Background

The Board constituted under the chairmanship of Mr MS Sahoo has recently rejected an application for registration as an insolvency professional (IP) under regulation 7 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (IP Regulations) through its first regulatory order.

Factual Matrix

The applicant had applied for registration as an IP through the Indian Institute of Insolvency Professionals (affiliated with the ICAI) (IIIP). Such application was forwarded by the IIIP to the Board.

While considering the aforesaid application, the Board observed that the applicant was in fact an employee. The Board referred to Clause 23 of the Code of Conduct of the IP Regulations (Clause 23), which requires that ‘an IP must not engage in any employment, except when he has temporarily surrendered his certificate of membership with the insolvency professional agency with which he is registered.’  Therefore, the Board formulated an opinion that such registration must not be granted.

In his defence, the applicant provided two explanations – (i) that Clause 23 suggests that an IP must not engage in any employment with the entity where he is appointed (as a liquidator, resolution professional, etc) in the event of insolvency resolution or liquidation of such entity, also stating that the objective of the Code of Conduct is to maintain independence and avoid conflict of interest; and (ii) that the requirements of the Code of Conduct cannot be used to determine eligibility for registration as an IP.

Order

In consideration of the facts and material available on record, the Board reasoned as follows:

  • Clause 23 makes it clear that an IP must not ‘engage in any employment’, i.e a person must not play two roles – profession and employment – simultaneously. The objective behind such a requirement is that an IP must have undivided loyalty and unflinching attention towards his professional obligations. The ‘time bound resolution’ principle envisaged in the Insolvency and Bankruptcy Code, 2016 (Code) requires time critical service from the IP.
  • Clause 23 mandates a comprehensive prohibition on other employment and is not intended to address issues of independence or conflicts of interest (for which there are comprehensive provisions contained in other regulations under the Code).
  • Regulation 7(2) of the IP Regulations requires an IP to abide by the Code of Conduct contained in such regulations at all times.

On these grounds, the Board rejected the applicant’s application for registration as an IP under Regulation 8(3)(b) of the IP Regulations.

Khaitan Comment

The Board has a duty to regulate and build the infrastructure required to make the Code a success. The insolvency professionals are an important part of this infrastructure. This order presented the Board with its first opportunity to clarify the kind of insolvency professional infrastructure it has envisioned.  The Board has, in effect, ruled that the role of an insolvency professional coupled with the strict timelines prescribed under the Code require extensive time commitment by insolvency professionals, which, in its opinion, would not be possible for an employee.