What are the ethical considerations in insolvency practice?
Table of Contents
In every field, a code of conduct must be followed, including by insolvency practitioners in the domain of insolvency law. The code of conduct for insolvency practitioners is outlined under the Insolvency and Bankruptcy Code, 2016, along with relevant regulations. Ethical considerations in insolvency practice must be adhered to throughout the insolvency process, ensuring fair treatment towards the corporate debtor, creditors, and stakeholders while strictly complying with the timelines mandated under the Insolvency and Bankruptcy Code, 2016.
Ethical considerations in insolvency practice
1. Pre- Registration Conduct
The conduct of an insolvency professional (IP) starts with the eligibility of a candidate to become an IP. As per Regulation 5 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (referred to as the ‘IP Regulations’), the candidate must meet the required qualifications and experience.
For instance, the candidate must pass the Limited Insolvency Examination and possess relevant experience in finance, management, or law. This ensures that an IP can competently fulfill responsibilities such as making public announcements to invite claims, consolidating claims, and taking immediate custody and control of the corporate debtor’s assets for business continuity during the insolvency process. Ethical considerations in insolvency practice must also be followed rigorously, ensuring integrity and fairness throughout these proceedings
2. Code of conduct applicable to an IP
The conduct applicable to an insolvency professional (IP) is outlined under Regulation 7(2)(h) of the IP Regulations. The code of conduct is listed in the First Schedule of the IP Regulations and covers important principles such as integrity and objectivity, independence and impartiality, professional competence, representation of correct facts and correcting misapprehensions, timelines, information management, confidentiality, occupation, employability and restrictions, remuneration and costs, as well as gifts and hospitality. Ethical considerations in insolvency practice guide these standards, ensuring that insolvency professionals maintain fairness and professionalism throughout their duties
Integrity and Objectivity:
To uphold the integrity and objectivity of an IP profession, the IP:
- An IP is required to be honest, straightforward and forthwith in all professional relationships.
- Misrepresentation of any facts or situations, and refrain from being involved in any actions that would disrepute the profession.
- An IP can be objective by making decisions free from any bias, conflicts of interest, coercion, or undue influence.
- An IP has to disclose the details of any conflict of interest to the stakeholders.
When appointed as an interim resolution professional, resolution professional, liquidator, or bankruptcy trustee, an IP should not acquire, directly or indirectly, any of the assets of the debtors nor knowingly permit any relative to do so.
Independence and Impartiality:
- An IP should be independent of any external influences during insolvency resolution, liquidation, or bankruptcy process.
- During the liquidation or bankruptcy process, the IP must ensure that he or his relatives do not acquire the debtor’s assets, directly or indirectly, unless it is shown that there was no impairment of objectivity.
- If an IP or any of his relatives, partners, or directors of the IP of which he is a director or partner of the IP entity is not independent relating to the process under IBC or is in relation with the corporate debtor and his related parties then the IP should not take up the assignment.
- An IP should not influence to the Committee of Creditor (CoC) decisions, stakeholders, to making any undue influence or unlawful gains for itself or related parties, or cause any undue preference for any other persons for undue or unlawful gains and not adopt any illegal or improper means to achieve objectives with mala fide intent.
Disclosure obligations:
- If the IP has any pecuniary or personal relationship with the stakeholder, entitled under section 53 for distribution of assets and final dividend under section 178 of the Code, then the IP should be disclosed to the CoC, resolution applicant, and the person proposing appointment, as applicable.
- An IP should disclose whether he was an employee or has been on the panel of the financial creditor to the CoC and to the insolvency professional agency (IPA), and the agency should publish this disclosure on its website.
- An IP should disclose its relationship to the corporate debtor, professionals engaged by the financial creditors, interim finance providers, and prospective resolution applicants to the IPA within the specified time.
- An IP should ensure timely and correct disclosures by the IP and other professionals appointed and provide a confirmation to the IPA.
Professional competence:
- An should maintain and upgrade his professional knowledge and skills to render competent professional service.
Representation of correct facts and correcting misapprehension:
- An IP must inform persons of any misapprehension or wrongful consideration of a fact which he becomes aware as soon as may be practicable
- An IP must not conceal any material information or knowingly make a misleading statement to the Insolvency and Bankruptcy Board of India (IBBI), the National Company Law Tribunal (NCLT), or any stakeholder.
Timelines:
- An insolvency professional (IP) must fulfill their duties by adhering to the time limits outlined under the Code, as well as the relevant rules, regulations, and guidelines for the resolution, liquidation, or bankruptcy process. Ethical considerations in insolvency practice require that the IP carefully plans their actions and communicates effectively with all stakeholders involved, ensuring a fair and transparent process.
- While fulfilling its functions or duties, an IP must not act with mala fide or negligently.
Information Management:
- An IP must communicate to the stakeholders in advance and in a manner which is simple, clear, and easily under by the stakeholders.
- In this communication, the IP should include its name, address, e-mail, registration number and validity of authorisation for assignment issued by the IPA.
- An IP must not communicate privately with any stakeholders unless required by the Code. Regulations or by an NCLT order.
- An IP must appear, cooperate, and be available for inspection and investigations carried out by the IBBI or any person authorised by the IBBI or IPA.
- An IP must provide all information and records the IBBI or IPA requires.
- An IP must be available and provide information for any periodic study, research, and audit conducted by the IBBI.
Confidentiality:
- It is necessary for the IP to ensure the confidentiality of the information relating to the insolvency resolution process, liquidation or bankruptcy process. However, this should not prevent the IP from disclosing information with the consent of the relevant parties.
Occupation, employability and restrictions:
- An IP must refrain from accepting too many assignments if he cannot devote adequate time to each assignment.
- An IP may resign from the assignment, subject to the CoC recommendations in a corporate resolution process (CIRP), consultation CoC in the liquidation process, the debtor or the creditor of the personal guarantor to the corporate debtor, and the approval of the NCLT.
- When an IP undertakes an assignment or holds valid authorisation for an assignment, he should not engage himself in any employment.
- An insolvency professional (IP) should not engage or appoint any of their relatives or related parties for, or in connection with, any work relating to their assignments. Ethical considerations in insolvency practice demand that IPs avoid conflicts of interest and maintain impartiality to ensure the integrity of the insolvency process
- An insolvency professional (IP) must not conduct business in a manner that is inconsistent with the profession’s reputation, in the opinion of the IBBI. Ethical considerations in insolvency practice mandate that IPs maintain integrity and professionalism, ensuring their actions uphold the trust and respect of all stakeholders involved in the insolvency process
Remuneration and costs:
- An IP should provide services as per the remuneration which is charged transparently, consistent with the applicable regulations, and reasonably reflected in his work.
- An IP should disclose his fees payable and costs incurred during the insolvency, liquidation, or bankruptcy process.
- An IP should not accept or share any fees or charges from any professional or service provider who is appointed under the processes.
- While undertaking assignments or conducting processes, the IP should exercise reasonable care and diligence while taking the necessary steps to ensure that the corporate person complies with the applicable laws.
- An IP should not include any amount towards any loss, penalty, in the insolvency process cost, liquidation cost, incurred on account of non-compliance of any provision of the laws applicable.
Gifts and hospitality:
- An IP or his relative cannot accept any gifts/ hospitality which undermines or affects his independence.
- An IP should not offer gifts, hospitality, financial, or any other advantage to a public servant or any other person intending to obtain or retain work for himself.
Consequences of non-adherence to the code of conduct by an IP
As per Regulation 11 of the IP Regulations, if an insolvency professional (IP) fails to adhere to the code of conduct, disciplinary proceedings must be conducted in accordance with the Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017. Under these regulations, a Disciplinary Committee will be formed to conduct an inspection or investigation. In line with ethical considerations in insolvency practice, the consequences of non-compliance, as outlined in section 220 of the Code and Regulation 11, can include penalties, suspensions, or even the cancellation of the IP’s registration
- The disciplinary committee may impose a penalty which may extend up to 3 times the amount of loss caused or which is likely to be caused to the concerned person or three times the amount of any unlawful gain made by the IP because of any contravention, whichever is higher. However, the penalty should not be greater than Rs. 1 crore.
- Suspension or cancellation of the IP registration
- A warning Suspension of authorisation for any assignment.
Orders of IBBI (Disciplinary Committee)
In the matter of Mr. Narem Seth on 30.01.2024, he, as an IP, violated the process of selling the assets of the corporate debtor and delayed the issue of public announcement and inconsistencies in the public announcement. The Disciplinary Committee found that not allowing all interested bidder(s) in the auction and conducting an auction in a short span of time restricts competition, lacks transparency and goes against the prime objective of the Code, i.e. value maximisation.
The Disciplinary Committee found that the liquidator had conducted the third auction in an unfair, non-transparent, inappropriate, and unduly biased manner, leading the NCLT to set aside the auction process. The Committee observed that the IP’s defense for the delayed publication of the public notice, even after becoming aware of the admission order, was not tenable. This negligence on the part of Mr. Naren Sheth violated ethical considerations in insolvency practice, and as a result, the Disciplinary Committee upheld the charge made in the show cause notice. Consequently, Mr. Naren Sheth’s IP registration was suspended for a period of two years
In the matter of Mr Kairav Anil Trivedi on 23.05.2023, the IP essentially contravened the Code by misrepresenting the records of the CoC minutes and entering the Information Memorandum of Understanding without the CoC approval. The Disciplinary Committee found that the e-voting result reflects that the proposal was in ‘dissent’ to appoint an interim resolution professional as a resolution professional. Although Mr. Trivedi had averred that there was no e-voting for the said meeting, the material available on record with respect to the email from the voting facility suggests otherwise.
The Committee also observed that in signing the MoU for the contract manufacturing activity, Mr. Trivedi did not maintain the required transparency. Though the draft CoC was shared with the CoC on 10.12.2021 for vetting by Canara Bank, it had already been signed by Mr. Trivedi on 10.11.2021. This conduct by Mr. Trivedi is unacceptable and falls short of ethical considerations in insolvency practice. As a result, the Disciplinary Committee ordered that Mr. Trivedi’s IP registration be suspended for a period of 6 months
Judicial decisions
In Vivek Raheja v. Insolvency and Bankruptcy Board of India, [1] the Hon’ble High Court of Delhi observed the obligations of IPs under the Code, specifically, its duty of diligence and transparency in the CIRP. The court held that the petitioner, who is the IP in this case, had failed to disclose crucial information to the CoC on the ineligibility of the corporate debtor to be a Joint Resolution Applicant, which had constituted a breach of statutory duties. In K.L. Juice Products Pvt. Ltd. v. Tripathi Juice Industries Private Limited, the NCLAT observed that the resolution professional had not rendered the correct advice to the CoC when submitting the resolution plan. Hence, the NCLT held that the resolution professional contravened the Code and should not be held as a liquidator.
Conclusion
Adhering to the code of conduct laid down in the Code and the relevant regulations instills confidence in the corporate debtor, creditors, shareholders, and other parties involved in the insolvency resolution, liquidation, or bankruptcy process. Ethical considerations in insolvency practice play a vital role in ensuring transparency and fairness throughout these proceedings. There have been decisions by the IBBI Disciplinary Committee and the NCLT in cases where insolvency professionals fail to comply with the code of conduct under the IBC
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