There are 353 registered insolvency professionals in India. But is even one of them up to the task of say, running a large company such as Essar Steel - a 10 million tonne per annum integrated steel manufacturer with Rs 45,000 crore of debt, for 6-9 months?
The answer to that question will be key determinants to whether the plan to resolve India’s top 12 non-performing assets will succeed.
In fact, there is more than one answer. There are also more questions.
1. Are Resolution Professionals Ready?
First some context - The Insolvency and Bankruptcy Act, 2016 provides that once a case for insolvency proceedings has been filed and accepted by the National Company Law Tribunal (NCLT), the company is put under moratorium i.e.: all legal cases and claims against it stand frozen, its board is suspended and an interim resolution professional appointed by the NCLT takes charge of the company.
Hence the question posed at the start.
Are They Up To It?
MS Sahoo, chairman of the Insolvency and Bankruptcy Board of India (IBBI) insists the answer is yes.
MS Sahoo, Chairman, Insolvency and Bankruptcy Board of India (IBBI) Some cases maybe very complicated, with a large number of stakeholders, many product lines. For all those purposes we have a mechanism of Insolvency Professional Entity, which are partnership firms or companies where majority of the partners are insolvency professionals (IPs) registered in their personal capacities. So an IP is empowered to use the organisational resources of an IPE, and is also empowered to engaged any professional he thinks necessary.
There are currently 7 registered insolvency professional entities (IPEs), all located in Delhi.
- IRR Insolvency Professionals Pvt. Ltd.
- AAA Insolvency Professionals LLP
- Witworth Insolvency Professionals Pvt. Ltd.
- Gyan Shree Insolvency Professionals LLP
- A2Z Insolvency Services Pvt. Ltd.
- Turnaround Insolvency Professionals LLP
- Nangia Insolvency Professionals LLP
Alok Dhir, managing partner at law firm Dhir & Dhir Associates and director at IRR Insolvency Partners, says it will be extremely difficult for insolvency professionals to deliver efficient services to medium and large scale companies on their own.
Dhir makes the case for IPEs over external advisors early in the process.
Alok Dhir, Managing Partner, Dhir & Dhir AssociatesThey (IPs) need to get together a large team of professionals to assist them in doing their job effectively given the very short time frame. Moreover multiple location of registered office, corporate and branch offices and operating units will require the IP to be ready with a team of professionals to takeover the management of the company as well as the control and custody of the assets of the borrower.
Dhir lists the many tasks that resolution professionals have to undertake
- Collate and verify creditors’ claims
- Manage the business as a going concern
- Tackle legal issues, including proceedings in NCLT
- Prepare periodic reports for NCLT and the committee of creditors
- Identify prospective resolution applicants
- Provide data rooms, get due diligence organised
- Evaluate resolution proposals
- Meet with the creditors’ committee to try evolve consensus on proposals
This, he says, will require a multidisciplinary team of high quality professionals who are a part of the IPs team right at the start as there will be little time to set up a team after the appointment as a resolution professional, interim or otherwise.
2. Cheaper May Not Mean Better
Under the law, the creditor filing the insolvency application proposes an interim resolution professional to take charge of the company. Or the NCLT may direct the IBBI to appoint an appropriate person. The committee of creditors, once constituted, can appoint the same person or a different one as resolution professional.
Dhir says clear criteria for appointment are an urgent need. He cites instances where IBBI and financial creditors, such as banks and financial institutions, have selected those insolvency professionals who bid the lowest fee.
Alok Dhir, Managing Partner, Dhir & Dhir AssociatesThis will result in price war and individual IPs with fewer resources and infrastructure will make lower bids, thereby ousting the more serious players / IPEs and institutionalised players. Recently some banks have come up with some empanelment processes where experience, infrastructure availability is kept as criteria for empanelment, however once some IPs are empanelled again the lowest bidder may win irrespective of his technical, managerial skills, quality of team and infrastructure.
Dhir argues for that a transparent mechanism should be evolved giving due weightage “to the stature, capability and experience of the IP, size and quality of team and infrastructure to conduct the assignment as an IP”.
3. Promoter Resistance
Since most companies in India are promoter owned and run, it’s widely accepted that professional management is also aligned with the promoter and neither may be cooperative with the resolution professional. But IBBI’s Sahoo shrugs off this fear.
MS Sahoo, Chairman, Insolvency and Bankruptcy Board of India (IBBI)The law is very clear, once the process starts the interim resolution professional takes over the management and the powers of board of directors are suspended. I presume everybody would comply with the law of the land. And if they do not there are consequences also. Of the 105 cases admitted already, only in one case there was problem in taking over. But I’m told the insolvency professional, with the help of police, could take over and the process could continue.
4. Getting The Right Advice
Second only to the capability of the resolution professional is the advice he receives to run the company efficiently while it is in insolvency proceedings i.e.: for a maximum period of 270 days.
Dhir points out that besides a robust internal team assisting the resolution professional, external advisors will be critical to timely resolution.
Alok Dhir, Managing Partner, Dhir & Dhir AssociatesThe ability of an IP to appoint advisors and/or operation and management teams depend upon the professional stature of the IP and his networking in the relevant community of professionals. It is difficult for a young or a mid-level professional to reach out to a high quality talent pool of advisors and service providers. You have to be of equal stature and ability to be able to manage such professionals and advisors to take the best out of them. That is the real challenge. MS Sahoo, Chairman, Insolvency and Bankruptcy Board of India (IBBI)They can engage any professional they want. The existing management is not thrown away. The board of directors is suspended. But existing management keep reporting to the IP. And for major decisions there is the committee of financial creditors.
5. Short Of Time
The IBC lays down strict timelines for every part of the insolvency process. Sample this. An interim resolution professional has to in a short 30 day term...
- collect all information relating to the assets, finances and operations of the company
- receive and collate all the claims submitted by creditors
- constitute a committee of creditors
- monitor the assets of the company and manage its operations
- file information collected with the information utility
“The time line under the IBC may be inadequate to meet the challenges of executing such large transactions,” says Dhir.
As per Dhir’s calculation there are just about 100 days available under the process for inviting resolution plans, receiving the plans after due diligence and negotiations with stakeholders and verification of the plans by the resolution professional, which seems “grossly inadequate for this size of companies,” he says.
Even if a 90 day extension is granted Dhir believes the timeline is very challenging.
Alok Dhir, Managing Partner, Dhir & Dhir AssociatesExperience of SDR and S4A has shown that such transactions cannot be executed in such a short time frame.
But Sahoo is confident that processes will soon mature - for instance India may see the introduction of pre-packs.
MS Sahoo, Chairman, Insolvency and Bankruptcy Board of India (IBBI)There is a practice of ‘pre-pack’ abroad where infact people before triggering the process agree upon how to do the resolution plan and then they go to the NCLT. So as time passes our people will get skill, pre-packs will develop, systems will get standardised and automated and transactions will get concluded much earlier than 180 days.