New curbs on insolvency resolution professionals

Last Updated19/07/2021

The changes seek to eliminate a potential conflict of interest that insolvency professionals in charge of steering a company through the bankruptcy process could have if any of their colleagues advise others involved in the case.
It is significant because shareholders and creditors of a bankrupt firm would be trying their best to maximize their separate and often conflicting interests during the process.

It was implemented through an act of Parliament.
Centre introduced the IBC in 2016 to resolve claims involving insolvent companies.
The bankruptcy code is a one stop solution for resolving insolvencies, which previously was a long process that did not offer an economically viable arrangement.

It was established on 1st October, 2016 under the Insolvency and Bankruptcy Code, 2016 (Code).
It is a key pillar of the ecosystem responsible for implementation of the Code that consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner
It aims for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.

Insolvency resolution professionals hired by lenders to rescue bankrupt companies cannot continue in that role if any of their colleagues represent any of the parties in that case.
Once a company enters bankruptcy proceedings either on its own or by a reference made by its lenders or other creditors, shareholders would be trying their best to retain their ownership while lenders would be looking for new investors.

The resolution professional appointed as administrator of the company will have to manage the affairs impartially.
An insolvency professional’s job includes verifying, accepting or rejecting claims by creditors and taking possession of assets and selling them.
A director or a partner of an insolvency professional entity shall not continue as a resolution professional in a corporate insolvency resolution process if the entity or any other partner or director of such an entity represents any other stakeholder in that resolution process.

The neutrality and independence of an administrator hired to guide a company through the bankruptcy resolution process are paramount to ensure the best outcome for the company.
The valuation professional hired by the insolvency resolution professional cannot be a relative or colleague of the professional, related party of the corporate debtor or an auditor of the company anytime in the preceding five years.
The hiring of valuer has to be on an arm’s length basis