Insolvency resolution professionals seek clarity on compliance when firms turn hostile
Mumbai: Resolution professionals (RPs) appointed to manage companies taken to the bankruptcy court have sought clarity on how to proceed when these companies refuse to cooperate with them, two RPs working on large bankruptcy cases said.
Several companies have turned hostile after a recent law made it tough for promoters to regain control of their companies in bankruptcy auctions, the two said on condition of anonymity. RPs said they had submitted their suggestions on the issue to a government panel formed to address concerns around the Insolvency and Bankruptcy Code (IBC).
“The Insolvency and Bankruptcy Board of India (IBBI) requires RPs to comply with all rules and regulations, which a company under normal circumstances also has to comply with. After the code put a near blanket ban on defaulting promoters, preventing them from bidding for their own firms, there have been several instances where the promoters have turned hostile, asking the employees to become non-cooperative,” the first of the two RPs cited above said.
He declined to be named as he is handling the resolution of one of the 12 firms mentioned by the Reserve Bank of India (RBI) in the first list of entities against which bankruptcy proceedings were launched.
An amendment made to IBC through an ordinance on 23 November nearly banned all defaulting promoters from participating in the resolution process. Later, on 29 December, parliament passed a bill, allowing them in if they repay dues in a month to make their loan account operational, and the resolution happens within the overall time frame specified. Most experts, however, say it will still be very difficult for promoters to take part in resolution proceedings.
Even though they are entitled to seek directions from the National Company Law Tribunal (NCLT) in a scenario of non-cooperation, RPs feel the remedy is “practically” ineffective. “In many of these companies, most of the employees remaining are in junior positions and do not have enough understanding about the resolution process. Moreover, it needs to be understood that these employees have not been paid for months. The moment you raise the issue at NCLT, they are willing to resign. Practically, the court order will not work,” the second RP said.
He said it is difficult to retrieve company data and in such a scenario, it is necessary that norms around quarterly filings, stock exchange disclosures and income tax enquiries and assessments are relaxed.
The government panel headed by the corporate affairs ministry secretary has sought suggestions from stakeholders to ensure efficient functioning of IBC. A member of the government panel on condition of anonymity told Mint that members last week had a detailed discussion on the suggestions received. “We have received several suggestions. The panel has decided to form sub-committees to understand and narrow down the concerns of different stakeholders,” he said.
While legal experts handling insolvency cases are of the view that compliance is difficult in companies undergoing the resolution process, complete relaxation of filing and disclosure rules is not possible.
Kumar Saurabh Singh, partner at law firm Khaitan and Co. said, “During insolvency resolution, the powers of the board of directors stand suspended and are exercised by RP. As per applicable laws, there are several disclosures that need to be done by directors, and RPs may not be in a position to confirm such compliances. However, considering RPs are exercising powers of the board and are obligated to run the corporate debtor on a going concern basis, it may be difficult to avoid the obligation to confirm compliance with applicable laws,” even as RP can go to NCLT in case of non-cooperation to seek suitable relief.
Aashit Shah, a partner at law firm J. Sagar Associates said RPs have a host of responsibilities, some prescribed in the code as well as others such as compliance with various laws applicable to the corporate debtor and its business within a stated timeline.
“Given the stringent timelines within which the IBC process has to be completed, there is a justification to provide some leeway to the IRPs, (interim resolution professionals) maybe by allowing additional time periods for compliances or obtaining help from third parties. Otherwise, they could be liable for failure to comply with the laws in a timely fashion. While the committee of creditors gives approval for certain important decisions, it is the IRP who is responsible for running daily operations and managing the company’s affairs. And if the company employees turn non-coperative, his job becomes even tougher. A sensible balance needs to be struck so that persons are not dissuaded from taking on this role,” he said.