Status as on- 23/11/23
Introduction: Resolution Professional as A Catalyst for Successful Resolution
The Insolvency and Bankruptcy Code was promulgated in 2016 in order to revive insolvent corporate entities as well as to secure the financial health of their creditors through prompt realization and distribution of their dues. The resolution professional (RP), appointed under the Code, is at the heart of these endeavors and has the mandate to complete this process in a time-bound manner.
In such a context, it becomes crucial to ensure that the said resolution professionals remain incentivized enough to act in the interest of the corporate debtor and its debtors. Simultaneously, care should be taken to minimize any undue benefit that the RP may seek to derive by virtue of his position that would adversely affect the stakeholders involved.
To this effect, the Insolvency and Bankruptcy Board of India has, on 13 September 2022, brought about a series of amendments, to be applicable to Interim Resolution Professionals and Resolution Professionals appointed from 1st October 2022 onwards. This article elaborates on the same.
Separation of fees of RP from that of other professionals: Clause 26A
The proposed Clause 26A to Schedule 1 of the IBBI (Insolvency Professionals) Regulations 2016 provides that an insolvency professional shall not accept/share any fees or charges from any professional/support service provider appointed under the processes of this Code.
This provision attempts to plug a loophole that emerged out of the practice of the resolution professional (hereinafter referred to as ‘RP’) appointing other professionals at will, in order to aid him in the resolution process.
However, it is possible that the wide discretion afforded to appoint subordinate professionals may make the letters amenable to any of the nefarious schemes proposed by an RP. This may manifest into a situation where the RP misleads the CoC into granting greater remuneration for distributing it with other professionals (but instead appropriates it himself) or charges a dubious commission on the fees of his co-professionals by making the letters discharge his own responsibilities. Such a reality would amount to a breach of faith towards the CoC who had solely and expressly put the IRP/RP in charge of resolution.
Minimum threshold of fees for RP: Regulation 34B
While the above amendment seeks to lay down a stringent guideline to maintain the sanctity of the process, the present one operates more in the form of a nudge to the RP to ensure greater effectiveness.
The proposed Regulation 34B in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations prescribes a minimum fee for either the IRP (under Regulation 33) or the RP (under Regulation 34). This fee would be based on the number of claims received during the insolvency process. Moreover, this minimum fee shall be applicable from the period of appointment of IRP/RP till the time of submission of application for approval of resolution plan under Section 30 or submission of application to liquidate corporate debtor under Section 33 or submission of application for withdrawal under Section 12A or order for closure of CIRP, whichever is earlier.
The implementation of such a provision will have a number of benefits. Firstly, the process of inviting claims from creditors under Section 18 will receive a boost. This will happen as the IRP would actively seek out claims greater in number as well as in value, as that would translate into higher fees for the latter. (For e.g., if the value of claims crosses Rs.50 crore, the minimum fee entitled increases from Rs 1 lakh to Rs 2 lakh per month). Hence, the requirement of invitation of claims would not be conducted in a mechanical manner, but rather be pursued with a renewed sense of purpose.
However, the provision can also lend itself to an adverse interpretation; it may inadvertently push the RP towards settling for the low-hanging fruit. Unlike the vigor with which the IRP will proceed to invite claims, the RP on the other hand will seek to do the bare minimum in the performance of his duty under S25(h) to invite prospective resolution applicants, since all he must do is find the first applicant who meets the criteria specified by the CoC and submit a resolution plan, and thereby collect the minimum fee.
In essence, no pecuniary motivation would exist for the RP to be invested in subsequent processes. If the AA under Section 31(2) rejects the resolution plan, this particular provision provides no incentive to the RP to formulate a second plan and try to prevent liquidation.
Performance-linked incentives: Regulation 34B
The apparent lack of motivation regarding the identification and submission of resolution plans by the RP has been addressed in the later provisions of Regulation 34B itself. These provisions lay out certain performance-linked incentives for the RP post-submission of resolution plans.
These incentives will be provided in the form of time-based and realization-based incentives.
For the time-based incentive, the timely resolution would be calculated on the date on which the resolution plan is submitted to the Adjudication Authority(AA) for its approval from the period of the commencement of the insolvency resolution process. For e.g., if the resolution plan is submitted to the AA for its approval within 160 days of the commencement of CIRP, RP gets 1% of the realizable value payable to creditors once the plan is approved by AA.
With regard to the realization-based incentive, additional remuneration payable would depend upon value maximization. For instance, once the AA approves the resolution plan, the RP will get 1% of the amount by which the realizable value exceeds the liquidation value (i.e., 1% of Liquidation Value-Realizable Value).
This new incentive grants greater reward to the RP for successfully achieving resolution in the present, rather than awaiting more fees as a future liquidator. This will consequently reduce the depreciation of assets that would result following the failure of the CIRP process
Hence, it may be concluded that the new amendments encouraging quicker resolution and enhanced realization are steps in the right direction.
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