The Insolvency and Bankruptcy Code, 2016 (Code), a landmark legislation consolidating the regulatory framework governing the restructuring and liquidation of persons (including incorporated and unincorporated entities) was enacted into law by the Parliament on 11 May 2016. As in the case of Companies Act 2013 (2013 Act), different provisions of the Code are being notified and operationalised in a phased manner. Part IV of the Code provides for the setting up of an insolvency regulator, the Insolvency and Bankruptcy Board of India (Board). The Board is empowered to frame regulations on matters pertaining to insolvency and bankruptcy. Provisions pertaining to the constitution and powers of the Board were notified and operationalised by the Central Government on 5 August 2016. Subsequently, the Board was constituted on 1 October 2016 under the Chairmanship of Mr MS Sahoo.
Operationalising the Key Intermediaries under the Code
Since its constitution, the Board has released draft rules on the regulation of insolvency professionals (IPs) and insolvency professional agencies (IPAs) for comments from the public. IPs are insolvency professionals charged with the responsibility of conducting insolvency or liquidation proceedings in accordance with the provisions of the Code, similar to administrators in the UK. IPAs are insolvency professional agencies responsible for registering and regulating IPs. After a period of public consultation, the following regulations were notified into law on 21 and 23 November 2016:
- Insolvency and Bankruptcy Board of India (Registration of Insolvency Professional Agencies) Regulations, 2016 (IPA Regulations);
- Insolvency and Bankruptcy Board of India (Model Bye-laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 (Model Bye-laws Regulations); and
- Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (IP Regulations).
The Code and the rules framed thereunder, have adopted a quasi self-regulatory model for regulating IPs. IPs are required to be registered with any IPA. Any not-for-profit company is eligible to be an IPA. Both IPs and IPAs are in turn regulated by the Board. In this Newsflash, we highlight certain key aspects of these regulations.
The IPA Regulations lay down the procedure and eligibility for registration as an IPA and grounds for rejection, suspension and cancellation of registration. Certain key highlights of the IPA Regulations include:
- The IPA is required to be incorporated as a not-for-profit company under Section 8 of the 2013 Act.
- The IPA is required to have a minimum net worth of INR 100 million and a paid- up share capital of INR 50 million.
- Only 49% of the share capital of an IPA can be held, either directly or indirectly, by a person resident outside India. Furthermore, prior approval of the Board is required when a person other than a statutory body seeks to hold more than 10% in the share capital of an IPA, either directly or indirectly.
- Every IPA applicant, along with its directors, promoters and all persons holding more than 10% of its share capital, is required to be a ‘fit and proper’ person as determined by the Board based on the guidelines in the Code and the IPA Regulations.
- In-principle registrations (i.e., temporary registrations) are also available to IPs for a limited period of 1 year. The in-principle approval regime replaces the provisional and transitional registration regime proposed in the draft IPA regulations.
Model Bye-laws Regulations
The Model Bye-laws Regulations prescribe model bye-laws that every IPA is required to adopt. These model bye-laws lay down the duties of the IPA, eligibility norms for enrolment as a member of the IPA, monitoring of members of an IPA, adoption of a grievance redressal mechanism, the manner of conduct of disciplinary proceedings against the members of an IPA, and norms pertaining to surrender of membership and expulsion of members of an IPA.
The Model Bye-laws Regulations also prescribe certain governance standards for IPAs, which include:
- Governing body of the IPA is required to have at least one-half independent directors and one-half Indian resident directors.
- No meeting of the governing body of an IPA can be held without at least one independent director being present.
- At least a quarter of the directors are required to be insolvency professionals themselves.
The IP Regulations lay down eligibility norms (including the requirement to have passed an examination held by the Board) and other registration requirements for IPs. They prescribe a code of conduct that IPs must adhere to, highlighting standards of impartiality and independence, integrity, professional competence, confidentiality, etc. Certain key highlights of the IP Regulations include:
- A person is eligible to register as an IP if, inter alia, he/she passes the National Insolvency Examination or passes the Limited Insolvency Examination but has management experience of 15 years or advocacy/ company secretarial/ accountancy experience of 10 years. Given that IPs, along with the committee of creditors, will play an important role in the management of an insolvent firm, an IP is likely to require knowledge of business administration in addition to law and accounting. The IP Regulations recognise this by providing for a more abridged insolvency examination for persons from a management or accounting background.
- In a significant departure from the draft IP regulations, the notified IP Regulations expressly recognise that: (a) IPs may be limited liability partnerships or even companies (referred as insolvency professional entities or IPEs); and (b) foreign citizens can act as IPs where they are a partner or director of an IPE recognised by the Board. Given the complexity and high risk associated with an insolvency process, these changes are likely to act as a significant fillip in attracting the right investment in this sector.
- The IP Regulations do, however, clarify that an IPE shall be jointly and severally liable for all acts/omissions of its partners/directors as IPs committed during such partnership/directorship.
The changes in these regulations compared to the drafts proposed are significant and welcome. The draft IP regulations only permitted general partnerships to be eligible as IPs. This was a “non-starter” in many respects. Allowing for IPEs is a welcome move. The action by the Board to notify these regulations, and the pace at which this task has been undertaken, underscores the Board’s commitment to notify and operationalise the Code in its entirety, as quickly as possible! Corporate India and individuals need to ready themselves as this new landmark legislation is likely to be fully effective soon.