Last year, the Insolvency and Bankruptcy Code, 2016 (IBC) was passed in the Lok Sabha in May. It took almost six months to pass the law after it was introduced in December 2015. IBC that was passed in May 2016 replaced three existing laws on insolvency and bankruptcy.
The aim of introducing this law was to seek a consolidation of the existing framework to create a single law for insolvency and bankruptcy. There were several rules laid in the code one of which is the appointment of an independent insolvency professional who would though his independent means undertake the resolution process of the insolvent or sick companies. There are around 800 independent resolution professionals who are offering such services today. However, in total violation of the rules laid down, one would be surprised that the bulk of the huge cases do not go to them.
There are several big firms namely EY, PwC, Deloitte, KPMG, Grant Thornton (GT), BDO and Alvarez & Marsal (A&M) who are getting the bulk of the resolution work today.
How do they do it?
The banker first contacts the firm who has several independent professionals working on its payroll. On the form the name of the employee is filled and handed over to the NCLT or the National Company Law tribunal (NCLT). The independent resolution professional can hire the services of private consultancy firms on several subjects like legal and audit.
The employee then suggests that he requires such specialised consultancy advice and in turn hires the services of his own company. This is a total conflict of interest. While professional service firms are barred from becoming an independent resolution professional (IRP), their executives do so in their individual capacity.
Several bank had in the recent past given huge loans to private companies which has gone bad. Senior bank management also have a preference for firms due to their sheer brand names.
Some IRP has already filed complaints with the board and hopefully the board would take a serious view of the charges.
What does the law state?
IBC permits hiring services of licensed professionals who have total control over assets of debtor while the proceedings are going on at a tribunal. The Code highlights insolvency processes for individuals, companies and partnership firms. It may be noted that, under IBC debtor and creditor both can start ‘recovery’ proceedings against each other.
Companies have to complete the entire insolvency exercise within 180 days under IBC. The deadline may be extended if the creditors do not raise objections on the extension. For smaller companies including start-up companies with an annual turnover of Rs 1 crore the whole exercise of insolvency must be completed in 90 days and the deadline can be extended by 45 days.
Why is this of an advantage to the creditor?
One of the biggest advantages this offers for small investors of company is the time bound manner for the reorganisation and the insolvency resolution of the company in order to maximise the value of the assets of the company and keep a balanced view of the interest of all the stakeholders.
In the Corporate Resolution process the application may be filed by any financial creditor, operational creditor or by corporate himself. The main condition for filing an application is that there should have been a default of more than Rs 1 lakh by the corporate that towards any financial institution, banks etc. called as financial creditor or their suppliers, employees, government dues or other operational dues called as operational creditor. When the application filed with the NCLT in a prescribed format, NCLT is bound to give its assessment within 14 days of filing the application. It can either admit the application for initiating the insolvency process or reject the application on various grounds as per the Act.
After the admission of the initiation of insolvency process, an IRP will be appointed and he will take entire charge of the Company and existing management and board of directors will be suspended till the resolution process period.
The IRP will do all acts as management of the company. He can appoint the other professional to run the company as going concern. He will take entire charge on all assets, bank accounts, etc. under his control.
During the resolution process, moratorium will be granted to the company for prohibiting institution of any suit before a court of law, transferring/encumbering any of the assets of the debtor etc.
However, the supply of essential goods or services to the corporate shall not be terminated during this period. It shall be effective till completion of resolution process.
The IRP will invite all claims from all creditors and consolidate all claims and will constitute the Committee of Creditors.
All financial creditors will be member of the creditors committee, operational creditor may be invited in the meeting of creditors but they will not get any voting rights in any decision. Creditors committee will watch all resolution process and entire decision will be taken and considered by the creditors committee with a vote of minimum 75 per cent.
A resolution plan will be invited from any creditor, outside agency and even from the promoters to resolve the financial sickness of the company. The plan would later be discussed in the committee of creditors and approved by them.
The plan would then be submitted to the National Company Law Tribunal for approval and implementation. If all the creditors are not satisfied with the resolution plan, the company then goes for liquidation.
Out of the remittance received from liquidation of assets, payment to creditors will be made as per the priority prescribed in the Act. Other than time bound resolution process another advantage of the act is that the creditors are in the loop for the process and it avoids costly and time consuming litigation process.
Big firms would prefer the liquidation of the insolvent companies as it would mean higher commission for them with most of their departments being equally involved in the process.
(The writer is an insolvency professional registered with the Insolvency and banking Board of India)