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Amendments to IBBI Regulations dated January 31, 2024, and Circulars dated February 01, 2024

AMENDMENTS MADE TO IBBI REGULATIONS ON JANUARY 31, 2024


The Insolvency and Bankruptcy Board of India (“IBBI”) notified certain amendments made on January 31, 2024, to the following regulations:


A. Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (“Insolvency Professional Regulations”)


The following clauses have been inserted to the First Schedule which prescribes the “Code of Conduct for Insolvency Professionals”: -

Clause

Subject

Pre- Amendment

Amendment

Remarks

22A

Resignation of Insolvency Professional

New Insertion

An insolvency professional can resign from his assignment, subject to the recommendation of the committee of creditors (CoC) in a corporate insolvency resolution process (“CIRP”), consultation committee in a liquidation process, or either of the debtor or the creditor in the insolvency resolution process of a personal guarantor to the corporate debtor subject to the approval of the Adjudicating Authority.  However, during this transition, the insolvency professional is obligated to discharge his duties, functions, and responsibilities until the Adjudicating Authority formally approves the resignation.

With this amendment, insolvency professionals (“IPs”) are now empowered to resign from any assignment for any reason. This provision for resignation was absent previously, and insolvency professionals believed that every professional assignment should allow for resignation. The idea is that professionals should not be compelled to undertake assignments against their will. However, to prevent potential misuse of this provision, it is now mandatory to have a recommendation from the relevant committee and subsequent approval from the Adjudicating Authority.

23B

Insolvency professional entities (“IPE(s)”) can engage its partners or directors for any of its assignments.

Insolvency professionals are barred from involving or appointing any of their relatives or related parties in any task related to their assignments.

The amendment provides that the insolvency professional which is an IPE may engage or appoint its partners or directors, as applicable, for or in connection with any work relating to any of its assignments other than work related to valuation and audit of the corporate debtor.

 

To enhance the efficiency of the insolvency resolution process, the IPEs are allowed to carry out the duties of an insolvency professional and accordingly the First Schedule of the IP Regulations will apply to the IPEs also. The amended regulations will now provide the IPEs to appoint any of its partners or directors and this is envisaged to leverage the paraphernalia of their resources and experience in the insolvency ecosystem. The amended regulation recognizes the unique dynamics of IPEs, allowing them flexibility in utilizing the expertise of their partners or directors while maintaining limitations on specific functions.

23C

IPEs can engage its partners or directors for any of its assignments.

Insolvency professionals are barred from involving or appointing any of their relatives or related parties in any tasks related to their assignments.

The amendment provides for a further explanation that the insolvency professional which is an IPE may engage or appoint its partners or directors, as applicable, for or in connection with any work relating to any of its assignments other than work related to valuation and audit of the debtor.

 

It is done with the intent to exempt the IPEs and enable them to engage their partners or directors with respect to any of its assignments. This exception is outlined to facilitate the efficient execution of professional duties while maintaining the essential limitations required for the integrity of the insolvency process.


B. Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 (IPA Regulations)


In clause 12A (Authorisation for Assignment) of the Schedule, the following sub-clause has been amended: -

Clause

Subject

Pre- Amendment

Amendment

Remarks

12A (6)

Authorisation for Assignment

An authorisation for assignment shall be valid for a period of one year from the date of issuance or renewal or until the professional member turns seventy, whichever is earlier

An authorisation for assignment issued or renewed by the agency shall be valid for 1 year from the date of its issuance or renewal.  The authorisation for assignment issued or renewed by the agency shall be valid:

●        till the 30th of June if the expiry period of one-year falls from 1st of January to 30th of June, or

●        till the 31st of December of the year if the expiry of the period of one-year falls from 1st of July to 31st of December, or

●        till the date on which the professional member turns seventy, whichever is earlier

 

The introduction of this amendment will facilitate uniformity for granting renewal of authorisation of assignment for insolvency professionals.  

C. Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017

 

The following amendments have been made to the Voluntary Liquidation Process Regulations: - 

Regulation

Subject

Pre- Amendment

Amendment

Remarks

3(1)(a)

Enhanced disclosure requirements

When a corporate person intends to liquidate itself voluntarily, a majority of the designated partners (in case of LLP), or persons responsible for exercising its corporate powers (in case of other corporate persons) shall make a declaration, verified by an affidavit stating that-

(i)    they are aware about the affairs of the corporate debtor, and

(ii)  the corporate person is not being liquidated to defraud any person.

A new insertion has been made to the contents of the affidavit:

●    a new sub-clause (iii) has been inserted to the existing clause (a) requiring the corporate person to make additional declaration in the affidavit stating that they have made sufficient provision for obligations arising from pending matters mentioned in sub-clause (iii) of clause (b), i.e., disclosure about pending proceedings or assessments before statutory authorities, and pending litigations, in respect of the corporate person.

 

Many new cases were coming up to avoid such requisite obligations, litigations and assessments. To keep the spirit of the Insolvency and Bankruptcy Code, 2016, IBBI has made it mandatory for the corporate person to declare beforehand itself that they have provisions to meet the obligations, and whether there are any relevant disclosures or litigations that need to be disclosed beforehand.

3(1)(b)

Disclosure of pendency proceedings or assessment by way of affidavit

The declaration under sub-clause (a) must be accompanied with the following documents:

(i) Audited financial statements and business operation records of the corporate person for the last two years or since its incorporation, whichever is later.

(ii) A report on the valuation of the corporate person's assets.

Sub clause (iii) has been inserted to clause (b). As per the amended norms, the director is required to submit the disclosure about pending proceedings or assessments before statutory authorities, and pending litigations, in respect of the corporate person.

As per the discussion paper on streamlining the Voluntary Liquidation Process issued by the IBBI on October 05, 2023, around 55% of the ongoing cases had been continuing for more than one year (as of August 31, 2023). Further, IBBI observed that the delay is generally on account of delay in making foreign remittances, pending appeal regarding demand/ penalty imposed and refund from statutory departments and other litigations. Therefore, such disclosure of the pending proceedings or assessments by the directors will reduce the prolonged liquidation process, ensuring timely compliance, improving efficiency, and enhancing transparency in the liquidation process.

 

37

Change in timeline to conduct contributories’ meeting

Under the existing laws, in the event of the liquidation process continuing for more than 12 months, the liquidator has to hold a meeting of the contributories of the corporate person-

●        within 15 days from the end of the 12 months from the liquidation commencement date, and

●        at the end every succeeding 12 months till the dissolution of the corporate person.

As per the amendment, the liquidator shall hold a meeting of the contributories of the corporate person

●        within 15 days from the end of 270/90 days, as the case may be, and

●        thereafter at the end of every succeeding period, as the case may be.

 

Further, the liquidator in its report shall also specify the reasons for not completing the process within the stipulated time and the additional time required to complete the process.

 

Furthermore, sub-regulation (4) has been inserted which provides for the timeline for filing the status report by the liquidator has also been specified. Now, the liquidator shall file the Status Report with the IBBI within seven days of the meeting of contributories.

The amended norms establish a mechanism for specifying reasons for the delay and additional time needed to complete the liquidation process, as well as promoting transparency and accountability in voluntary liquidations. This further streamlines the process, reduces delays and promotes efficiency in corporate liquidation, along with ensuring timely reporting and updates to the IBBI regarding the progress and status of the voluntary liquidation process.

39

Detailed norms w.r.t claiming of amount deposited into the Corporate Voluntary Liquidation Account by the stakeholders

As per Regulation 39, the liquidator shall deposit the amount of unclaimed dividends, if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon till the date of deposit, into the Corporate Voluntary Liquidation Account.

Under the existing norms [Reg. 39(7)], if a stakeholder, who claims to be entitled to any amount deposited into the Corporate Voluntary Liquidation Account, may apply to IBBI in Form I for an order for withdrawal of the amount.

The amended regulations provide that prior to dissolution of the corporate person, a stakeholder, who claims to be entitled to any amount deposited into the Corporate Voluntary Liquidation Account, may apply to the liquidator in Form-I for withdrawal of the amount. On receipt of such request, the liquidator after verification of the claim, shall request IBBI for release of amount to him for onward distribution. Further, the IBBI on receipt of request may release the amount to the liquidator The liquidator shall, after making the distribution to the stakeholder, intimate the Adjudicating Authority of such distribution.

 

After dissolution of the corporate person, a stakeholder, who claims to be entitled to any amount deposited into the Corporate Voluntary Liquidation Account, may apply to IBBI in Form-I for an order for withdrawal of the amount.

IBBI has observed a substantial increase in withdrawal requests in cases where a final report has been submitted but the dissolution order has not been passed. The time gap between the issuance of the dissolution order and the submission of the application for dissolution is growing wider.

 

Further, the discussion paper on streamlining the Voluntary Liquidation Process issued by the IBBI on October 05, 2023, provides that the average time taken for the dissolution of the voluntary liquidation process from the date of submission of the final report is 280 days. This leads to delays in distribution and inconvenience to claimants.

 

Further, the extant norms do not provide for distribution after the final report but before the issuance of the dissolution order. Therefore, there is a need to provide for distribution to these claimants as it will help them get their dues and will reduce the correspondence being made to IBBI.


D. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019


The following amendments has been made to the said regulations:

Regulation

Subject

Pre- Amendment

Amendment

Remarks

4(1)

Eligibility criteria of insolvency professional in case of personal guarantors (PGs)

An insolvency professional was eligible to be appointed as a resolution professional for a resolution process of the corporate debtor, if he, the IPE of which he is a partner or a director, and all the partners and directors of the said IPE are independent of the guarantor. One of the criteria for considering the person as independent of the guarantor is that he/she has not acted or is not acting as interim resolution professional, resolution professional or liquidator for the corporate debtor.

 

In the amended regulation, the below criteria for considering the person as independent of the guarantor has been omitted.

That insolvency professional has not acted or is not acting as interim resolution professional, resolution professional or liquidator in respect of the corporate debtor.”

 

The intent behind the amendment is to allow the interim resolution professional, resolution professional or the liquidator, to act as resolution professional in cases of resolution process against personal guarantor. Previously, the same insolvency professional was prohibited from undertaking assignments for personal guarantors, thereby limiting the same insolvency professional from engaging in CIRP of both the corporate debtor as well as personal guarantor to the corporate debtor. The new amendment will enable the same insolvency professional to provide its services in the insolvency resolution of both the corporate debtor and its personal guarantors, given that the two are intrinsically linked.

17A

Meeting of creditors

New insertion

The new amendment requires the resolution professional to place the repayment plan as per Section 105 for its consideration before creditors, in the meeting of creditors. If no repayment plan is received, the same is to be notified by the resolution professional in the meeting of creditors. 

 

It was observed by IBBI that if no repayment plans were received then there would be no meeting of creditors. To deal with the same, the said amendment has been introduced mandating the insolvency professional to place the repayment plan before the committee and in case no such plan is received, still a meeting to be conducted and creditors to be informed of the same. This mandatory involvement of creditors brings a comprehensive and collaborative approach to the resolution process, enhancing the efficacy and fairness of the system. The amendment intends to foster active participation and cooperation among all stakeholders, thereby reinforcing a robust and equitable framework for addressing financial distress in PG cases.

E.     Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019


The following amendments has been made to the said regulations:

Regulation

Subject

Pre- Amendment

Amendment

Remarks

3

Eligibility criteria of insolvency professional

An insolvency professional shall be eligible to be appointed as a bankruptcy trustee if-

●        the IPE of which he is a partner or director, or any other partner or director of such IPE does not represent any party in the bankruptcy process,

●        he is not subject to any ongoing disciplinary proceeding and

●        he, the IPE of which he is a partner or a director, and all the partners and directors of the said IPE are independent of the guarantor.

An insolvency professional who has acted or is acting as an interim resolution professional, a resolution professional or a liquidator in respect of the corporate debtor could not be appointed for the same as he/she is not considered independent of the director.

The criteria to consider whether the insolvency professional is independent of the corporate debtor has been omitted. The omitted clause is produced hereto for reference:

An insolvency professional who has acted or is acting as an interim resolution professional, a resolution professional or a liquidator in respect of the corporate debtor could not be appointed for the same.

The intent behind the amendment is to allow interim resolution professional, resolution professional or liquidator in respect of a corporate debtor to be appointed as a Bankruptcy Trustee.


IBBI CIRCULARS DATED FEBRUARY 01, 2024


IBBI recommended certain measures pertaining to the professional services rendered and availed by the IPs, and the framework for IPEs. The circulars issued on February 01, 2024, address several key measures aimed at facilitating efficient conduct of insolvency processes of IPEs. The key clarifications include:


  • Initiation of disciplinary proceedings against an insolvency professional (which is an IPE)

When an IPE acts as an insolvency professional and such an insolvency professional undertakes an assignment, the show-cause notice under Regulation 11 of the IBBI (Inspection and Investigation) Regulations, 2017, has to be issued to its partner or director, who is authorised to sign and act for the respective assignment. In case of systemic failure or repeated instances of contravention, the notice will have to be issued to the IPE as well.


  •  No limit on number of assignments for insolvency professional which are IPEs

Clause 22 of the Code of Conduct specified in First Schedule to Insolvency Professional Regulations provides that at any point of time, an insolvency professional should not have more than ten assignments as resolution professional in CIRP, of which not more than three shall have admitted claims exceeding one thousand crore rupees.  This restriction has been envisaged for insolvency professionals who are individuals.

The limitation on the number of assignments applicable to an insolvency professional does not extend to an insolvency professional that is an IPE. Recognizing that the IPEs have been authorised to engage in insolvency professional activities for less than two years, it was deemed necessary to eliminate the prescribed restriction outlined in Clause 22 of the Code of Conduct mentioned in the First Schedule to Insolvency Professional Regulations for such insolvency professionals.


  •  Fee structure under CIRP Regulations does not apply to insolvency professionals which are IPEs

The framework of fees payable to resolution professionals during a CIRP, as outlined in Regulation 34B of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) does not extend to insolvency professionals that operate as IPEs. This exemption is due to the comprehensive array of services provided by IPEs, which is broader in scope than those offered by individual insolvency professionals. IBBI also noted that given the institutional framework of IPEs, they are better placed to negotiate their fees commensurate with their pool of in-house resources and diverse range of services offered by them as compared to an individual insolvency professional. IBBI observed that, at present, the fees for IPEs should be ‘determined by the market.’


  •  Providing professional services in implementation of resolution plan

Many times, it is observed that the Adjudicating Authority approves the resolution plan with provisions for constitution of implementation or monitoring committees, subject to meeting other requirements. Such implementation mechanism is proposed to ensure effective implementation of the approved resolution plan and effective management of the corporate debtor during the transitional phase. Since the concerned insolvency professional is already familiar with the nuances of the business of corporate debtor, he/she is normally given a role in the implementation or monitoring committee.

The IBBI has clarified that the insolvency professional can provide professional services in the implementation of the resolution plan approved by the Adjudicating Authority. However, the resolution plan must contain details of such services, in view of Regulation 38 of the CIRP Regulations, 2016, which lists down the mandatory contents to be incorporated in the resolution plan.


  •  Billing or invoicing professional services

Clause 25C of Code of Conduct specified in First Schedule to Insolvency Professional Regulations stipulates that an insolvency professional shall ensure that the IPE or the professional engaged by it raises bills or invoices in their own name towards their fees, and such fees shall be paid to them through banking channel. The IBBI clarified that when an insolvency professional engages an IPE or a professional, it will suffice if the bills or invoices are raised by such a professional in the name of the firm in which he or she is a partner, for compliance with Clause 25C of the Code of Conduct under the First Schedule to the Insolvency Professional Regulations. IBBI’s clarification provides an additional option, enabling billing or invoicing for professional services in the name of the firm in which the IPE or the professional is a partner.

 

Sources:

 

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