IPAs that may be set up in the future. Specifically, the Indian Institute of Insolvency Professionals under the ICAI, and ICSI Insolvency Professional Agencies are the two currently authorised IPAs. However, beyond the above, no other institutional framework has been setup under the Code. Further, although the Government had announced that the entire Code would come into effect/force in December, 2016, we are yet to see any official announcement in this regard.
Thus, while the provisions and infrastructure sought to be set up under the Code seem to be quite robust and effective, it remains to be seen how long it will take before all of them actually take effect. Only once they are in place, will we be able to make an informed and accurate prediction as to the future success and effectiveness of the Code.