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Value of assets to decide fees of professionals

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The government has been quick in strengthening the newly introduced Insolvency and Bankruptcy Code 2016 by framing draft regulations for insolvency process and liquidation of corporate entities, registration of insolvency professionals and insolvency agencies, rules for applications to the adjudicating authority and draft model by-laws for insolvency agencies. 

Business Standard takesalookat thebriefbackgroundandprogressof theCode,aswellassomekeyfeatures oftherecentproposalswhichhave beenputupforpublicdiscussiontill October31.

WhenwastheCodeintroduced,and withwhatobjective?

TheCodecameintoforceonMay28, 2016.Theobjectivewastorevampthe scenarioofassetreconstructionand streamlinetheprocessofcorporate liquidation.Stillinitsnascentstages, thelegislationhasalreadybeenlaudedasapath-breakingdevelopment fromtheearlierframeworkofinsolvency,governedprimarilythoughthe erstwhilecolonialstatutes—The PresidencyTownsInsolvencyAct 1909andTheProvincialInsolvency Act 1920 — alongside the Sick IndustrialCompaniesAct1985.

Whatdodraftmodelby-laws forinsolvencyprofessional agenciessay?

Theobjectivesofthemodelby-laws aretoeducate,promoteandsafeguard theinterestsofallpartiesinaninsolvencyprocessconductedbyinsolvency professional agencies. In this regard,theby-lawsenumeratethe powersanddutiesoftheseagencies and lay down conditions for membership.Theby-lawshavealso proposedamechanismforredressalof grievancesagainsttheworkingsofthe agenciesand/ortheirmembers,such astheformationofagoverningboard withaminimumofsixmembers(half of whom must be independent experts),grievanceredressalcell(and policy),disciplinarypanelandappellatepanel.Theseinternalbodiesprovideanadditionallayerofchecksand balances,toaidintheadherenceand applicationofthegeneralschemeof theCodeanditsalliedlaws.

Whataretheresponsibilitiesofthe insolvencyprofessionals?

Theregulationslaydownthepowers anddutiesofinsolvencyprofessionals whileconductingaresolutionprocess forcorporatepersons.Theyrequire interiminsolvencyprofessionalsto makepublicannouncementsand appointvaluerstocalculateliquidity valuesofcorporatedebtors.Theylist thepowersofresolutionprofessionals tomanagetheaffairsoftheconcerned entity,includingtheundertakingof contractualcommitmentsandexecutionofalldeeds.Insolvencyprofessionalsalsoprepareresolution plans,whicharetobeapprovedby theadjudicatingauthority.

Howareremunerationsof bankruptcyprofessionals determined?

Theexpensesincurredbytheinterim resolutionprofessionalsshallbepaid forbytheapplicantsinitiatingtheresolutionprocess.Thereafter,theremunerationofresolutionprofessionals willbedeterminedbythecommittee ofcreditorswithdueconsiderationof complexityofthecase,levelofresponsibility,effectivenessoftheprofessionalandvalueoftheassetsofthe debtor.Incaseofliquidators,the remunerationistobedeterminedby thecommitteeofcreditorsinproportiontotheassetsrealisedintheliquidationprocess.“Ifthevalueofassetsis madeafactorforfixingthefees,itis reasonabletoexpectthattheinsolvencyprofessionals/liquidatorswill notbemotivatedtotakeupsmallor midassetvaluecompanies.Thismay ultimatelyimpactthesenseofresponsibilityandtheconductofthesepractitioners,”saysSatyajitGupta,principalM&A/Corporate,AdvaitaLegal.

HowfarhastheCodecomein achievingitsobjective?

Thecommonconsensusamongprofessionals is that the Code has achieveditsinitialobjectiveofprovidingcertaintytobankruptcyproceedingsandinchangingthegeneral mindsettowardsinsolvency.

However,expertshavealsoraised concernsaboutthestricttimeframes forcompletionofproceedings,which maynotbeachievableinthepresent scenarioandmightrequirere-examinationinthefuture.Accordingto AmitVyas,founder,VerticesPartners, theCodehasbeensuccessfulinensuringthatthefailureofabusinessdoes notactasapersonalstigmaforpromoters,butinsteadasameansfora freshstart.

Whatarethenextstepsfor actualisingtheCode?

Asofnow,themodelby-lawsand draftregulationsonlydealwiththe functioningofinsolvencyprofessionals(andagencies)andtheprocedure forinsolvencyandliquidationofcorporatepersons.Theintroductionof similarguidelinesforcompaniesis yettobeframed,andisanessential stepinthecompletionoftheframework.ThefinalefficacyoftheCode canonlybegaugedoncetheseregulationsandguidelinesareframed (andfinalised)andbecomepartofthe statutorymechanismforconducting futureinsolvencyproceedings.

THE BUSINESS STANDARD, 
NEW DELHI, 17TH OCTOBER, 2016.c

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