Regulation of Insolvency Profession in India: Is it time to ‘hold the horse’?

By Dr. Neeti Shikha (Indian Institute of Corporate Affairs) and Urvashi Shahi (Indian Institute of Corporate Affairs)

The Indian insolvency regulator (IBBI) has recently invited comments for public discussion on a policy that is worth an eye. It proposes to restrict the number of assignments that an insolvency professional (IP) may undertake. In this post, we evaluate whether such policy is in the larger interest of the profession? Should India which is at a very nascent stage both in terms  of the new insolvency regime and insolvency  as a profession, take recourse to such policy decisions?

Currently, there is no restriction on the number of assignments handled by an Insolvency Professional in India. IP’s engagement is a market driven process akin to many other jurisdictions such as UK, Italy, USA etc. Nevertheless,  the Code of Conduct for IP’s stipulates that they must refrain from taking too many assignments, if they are unlikely to be able to devote adequate time to each.

The justification of IBBI for such policy recommendation is premised on three reasons. Firstly,  it notes that similar to the restriction that places for Key Management Professionals and directors under section 165 of the Companies Act 2013 restricting the number of directorships they may hold, there should be a cap on the number of assignments an IP can handle at a given point, considering the colossal responsibility that it holds when it acts like “CEO of a distressed company.”

Secondly, IBBI notes that there is skewed work allocation amongst IPs. This reason is not substantiated by any data though. Third reason extended by IBBI is that there is emerging jurisprudence that IP should not handle too many cases as it may affect the timeliness of completion of the Corporate Insolvency Resolution Process (CIRP). Thereafter, IBBI makes some positive assumptions that proposed restraint will improve quality of output and this, in turn, will facilitate inter alia realisation of the objective of value maximization as enshrined in the Insolvency and Bankruptcy Code. It also justifies that the economic implication of this policy will be minimal as it will be based only on complaints raised by others and IBBI will not put in place any mechanism to monitor this as such. Thus, indicating that the market will control the abuse of this law. It also suggests that leveling the playing field for the IPs will guarantee enough work for all IPs ensuring that new talents become “self reliant, a concept that also is promulgated as new national fervour post COVID-19.

Any policy change which is not premised on evidence may lead to unintended consequence that is in total paradox to its original objective. In this case, the proposed policy change in restricting assignments that an insolvency professional can handle at a given time, is myopic and may cause more harm to the profession in the long run. Our arguments are based on three reasons. Firstly, there is lack of evidence to support skewed assignment of cases and more importantly  to show causal link between delay and number of assignments. Secondly, in its current form, the Code and accompanying regulations have sufficient safeguards to curtail both unethical and unprofessional conduct as well as any delay in CIRP process. Insolvency Professionals have to furnish the details regarding any delay, reasons for non-compliance and details of persons responsible for non-completion to the regulator enabling it to take appropriate legal remedy. Thirdly,  the main objective of the IBC which is value maximization will be affected as with change in the rules of the game, it is obvious that players will be gaming the rules. In this case, an increase in higher fee per assignment will be a natural reaction  to the restriction imposed, which will affect the overall CIRP cost.

As contended by the regulator that  handling of too many assignments by an insolvency professional leads to delay in the CIRP process is an issue that needs to be evaluated further. This is because delay in the CIRP can be ascribed to many factors often outside the control of IP. The delay could happen due to lack of information, delay in getting information for promoters, non cooperation from creditors etc. It must be examined whether the delay is solely attributable to the number of assignments undertaken. Even if it is found that higher assignments taken by an IP leads to delay, one needs to evaluate whether a new regulation should be brought in place or whether the  proper implementation of existing mechanisms is sufficient to curtail the problem. In this case, a strict application of code of conduct could certainly resolve the issue. There are already enough incentives and disincentives for timely resolution in ‘The Code’. If the mandatory timelines ,as prescribed are strictly implemented to its true spirit, delays in CIRP would soon be bygones in Indian restructuring landscape.This would also incline creditors to remove inefficient IP’s inorder to protect the value as Non completion on time results in forced liquidation thereby impacting the returns to creditors.

Sanctions of illegal behaviour should be a combination of (self-interested) reputation considerations and internalised morality. Considering the  insolvency profession is one of skill and reputation, market forces anyways exert accountability in a significant way.

If the regulator still feels the need for any further  accountability, it could well use the existing pillar ie Insolvency Professional Agencies (IPAs). IPAs which are as such  responsible for monitoring the performance of IPs. They may use “naming and shaming techniques” or “reward mechanism” to encourage IPs to bite only as much as they can chew. They may also use age-old techniques of fostering  morality through oath taking, such as hippocratic oath. This will not only facilitate moral deliberation but is also an important part of a rite de passage into the profession.Only if IPA’s fail to perform their role, IBBI should step in.

Before tailoring such bold reforms, larger economic impact must be evaluated. State must only interfere when the market forces yields poor outcomes and freedom leads to exploitation. This becomes more pertinent given the larger political vision of the current Indian government which is determined to expunge the socialist thought and embrace a market friendly mechanism for promoting commerce.