Best Practices For Insolvency Professionals By ICSI IIP


BEST PRACTICES FOR INSOLVENCY PROFESSIONALS

The Insolvency & Bankruptcy Code, 2016 (Code) came into existence on 28th May, 2016 and it is still at the evolving stage. The precedents are developing through the cases settled at various benches of Adjudicating Authorities and Appellate Authorities.

The Insolvency Profession is also growing with the pace of the law. In order to achieve a reliable and desired result, the best practices in any profession are required to be developed.

ICSI IIP enlists the following best practices which need to be adhered by the Insolvency Professionals:

A. DURING THE CIRP

  • Insolvency Professional should after his appointment immediately take over the possession of assets of the Corporate Debtor and prepare two separate lists of statutory and non-statutory records.
  • Maintain records in soft and hard form as per the provisions of the Code and keep the records in his safe custody for the period mentioned in the provisions.
  • Judicially decide about when to call the meeting of the CoC and must assure that all the matters which affect the interest of the stakeholders must be placed before the CoC.
  • Allow access of the records and minutes of the CoC to the creditors and the suspended board of directors.
  • IP should include all the required aspects in the Information Memorandum in order to attract more and more Resolution Applicants.
  • IP should ensure that all communications to the stakeholders, whether in the form of notices, reports, updates, directions, or clarifications, is made well in advance and in a manner which is simple, clear, and easily understood by the recipients.
  • IP should not make any private communication with any of the stakeholder unless required by the Code, rules, regulations and guidelines there under, or orders of the Adjudicating Authority.
  • IP should maintain timelines prescribed under the Code.
  • IP should ensure that all the notices, agendas, resolution plan etc should be forwarded to the suspended Board of Directors.
  • IP should appoint only two Registered Valuers within the prescribed period who must fulfil the criteria as prescribed under the Companies Act, 2013.
  • IP should take care of conflict of interest while appointing the requisite professional to carry out the assignment.
  • IP should disclose the details of his appointment to Insolvency Professional Agency and CoC.
B. FEES AND EXPENSES

Fees and Expenses incurred during the CIRP and Liquidation
 
Under the Code, an Insolvency Professional (IP) is vested with the management of its affairs and he manages its operations as a going concern. He complies with the applicable laws on behalf of the corporate debtor. He conducts the entire CIRP. Such responsibilities of an IP require the highest level of professional excellence. He needs to be compensated for his professional services commensurate to his ability, duties and responsibilities. He also needs to pay fee or incur other expenses for various goods and services required for conducting the CIRP and or managing the operations of the corporate debtor as a going concern.
 
Further, an IP is obliged under section 208 (2) (a) of the Code to take reasonable care and diligence while performing his duties, including incurring expenses. He must, therefore, ensure that not only fee payable to him is reasonable, but also other expenses incurred by him are reasonable.
 
IBBI vide its Circular dated 12th June, 2018 on Fees and Expenses has issued following directions to the IPs to ensure that:
 
  1. the fee payable to him, fee payable to an Insolvency Professional Entity, and fee payable to Registered Valuers and other Professionals, and other expenses incurred by him during the CIRP are reasonable;
  2. the fee or other expenses incurred by him are directly related to and necessary for the CIRP;
  3. the fee or other expenses are determined by him on an arms’ length basis, in consonance with the requirements of integrity and independence;
  4. written contemporaneous records for incurring or agreeing to incur any fee or other expense are maintained;
  5. supporting records of fee and other expenses incurred are maintained at least for three years from the completion of the CIRP;
  6. approval of the Committee of Creditors (CoC) for the fee or other expense is obtained, wherever approval is required; and
  7. all CIRP related fee and other expenses are paid through banking channel
Factors to be considered while charging a fee: 
 
  • IP may consider fixed or variable factors while charging a fee in handling any CIRP of Liquidation process, which may cover the following:-
  • cost directly related to the insolvency resolution process,
  • indirect cost includes out of pocket expenses
  • professional standards
  • the terms of the agreement,
  • Level of expertise
  • Number of a staffs member to be engaged by him/her to handle the CIRP or liquidation work.
(ii) An IP may choose any of the fee structure methods for their work in order to remain transparent:
(a) an hourly rate,
(b) fixed fee,
(c) percentage-based charging,
(d) Prospective fees and/ or contingency fee, if any, actual expenses incurred,
(e) Combination of any of the above.
 
  • An IP should consider the following factors while determining the quantum of a fee to be charged:
(a) value and nature of the assets dealt with,
(b) time spent  by the IP and her staff engaged by the IP in handling the affairs of the debtor,
(c) the complexity of the case,
(d) exceptional circumstances, if any occurred during the CIRP,
(e) the properties of the corporate debtor are in multiple locations all over the country or outside the country.
(f)various litigation cases filed by or against the corporate debtor in multiple locations all over the country or outside the country.
 
(iv) In case of any change in the fees, the same should be made with prior approval of the authority fixing his/her fee.
 
 Factors to be considered for reimbursement of out-of-pocket expenses
 
  • Out-of-pocket expenses incurred by an IP is considered to be the part of the CIRP cost.
  • During the process, an IP should disclose and obtain approval for the out-of-pocket expenses that he/she estimates will be incurred of the applicant or committee of creditors, as the case may be.
  • IP should ensure that the out-of-pocket expenses incurred by him are reasonable.
  • To determine the reasonability of these expenses, should consider if the expenses are-
(a) directly related to the insolvency resolution process,
(b) in furtherance of the exercise of the powers and functions under Code, professional      standards, and the terms of the agreement,
(c) determined on an arms’ length basis, in consonance with the requirements of integrity   and independence, and
(d) in consonance with his/her duties under the Code and the Regulations thereunder.

  • The following expenses may be out-of-pocket expenses that can be reimbursed-
      (a) Expenses paid to third parties for expenditure directly in respect of the case. This may include the expenses for the following:-

-  travel for the purposes of discharging duties under the Code,
-  printing costs conducted outside, etc.
 
(b)   Allocated expenses, which are related to the case but not payable to a third party. This may include the expenses for the following-

            - communication systems,
            - document storage,
            - printing costs,
            - postage, etc.
 
  • Care must be taken to ensure that these expenses are not in the nature of overhead charges.
  • An IP is not entitled to and should not claim reimbursement for the following kinds of expenses-
  • Incidental expenses, which are not directly related to the case. This includes expenses for the following-
- office,
-  standing charges,
-  depreciation,
-  finance charges, etc.
 
(b) Personal expenses, which are not related to the professional duties of the IP. This includes expenses for the following:

- recreation,
- personal
- communications,
- personal staff, etc.

  • The IP may separately charge for expenses incurred by him pre-appointment if approved by the applicant or committee of creditors.
  • The payment of expenses should be on actual and should not be as a percentage of the amount charged as fee.
Documentation in respect of fees and expenses:
 
(i)  An IP shall submit following information or documentary evidence in support of fees and expenses incurred by him/her to the Committee of Creditors:
 
               - Court order
               - Estimates of the cost to be incurred by him/her which includes the item wise cost.
               - outline of work to be undertaken by him/her
               - basis of charges to be incurred by him/her.
               - invoices in cases of any out of pocket expenses/ perspective/ contingencies expenses.
               - manner and period in which he/she will be paid.
  
C. DUTIES OF IPS

IP must take reasonable care and diligence while performing his following duties as per the Code:
  • Managing the affairs of the Corporate Debtor
  • collect all information relating to the assets, finances, and operations of the corporate debtor
  • receive and collate all the claims submitted by creditors
  • constitute the committee of creditors;
  • monitor the assets of the Corporate Debtor
  • to file information collected with the information utility, if necessary
  • take control and custody of an asset over which the Corporate Debtor has ownership rights
  • to preserve and protect the assets of the Corporate Debtor
  • represent and act on behalf of the Corporate Debtor with third parties,
  • raise interim finances (subject to the approval of CoC)
  • appoint accountants, legal or other professionals in the manner as specified by Board;
  • maintain an updated list of claims;
  • convene and attend all meetings of the committee of creditors
  • prepare the information memorandum
  • invite prospective resolution applicants
  • present all resolution plans at the meetings of the committee of creditors;
  • filing of an application for the avoidance of transactions
D. CODE OF CONDUCT

  • IP must comply with all requirements and terms and conditions specified in the bye-laws of the IPA of which he is a member.
  • IP must not accept too many assignments simultaneously.
  • IP must have adequate infrastructure and other support while handling the CIRP.
  • IP must not engage in any other employment when he/she is handling any CIRP.
  • Insolvency Professional must adhere to the time limits prescribed in the Code and the rules, regulations and guidelines thereunder for insolvency resolution, liquidation or bankruptcy process, as the case may be, and must carefully plan his actions, and promptly communicate with all stakeholders involved for the timely discharge of his duties.
  • An Insolvency Professional must not act with mala fide intention or be negligent while performing his functions and duties under the Code
  • An Insolvency Professional must provide all information and records as may be required by the Board or the Insolvency Professional Agency with which he is enrolled.
  • An Insolvency Professional must ensure that confidentiality of the information relating to the insolvency resolution process, liquidation or bankruptcy process, as the case may be, is maintained at all times except with the permission with the relevant parties.

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