News
IBBI steps up heat on debt resolution professionals
Summary
IBBI had in 2022 permitted firms to take up the mandate of administering businesses going through the bankruptcy process in place of individual professionals, given that an organization will have more internal controls and governance systems.New Delhi: The Insolvency and Bankruptcy Board of India (IBBI) has intensified scrutiny of professionals hired by lenders to run bankrupt businesses, citing instances of alleged professional misconduct. The development highlights a major vulnerability in India’s framework for addressing industrial sickness, as evidenced by a series of orders issued by the regulator.
IBBI issued more than 20 disciplinary orders targeting resolution professionals in May alone, with regulatory action ranging from calls to professionals to be more diligent to suspending their registrations for periods spanning from several months to two years in certain instances.
In certain cases, a monetary penalty has also been imposed. IBBI has issued over 40 disciplinary orders since the beginning of January, about half of which have come in May.
Since last May, the regulator has issued over 100 disciplinary orders, official data showed.
The orders showed alleged misconduct, including suppressing facts in communications to lenders, overcharging the fee for resolution professionals, dereliction of duty, and gaps in the procedures followed in documenting valuation reports. In some instances, the disciplinary committee of the regulator has ordered an inspection of all the liquidation matters handled by a professional to probe cases of overcharging.
The move comes as part of government efforts to make debt resolution of sick companies successful and to help revive investments. The Narendra Modi administration counts cleaning up of balance sheets of banks and corporations over the last few years as a major reform measure, which has made the industry more investment-ready. Rescuing sinking businesses and salvaging the investments deployed in them without further erosion in value is a priority for the government, and IBBI and the government are closely watching the outcome of bankruptcy resolution.
Experts agree that individual insolvency resolution professional is a crucial vulnerability in the whole ecosystem of debt resolution. Lack of institutional support and depth of experience among some individual insolvency resolution professionals is a key concern for stakeholders, said Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co.
“One way to tackle the capacity constraints related to debt resolution is to encourage insolvency professional entities to take up the mandate to administer bankrupt businesses. The regulator and professional services firms could engage and address issues relating to the legal liability arising from the entity’s decisions so that they are more forthcoming in taking up this mandate," Rawat said.
IBBI had in 2022 permitted firms to take up the mandate of administering businesses going through the bankruptcy process in place of individual professionals, given that an organization will have more internal controls and governance systems. At the moment, individual practitioners hired by lenders to run the process rope in firms for support services.
As of March, there were more than 2,400 insolvency resolution professionals authorized to take up assignments. Besides suspending registrations, IBBI has also ordered the cancellation of registrations in nine cases so far, either for disciplinary reasons or for not being fit for purpose, official data showed.
