Persisting challenges of insolvency resolution professionals

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InsolvencyThe National Company Law Tribunals have been overburdened with cases under the Insolvency and Bankruptcy Code 2016 against indebt companies, since the Code received President’s assent on May 28, 2016.

Analysing the persisting challenges of insolvency resolution professionals, Mayur Shetty, Associate Partner, Rajani Associates and Archan Shah, Associate, Rajani Associates explains the entire gamut.

According to the Financial Stability Report (FSR) of the Reserve Bank of India, as of November 2017, over 4,300 applications under the Code were filed in the Tribunals. Out of these, more than 500 applications were rejected, dismissed or were withdrawn. Approximately 470 cases were admitted by the Tribunals, which are at the various stages of the insolvency process. Until November 2017, the Tribunals have approved the resolution plans or liquidation orders in case of 25 Corporate Debtors.

Synergies-Dooray Automative Ltd, is the first case in the history of the Code whose Resolution Plan was approved by the Tribunal at Hyderabad. Thereafter, Tribunal of Mumbai in the case of Chapparia Industries, approved the resolution plan of the debtor company that required financial creditor Asset Care and Reconstruction Enterprise to invest about 40 per cent of the exposure in the defaulted loans. In another notable case viz. Kamineni case, the Hyderabad Tribunal approved the resolution plan even when only 66.67 per cent of the members of CoC voted in favour of the resolution which is less than the threshold limit of 75 per cent provided under the Code.

However, the said order of the Tribunal is being challenged before National Company Law Appellate Tribunal (NCLAT) in an appeal and the operation of Resolution Plan sanctioned by the Tribunal has been kept on abeyance.

In all the aforesaid resolution plans the Resolution Professional has a major role to play. As of today, there are more than a 2,000 individuals who have been registered as Resolution Professionals under the Code. Once the moratorium period starts, the Resolution Professionals are responsible for taking control of the debtor company with the objective of protecting its assets and the fundamental operations. The Resolution Professionals thus have to manage the affairs of the debtor company through the entire process of Corporate Insolvency Resolution Process (CIRP). However, the Resolution Professionals have been facing grave issues in running the affairs of the debtor company.

Timeline management of the resolution process

It is well known that the Code provides for stringent timelines for insolvency resolution process of a Corporate Debtor. The Resolution Professional has 180 days to complete the insolvency resolution process for the Corporate Debtor. The Tribunal can extend the time period by not more than ninety days. In the present circumstances, the Resolution Professionals have a very limited time period to understand the debtor company’s fundamentals and prepare a strategy for its resolution.

Whilst the Resolution Professional prepares the resolution plan in a time bound manner, invariably he has to also deal with several challenges.

Addressing conflicts with suspended promoters

One of the major challenges is to deal with the suspended promoters of the corporate debtor. In many instances, it has been observed that the promoters and directors of the Corporate Debtor Companies are reluctant to cooperate with the Resolution Professionals. This issue may be dealt by the Resolution Professional with some help from the Tribunal. The Resolution Professional, through the Tribunal, can compel the promoters and directors of the corporate debtor to provide necessary information and assistance. However, since the Resolution Professional has a stringent timeline, it would not be prudent for the Resolution Professional to approach the Tribunal time and again for obtaining directions against the promoters and directors. Therefore, it would be advisable for the Resolution Professional to seek all the requisite information and documents as may be required from the promoters and directors in form of a questionnaire to them, immediately on initiation of Corporate Insolvency Resolution Process (CIRP) of the corporate debtor. In the event the promoters do not comply or provide any or all the information sought in the questionnaire then the resolution professional may approach the Tribunal for the necessary directions.

The Resolution Professional may also face challenges which may be sector specific to the corporate debtor and unknown to resolution professional. To deal with such issues the resolution professional can appoint a sector-specific expert to assist him in running the business of the Corporate Debtor as an ‘ongoing concern’.

Apart from above, the Resolution Professional may also have to face hurdles while working around incomplete records, pending compliances, and personnel of the corporate debtors. The pending compliances and incomplete records can be dealt with some support from appropriate professionals like company secretary, chartered accountants and forensic experts.

However, the IRP may face many other issues while strategising a resolution plan and running affairs of the corporate debtor, which would have been dealt with on case to case basis. Nevertheless, on the positive side, in almost a year since the Code has come in to force, Resolution Plan has been approved for about 4 Corporate Debtors, about 28 Corporate Debtors have been directed to undergo Liquidation, about 485 Corporate Debtors cases have been admitted and are presently going through CIRP. Under the Companies Act 1956, often it would take years for a Winding up Petition to be admitted, and the liquidation of the Company would often take more than a decade. The pace at which the case of the Corporate Debtors are been dealt under the Code, is commendable. The credit for the same ought to be given to the Tribunals and Resolution Professionals, for having achieved such feats under stringent timelines and enormous challenges faced by them.

Disclaimer: The article has been written by Mayur Shetty, Associate Partner, Rajani Associates and Archan Shah, Associate, Rajani Associates. The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house.

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