by Sumit Agrawal
The Insolvency and Bankruptcy Board of India (IBBI) was established on October 1, 2016 in accordance with the provisions of The Insolvency and Bankruptcy Code, 2016. Within a short span of five months of its establishment, Dr. M S Sahoo, Chairman of IBBI has issued first regulatory order last week.
The order has been issued in an application under regulation 6 of IBBI (Insolvency Professionals) Regulations, 2016 (“the Regulations”) for registration as an Insolvency Professional (IP), filed by an Assistant Vice President of Ernst and Young, a chartered accountant firm.
In terms of the Regulations, an individual enrolled with an insolvency professional agency (IPA) as a professional member may make an application to the IBBI in prescribed form, along with a non-refundable application fee of ten thousand rupees. In this case, Indian Institute of Insolvency Professionals of ICAI was IPA, which had recommended registration of the applicant.
Under regulation 8(3) of the Regulations, after considering the explanation, IBBI is required to communicate its decision to either (a) accept the application, along with the certificate of registration, or (b) reject the application by an order, giving reasons thereof, within 30 days of receipt of the explanation.
Interpreting regulation 7(2)(a) of the Regulations read with with the Code of Conduct prescribed in the Regulations (specifically clause 23), the applicant had submitted two-fold arguments. Applicant pleaded that clause 23 of the code of conduct suggests that an IP must not engage in any employment with the entity where he is appointed (as a resolution professional, liquidator, bankruptcy trustee etc). To justify this explanation, he submitted that the objective of the code of conduct is to maintain independence and to avoid conflict of interest. Second, the requirements of the code of conduct cannot be used to determine the eligibility for registration as an IP. Thus, he claimed registration as an IP.
IBBI, rejecting both the contentions, has held that for meeting the conditions for registration, an IP must not ‘engage in any employment’ and therefore, an employed person cannot be an IP. The order holds as following: –
6. A plain reading of the above clause makes it clear that an IP must not ‘engage in any employment’, repeat ‘any employment’. It envisages that a person must not play two roles- profession and employment – simultaneously. It is like the requirement that a person in employment must not practice as an advocate and vice versa. The solemn objective behind such a requirement is that a professional must have undivided loyalty and unflinching attention towards his professional obligations. It assumes further significance in case of an IP who renders time critical services under Insolvency and Bankruptcy Code, 2016. This Code, for example mandates resolution plan to be submitted within 180 days of the resolution commencement and if it is not done, the corporate person is pushed into liquidation. It is, therefore, beyond comprehension to have an employed person as an IP. The clause, however, allows an IP to temporarily surrender registration and thereafter engage in employment. This is only an exception and even the exception does not allow a person to engage in employment without surrendering registration.
7. The applicant has submitted that an IP is prohibited from employment with that entity where he is appointed as a resolution professional, liquidator, bankruptcy trustee, etc. As the objective is to maintain independence and to avoid conflict of interest. I find that the prohibition is comprehensive, that is, no employment whatsoever. The objective of the clause is total commitment for the profession. This clause is not intended to address the issues of independence or conflict of interests. There are specific provisions in the relevant Regulations to address such issues……..
9. Regulation 7(2)(a) requires an IP to abide by the Code of Conduct at all times. This code does not allow him to engage in employment, as explained above. However, the applicant here is engaged in employment. Assuming that a requirement in the code of conduct is not an eligibility requirement, as claimed by the applicant, what purpose would it serve if he is granted registration as an IP if he is not to render services as an IP? Further, how can the Board grant registration to a person in employment? He would be violating the code of conduct the moment he is granted registration as an IP and consequently violate Regulation 7 of the Regulations. I, therefore, do not find the second examination of the applicant tenable.”
This first historic order from IBBI sets a tone on how it is going to interpret the provisions of its regulations. Where the code of conduct forms part of the Regulation, the violation of the code of conduct, will become punishable for violation of Regulations and hence both have to be read together.
This legal principle, which is already established in the field of securities law through orders issued by SEBI and Securities Appellate Tribunal (SAT) has been reaffirmed in this order as well. The provisions of the Regulations and code of conduct have to be interpreted keeping in view the aims and objectives of the Act. Any other view would defeat the very purpose of the Regulations.
(Author is Partner, Suvan Law Advisors and former Assistant Legal Advisor, SEBI. Views are his own.)
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