The Insolvency and Bankruptcy Board of India (IBBI), has come out with new rules for insolvency resolution professionals (IRPs) hired by lenders to rescue bankrupt companies. The new changes will not allow IRPs to continue in that role if any of their relatives or colleagues represent any of the parties in that case.
As per the amended regulation, the valuation professional hired by the IRP cannot be a relative or colleague of the professional, related party of the corporate debtor or an auditor of the company any time in the preceding five years. The hiring of valuer has to be on an arm’s length basis, the IBBI said.
The new rule is an attempt to get rid of a potential conflict of interest that insolvency professionals in charge of guiding a company through the bankruptcy process could have if any of their colleagues advise others involved in the case.
This might be significant because shareholders and creditors of a bankrupt company try their best to maximise their separate and often conflicting interests during the resolution process.
The norm change is part of the IBBI (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2021.
It is often observed that when a company enters bankruptcy proceedings either on its own or after being referred by its lenders or creditors, shareholders try their best to retain their ownership while lenders tend to look for new investors.
The resolution professional appointed as the administrator of the company must manage the affairs without prejudice. The insolvency professional oversees verification, accepting or rejecting claims by creditors and taking possession of assets and selling them.
A director or a partner cannot continue as an interim resolution professional or resolution professional in an insolvency resolution process if the entity or any other partner or director of such an entity represents any other stakeholder in that process, IBBI said in the gazette notification issued on 14 July 2021.
It is noted that the impartiality and independence of an administrator recruited to steer a company through the bankruptcy resolution process are vital to ensure the best outcome for the company.
Earlier in March this year, the IBBI had also brought out a handbook, stipulating those professionals managing affairs of bankrupt companies should not accept or offer gifts.
The IBBI has reiterated that being an officer of the court, these resolution professionals are expected to show ‘utmost integrity’ and are entrusted with effectively managing the corporate debtor as a going concern.