According to a new regulation issued by the Insolvency and Bankruptcy Board of India (IBBI), insolvency resolution experts employed by lenders to rescue bankrupt firms cannot remain in that capacity if any of their colleagues represent any of the parties in the case.
The amendment aims to avoid a potential conflict of interest that insolvency experts in charge of guiding a firm through the bankruptcy process may have if any of their colleagues counsel others engaged in the case. It is crucial because stockholders and creditors of a bankrupt business would be attempting to maximise their different and frequently competing interests throughout the process.
When a business declares bankruptcy, either on its own or as a result of a reference made by its lenders or other creditors, shareholders will do everything they can to save their ownership, while lenders will search for new investors. The resolution expert designated as the company's administrator must run the affairs impartially. The duties of an insolvency expert include verification. An insolvency professional's responsibilities include confirming, approving, or rejecting creditor claims, as well as taking ownership of and selling assets.
According to the IBBI, a director or partner of an insolvency professional entity may 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. The modification in norms is part of the IBBI (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2021, the regulator has recently notified.
The neutrality and independence of an administrator engaged to assist a firm through the bankruptcy resolution process are critical to ensuring the best outcome for the company, according to the bankruptcy rule-maker. IBBI issued a guide in March to emphasise this point, stating that experts managing the affairs of insolvent firms should neither accept nor provide gifts. It further stated that as a court officer, these experts are required to demonstrate "utmost honesty" and are tasked with efficiently managing the corporate debtor as a continuing concern.
In the revised rule, IBBI said that the valuation expert engaged by the insolvency resolution professional cannot be a family or colleague of the professional, a connected party of the corporate debtor, or an auditor of the firm at any point in the previous five years. It said that the employment of a valuer must be done on an arm's length basis.
A resolution professional is expected to maintain independence, so the new regulation prohibits an insolvency professional entity and its directors/partners from representing other stakeholders if a director/partner is acting as a resolution professional.
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