Neutrality and independence of an administrator hired to guide a company through the bankruptcy resolution process is paramount to ensure the best outcome for a company
Insolvency resolution professionals hired by lenders to rescue bankrupt companies cannot continue in that role if any of their colleagues represent any of the parties in that case, says a new rule brought out by the Insolvency and Bankruptcy Board of India (IBBI).
The change seeks to eliminate a potential conflict of interest that insolvency professionals in charge of steering a company through the bankruptcy process could have if any of their colleagues advise others involved in the case. It is significant because shareholders and creditors of a bankrupt firm would be trying their best to maximize their separate and often conflicting interests during the process.
Once a company enters bankruptcy proceedings either on its own or by a reference made by its lenders or other creditors, shareholders would be trying their best to retain their ownership while lenders would be looking for new investors. The resolution professional appointed as administrator of the company will have to manage the affairs impartially. An insolvency professional’s job includes verifying, accepting or rejecting claims by creditors and taking possession of assets and selling them.
A director or a partner of an insolvency professional entity shall not continue as a resolution professional in a corporate insolvency resolution process if the entity or any other partner or director of such an entity represents any other stakeholder in that corporate insolvency resolution process, IBBI said. The norm change is part of the IBBI (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2021, the regulator has notified.
For the bankruptcy rule-maker, the neutrality and independence of an administrator hired to guide a company through the bankruptcy resolution process are paramount to ensure the best outcome for the company. In March, IBBI brought out a handbook to highlight this and stipulated that professionals managing the affairs of bankrupt companies should not accept or offer gifts. It also said being an officer of the court, these professionals are expected to show “utmost integrity" and are entrusted with effectively managing the corporate debtor as a going concern.
IBBI said in the amended regulation that the valuation professional hired by the insolvency resolution professional cannot be a relative or colleague of the professional, related party of the corporate debtor or an auditor of the company anytime in the preceding five years. The hiring of valuer has to be on an arm’s length basis, it said.
“A resolution professional is expected to maintain independence and, accordingly, the new regulation restricts an insolvency professional entity and its directors/partners from representing other stake-holders if a director/partner is acting as a resolution professional," said L. Viswanathan, partner, Cyril Amarchand Mangaldas.