Managing a Going Concern


[A version of this article was published in July – August 2017 issue of Newsletter of The ICSI – WIRC Pune Chapter.]

These days, media hype talk about a new magical law to reduce nonperforming assets from the books of lender banks and financial institutions. There is no such new law. There is a law for insolvency resolution. This law also deals with the possibility of liquidation which may trigger after the failure of resolution of insolvency.

The Insolvency and Bankruptcy Code, 2016 (the Code) as its preamble suggest essentially is “an Act to consolidate and amend the law relating to reorganization and insolvency resolution of corporate persons, partnerships and individuals in time bound manner for maximisation of the value of assets of such person…”
Insolvency resolution is prime purpose of the code though it may not be a sole purpose. Insolvency professionals are entrusted with the duty of insolvency resolution at different stages in different roles. Insolvency professional may act as (a) Interim corporate Insolvency Resolution Professional, (b) corporate Insolvency Resolution Professional, (c) Liquidator, (d) Insolvency Resolution Professional and (e) Bankruptcy Trustee. There may be some other roles as representative in the meeting of the committee of creditors and draftsman of the resolution plan.
All these roles of insolvency professional commonly demand his administrative acumen along with good knowledge and experience of law, accounting, finance, management and administration. For fine performance, there is different experience and skill set required on sophistication label depending upon business and business model of corporate debtor concerned. There is a general feeling among insolvency professionals that job is tougher where corporate debtor under insolvency is working as going concern and should be dealt accordingly.

Endeavour to manage as a going concern
Section 20 of the Code puts the responsibility on insolvency professional to make every endeavour to manage the operations of the corporate debtor as a going concern.
According to subsection (1) of section 20, the interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.
This subsection reveals an essence of corporate insolvency resolution. In primary reading, it seems to have a certain limitation of applicability. It seems applicable to interim resolution professional only. According to subsection (2) of section 23, the resolution professional shall exercise powers and perform duties as are vested or conferred on the interim resolution professional under this Chapter. As a passing thought here we may note, the term “Resolution professional” includes “Interim resolution professional” according to clause (27) of Section 5. A reading of subsection (2) of section 23 with clause (27) of section 5 suggests that all powers and duties of interim resolution and resolutions are same irrespective of terms used in different sections. Therefore, both interim resolution professionals, as well as resolution professional, shall make every endeavour to manage the operations of the corporate debtor as a going concern.

Authorities to ensure going concern
Subsection (2) of Section 23 ensure some authorities to ensure operation of the corporate debtor as a going concern. These authorities are –
(a) to appoint accountants, legal or other professionals as may be necessary;
(b) to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process;
(c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured by such encumbered property:
Provided that no prior consent of the creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt.
(d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and
(e) to take all such actions as are necessary to keep the corporate debtor as a going concern.
The subsection ensures virtually all authorities, a resolution professional may need to run corporate as going concern.

Managing Corporate Debtor as going concern
Corporate debtor may not function as going concern unless there is a team to run it. There are some suggestive solutions to have a team to run a corporate debtor. All of them are yet to pass a test before Tribunal and Practicality.

Set – down management
Recently, some of the top corporate debtors fearing initiation of insolvency proceedings against them by financial creditors took an unprecedented step. Their executive directors resigned to take positions one level below the Board. Certainly, this is to ensure the status of a corporate debtor as going concern and also to ensure the protection of their corporate philosophy, core values and intellectual property work. However, this method shall subject to judicial scrutiny. This method may be considered a violation of the spirit of Section 17 (1) (b). Section 17(1)(b)declare that the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional.

Insolvency Professional agency
Insolvency Professional Entity gets its status from Regulation 12 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016. The Term “Insolvency Professional Entity” has no direct mention in the Insolvency and Bankruptcy Code, 2016.
To limit the wings of insolvency professional entities, we have a press release dated 15th June 2017 issued by the Board. The relevant portion of the press release correctly reads, “No person other than persons registered as IPs with the IBBI can act as IP. Insolvency Professional Entities are neither enrolled as a member of an IPA nor registered as IP with the IBBI. They cannot act as IPs under the Code. This is issued to clarify the position under the Code as to who can render services as IPs.”

Multi- tasking team
According to Para 7 of Code of conduct of Insolvency Professionals given in First Schedule of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, an insolvency professional shall not take up an assignment under the Code if he, any of his relatives, any of the partners or directors of the insolvency professional entity of which he is a partner or director, or the insolvency professional entity of which he is a partner or director is not independent, in terms of the Regulations related to the processes under the Code, in relation to the corporate person/ debtor and its related parties.
There could not be a formal organisational structure of multitasking team. The code of conduct suggests a workout for a special team of multitasking professionals who are together on an arms-length basis not a formal alliance as partners or directors of a common entity.

 

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