IBBI issues strict disclosure norms for insolvency professionals

In a bid to prevent connivance between the promoters of companies and insolvency professionals (IPs), the Insolvency and Bankruptcy Board of India (IBBI) has come out with a set of tough guidelines that will attract punitive action if disobeyed.

The IBBI has come out with strict disclosure norms for the IPs, both on their relationship with the corporate debtor and also on the fees and invoices charged for the bankruptcy proceedings.
The circular says that within three days of his appointment the insolvency professional will also have to disclose his relationship with other professionals engaged by him, financial creditors, interim finance providers and prospective resolution applicants to the Insolvency Professional (IP) of which he is a member.

The new circular issued on January 16, a copy of which is with DNA Money, is also set to curb the sudden spike in the share prices of companies where bankruptcy proceedings are announced.

Any wrong or delayed disclosure shall attract action against the IP and the other professional as per the provisions of law, the circular said. The IP shall ensure timely and correct disclosures by him and the other professionals appointed by him, it added.

The IP will have to disclose if he or any of his family members, including his spouse, spouse's family, sibling or his family have any relation to the company. He also has to disclose if he has received 5% or more of their gross revenue from the company or any related entity. When legal professionals, valuers and other professionals such as M&A experts are appointed, he has to disclose if he has any relationship with them.

The IP has to disclose whether he or his family members (which includes his spouse's family and also siblings' family) are a shareholder, director, key managerial personnel or partner of the company in any way. When the Committee of Creditors (CoC) is appointed within three days, he also has to disclose whether he or his extended family has any relationship with the creditor.

The IP shall disseminate the disclosures on its website within three working days of its receipt. The disclosures in respect of the ongoing processes shall be made to the respective IP by January 31, 2018.

Management consultants who team up with the IPs will no longer be able to run up bills and invoices for bankruptcy proceedings. All payments will now have to be raised by the IP and paid into his bank account only.

IBBI has restricted the fees charged by the IPs to discharge their functions as a resolution professional. IBBI has said in its circular that only the money paid to the IP will be considered as bankruptcy case charges.

In many cases after the IP is appointed, management consultants like Deloitte, E&Y, Grant Thornton and Alvarez & Marsal are helping banks and other creditors to sew a resolution plan or find a new bidder for the stressed companies. The fees charged by these consultants will no longer be considered as fees for bankruptcy. Only the fees paid to the IP will qualify as fees for bankruptcy.

"Insolvency professional shall render services for a fee which is a reasonable reflection of his work, raise bills and invoices in his name towards such fees, and such fees shall be paid to his bank account. Any payment of fees for the services of an insolvency professional to any person other than the insolvency professional shall not form part of the insolvency resolution process cost," the IBBI circular said.

Some of the big companies such as Essar Steel, Bhushan Steel and Amtek Auto are being tried in the National Company Law Tribunal under the Insolvency Bankruptcy Code.