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CoC Enjoys authority without responsibility

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Written by: admin

Category: IBC

Published: 09 August 2022

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As per Section 20(2)(a) of the Insolvency and Bankruptcy Code, 2016, the Interim Resolution Professional (IRP) has the authority to appoint accountants, legal or other professionals as may be necessary to manage the operations of the Corporate Debtor as a going concern. Similar authority is given to the Resolution Professional (RP) as per Section 23(2) of the Code. In addition to this general clause which says that the RP shall have all the powers and perform the duties of the IRP, Section 25(2)(d) casts upon a duty on the RP to appoint accountants, legal or other professionals in the manner specified by the Insolvency and Bankruptcy Board of India (IBBI).

As per Regulation 35A of the IBBI (CIRP) Regulations, on or before the 75th day from the Insolvency Commencement Date (T+75 is the deadline), the RP has to form an opinion whether the Corporate Debtor has been subjected to any transaction covered under Sections 43, 45, 50 or 66 of the Code. If he is of the opinion that the Corporate Debtor has been subjected to the transactions as mentioned before, he has to determine (list out the transactions and find out the value thereof) with T+115 as the deadline and he has to make an application to the NCLT for relief with T+135 as the deadline.

If any of the above deadlines are missed, the NCLT as well as the IBBI can pull up the RP for delay. However, the point to be noted is that the RP may not, by himself, determine the transactions. An RP who is a Chartered Accountant may be equipped to determine the transactions but other Insolvency Professionals who belong to other professions or having solely managerial experience may find it time-consuming to deterimine themselves. It is not suggested that they cannot do this, but the time to be spent by the RP will be huge.

So, the better way for the RP would be to entrust this job to an independent professional by way of a special audit.

As per Regulation 27 of the IBBI (CIRP) Regulations, 2016, the RP has to appoint valuers within seven days from his appointment but not later than 47th day from the Insolvency Commencement Date. The RP has to appoint two registered valuers to determine the fair value and liquidation value of the Corporate Debtor. It is to be noted that this is a duty cast upon the Resolution Professional. If the RP fails in meeting the timelines, the IBBI can issue a show cause notice why disciplinary action should not be taken against the Insolvency Professional in charge of the job as the Resolution Professional.

Whether appointment of special auditors or appointment of valuers, the RP has timelines to adhere to since it is his duty to appoint the valuers and determine the value of transactions under Sections 43, 45, 50 and 66. Hence, the RP would be inclined to appoint the professionals at the earliest.

While giving the responsibility to appoint professionals, the Code has not given the freedom to the RP to fix their fees. Now, how can one appoint a professional without fixing their fees? No professional will work for a fee that is not determined before taking up the assignment.

Then, in whose hands the financial power is given by the Code? It is the Committee of Creditors (CoC) that has the financial power. Please go to Section 5(13) of the Code which defines the term "Insolvency Resolution Process Costs" (we will call them in short "CIRP costs"). The CIRP costs as per Section 5(13) include the cost of interim finance and costs incurred in raising such finance, fee of the RP, costs incurred by the RP in maintaining the business of the CD as a going concern etc. This is to be read with Regulation 31 of the IBBI (CIRP) Regulations, which defines CIRP costs but we will take only whatever is relevant to our discussion, i.e., costs incurred by the IRP/RP which are defined as under:

Expenses incurred by the IRP to the extent ratified by the CoC (under Regulation 33)
Expenses incurred by the RP as fixed by the CoC (under Regulation 34)
Other costs directly relating to the CIRP and approved by the CoC.

What happens if the costs are not ratified by the CoC?
As per Regulation 33(3), the applicant (who has filed the company petition which led to the present CIRP of the CD) has to bear the expenses which shall be reimbursed by the CoC to the extent it ratifies. Hence, in case certain expenses are not ratified by the CoC, the applicant has to still bear them but has to write off. Hence, IRP is on a safer wicket only so so.

As per Regulation 34, the CoC has to power to fix the expenses to be incurred by the RP and those expenses shall constitute CIRP costs. Expenses include RP fee, fee to be paid to Insolvency Professional Entity, fee to be paid to professionals, if any, and other expenses to be incurred by the RP. Hence, RP is on a sticky wicket.

In case any expense is incurred by the RP is not approved/ratified by the CoC, then what happens?
The RP has to bear the expense out of his own pocket.

Now, he has to appoint special auditors and valuers on a timely basis. But he cannot fix the fees. The CoC can fix the fees but not given express authority to appoint. In practice, the person who has the financial power controls the administrative authority also by default which also extends to approving the name of the person/agency to be appointed. If, by mistake, the RP has already appointed some person/agency and this is not suitable to the CoC, the CoC can choose not to approve their fees and the RP would end up bearing those costs which will be a great burden on him.

So, to avoid all these, the IRP/RP in practice is seeking the permission of the CoC from the stage of shortlisting of persons/agencies. By this way only he can safeguard his financial position and avoid being put to a loss.

But IBBI views this practice seriously and reprimanded several Insolvency Professionals who waited for conducting the CoC to take approval while the deadline is impending. IBBI says that whereas the power is given in the Code to the RP, why he has not exercised it? The answer is that power or duty given without the financial authority is no power at all. In case the CoC defers the matter for next meeting and by that time the deadline is over, the RP has to answer to the IBBI.

Hence, it is better to have the powers and duties concentrated in one place. It is better to cast the responsibility of appointing professionals upon the CoC. The responsibility of the IRP/RP would have to be limited to advising the CoC of the requirement of professionals or valuers and also indicating the due date for the same. By this way, the onerous responsibility cast upon the Insolvency Professionals can be eased. This requires an amendment of the Code.

The other way would be to concentrate the financial powers which go with the responsibility also with the RP. But the problem here is that instead of collective wisdom of the CoC, the RP as an individual takes a decision (regarding fees of the professionals) which may be subjective and he can be accused of giving higher fees etc. To avoid this, the IBBI can fix the fees of the Special Auditors and Valuers as a percentage of the last audited balance sheet total or last audited net block of assets with a monetary cap. Say 0.25% of the last audited net block which cannot go beyond Rs.10 lakh for ex. By this way, the extremely high fees charged by some special auditors also will be controlled. This also requires an amendment to the Code.

Anyway you look at it, the CoC is enjoying all the powers, including those granted to the IRP/RP and hence, why it cannot take the responsibility for the timelines also?