Regulatory Framework and Code of Ethics governing Insolvency Practitioners in India

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1 Regulatory Framework and Code of Ethics governing Insolvency Practitioners in India 10 TH August, 2010 I.1. Introduction The Companies (Second Amendment) Act, 2002 ( Amendment Act ) provided for the creation of a National Company Law Tribunal as a forum for deciding on various company law matters. In addition, all pending matters before the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR) and the corporate benches of the High Courts, would be transferred to NCLT. The amendment also provided for a process for Revival and Rehabilitation of sick companies under the Companies Act to be conducted before the NCLT and envisaged the appointment of private practitioners as Liquidators/Administrators etc. during winding-up and revival and rehabilitation proceedings respectively. The constitutionality of the Companies (Second Amendment) Act, 2002 was subjected to a legal challenge and a five-judge Supreme Court (SC) constitution bench on cleared the decks for the establishment of a National Company Law Tribunal (NCLT) on the basis of new guidelines on the composition and functioning of these tribunals. Under the proposed dispensation, NCLT would be headed by a retired high court judge. Any bench consisting of both judicial and technical members would have a majority belonging to the first group. Tribunal members will be appointed by a committee consisting of CJI, a serving SC judge or high court chief justice, the law secretary and the trade secretary. This has paved the way for establishment of NCLT (subject to the constitution of NCLT in accordance with the Supreme Court Guidelines) and the enforcement of the Amendment Act. Once the Amendment Act is enforced, Section 448 which pertains to the appointment of official liquidators will be widened and experts/professionals dealing with business laws can be appointed as Official Liquidator; however, their powers and duties will remain the same. Under the new S. 448 following persons can be appointed as an Official Liquidator: - Chartered Accountants, Advocates, Company Secretaries, Costs and Work Accountants or firms having a combination of these professions. A body corporate comprising of professionals mentioned above; A whole-time or a part-time officer appointed by the Central Government. I.2. Need to Regulate & Outline the Qualification of Company Liquidators 1 P a g e

2 Under the Companies Act, 1956, Company Liquidators (professionals and private practitioners as Liquidators) can be appointed only in cases of Voluntary Winding-up procedures. However, under the Companies Bill, 2009 the scope of appointment of Company Liquidators in the process of winding up of the Company has been widened so as to include Winding-up by the Tribunal as well. With more involvement and responsibility being given to the Company Liquidators (known as Insolvency Practitioners or Private Trustees in UK and USA respectively), there is a greater need to ensure the quality of people who practice this profession. The Companies Bill, 2009 only lists down the professions from which Company Liquidators can be appointed but merely listing the professions from which company Liquidators should be appointed will not suffice and a set of minimum qualification should be prescribed before the professionals can be enlisted in the panel so as to ensure the quality of professionals entering the professionals entering the profession as Company Liquidators. Hence, there is need to have a regulatory framework in place to regulate, guide and monitor the conduct of Company Liquidators. I.3. Scope of Regulation The Regulation like any other regulation regulating professionals need to address the some of the important issues mentioned below: - 1) Regulator for the profession 2) Qualifications of a Company Liquidator 3) Disciplinary mechanism 4) Professional Education and Qualifications of Insolvency Practitioners 5) Code of Ethics/Conduct 2 P a g e

3 II. Regulator of the profession International Practice II.1. United Kingdom In UK, the Secretary of State (SoS) for the Department of Business, Enterprises and Regulatory Reforms regulates the Insolvency Practitioners. The SoS recognizes independent professional bodies for the purpose of authorizing, licensing and regulating appropriately qualified individuals to act as Insolvency Practitioners. These bodies are called Recognized Professional Bodies or RPBs. The SoS regulates the RPBs. The SoS regulates the RPBs by monitoring their compliance with legislation and agreed standards. The SoS and each RPB authorize and licence appropriately qualified individuals to act as Insolvency Practitioners. The SoS and each RPBs regulate the Insolvency Practitioners whom they authorize and license by monitoring their compliance with legislation and accepted standards. List of Recognized Professional Bodies: - 1. Institute of Chartered Accountants of England and Wales( ICAEW) 2. Institute of Chartered Accountants of Scotland (ICAS) 3. Institute of Chartered Accountants of Ireland (ICAI) 4. Association of Chartered Certified Accountant (ACCA) 5. Solicitors Regulation Authority (SRA) 6. Law Society of Scotland (LSS) 7. Insolvency practitioners Association (IPA) II.2. Australia Australian securities and Investment Commission (ASIC) is the authority which regulates the Private Insolvency Practitioners in Australia. Private sector practitioners become registered with ASIC and Insolvency Practitioner Association of Australia (IPAA) and are then able to be appointed as receivers, administrators and liquidators in individual cases. When they become registered with ASIC they become known as registered liquidators. There is a separate category of liquidator; called Official Liquidators who are the only liquidators permitted to conduct court windings-up. The criteria that must be met to become a registered liquidator and the role and duties of appointees to particular cases are set out in the Corporation Act. II.3. United States of America Under the legal framework in United States, Trustee is responsible to look after the Bankruptcy proceedings. Once the order of Relief is made in case of liquidation proceedings under chapter 7 of 3 P a g e

4 the Bankruptcy Code, the United States Trustee 1 shall appoint one disinterested person that is a member of the panel of private trustees established under section 586(a)(1) of title 28 or that is serving as trustee in the case immediately before the order for relief under this chapter to serve as interim trustee in the case. The service of an interim trustee under this section terminates when a trustee elected by creditors or designated under section 702 of title 11 agrees to serve as trustee. Creditors meeting held under Section 341 of Title 11, a Trustee can be elected by the creditors and if a Trustee is not elected then the interim trustee will serve as the Trustee in the case. 1 The United States Trustee Programm is an agency of the United State Department of Justice that is responsible for overseeing the administration of bankruptcy cases and private trustees. The United State Attorney General generally appoints a separate United States Trustee for each of twenty-one geographical regions for a five year term. Each United States Trustee is removable from office by and works under the general supervision of the Attorney General; the above mentioned information has been taken from 4 P a g e

5 III. Qualifications of Company Liquidator International Practice III.1. United Kingdom Qualifications for Insolvency Practitioners Quite often Insolvency Practitioners have accountancy have an accountancy background. A few active practitioners are lawyers, but it is not necessary to be qualified as either, as since 1986 there has been a direct entry route to the profession. Insolvency is a regulated profession under the Insolvency Act 1986 and anyone who wishes to practice as an Insolvency Practitioner needs to pass the three examination papers (paper on Liquidations; Administrations, Company Voluntary arrangements and Receiverships; and Personal Insolvency) set by the Joint Insolvency Examination Board (JIEB) and meet the authorizing body s insolvency experience requirements. Though no mandatory qualification in terms of any degree is prescribed but is suggested that the candidates appearing for the Joint Insolvency Examination should have a basic understanding of Accounting, Taxation and Business Laws. III.2. Australia Only natural persons are allowed to be registered as Liquidators in Australia. 2 Following are the requirements laid down under section 1282 of the Australian Corporations Act, 2001 that a person applying for registering himself/herself as a Liquidator has to fulfil:- Holds a degree, diploma or certificate from a prescribed university or another prescribed institution in Australia and has passed examinations in such subjects, under whatever name, as the appropriate authority of the university or other institution certifies to ASIC to represent a course of study in accountancy of not less than 3 years duration and in commercial law (including company law) of not less than 2 years duration; or has other qualifications and experience that, in the opinion of ASIC, are equivalent to the qualifications mentioned above. Has experience in winding up bodies corporate 2 Section 1279 of the Corporations Act, P a g e

6 Is capable of performing the duties of a registered liquidator and is otherwise a fit and proper person to be a registered liquidator Is not a person disqualified from managing corporations Is (generally) resident in Australia and If the application is granted, will comply with our policy on the security required under S III.3. United States of America Qualifications of Private Trustees 3 The qualifications for membership on the panel for a Private Trustee are as follows: 1) The person who can be appointed as a trustee must be:- i. Be a member in good standing of the bar of the highest court of a state or of the District ii. iii. iv. of Columbia; or Be a certified public accountant; or Hold a bachelor s degree from a full four-year course of study(or the equivalent)of an accredited college or university with a major in a business-related field of study or at least 20 semester-hours of business-related courses; or hold a master s or doctoral degree in a business-related field of study from a college or university of the type described above; or Be a senior law student or candidate for a master s degree in business administration recommended by relevant law school or business school dean and working under the direct supervision of: (A) A member of law school faculty; or (B) A member of the panel of private trustees; or (C) A member if a program established by the local bar association to provide clinical experience to students; or v. Have equivalent experience as deemed acceptable by the U.S. Trustee. 2) Possess integrity and good moral character. 3) Be physically and mentally able to satisfactorily perform a trustee s duties. 4) Be courteous and accessible to all parties with reasonable inquiries or comments about a case for which such individual is serving as private trustee. 3 The qualification for private trustee is provided under part 58, chapter I, Title 28 of the United States Code; the information has been obtained from 6 P a g e

7 5) Be free of prejudices against any individual, entity, or group of individuals or entities which would interfere with unbiased performance of a trustee s duties. IV. Disciplinary Mechanism Insolvency Profession itself is a completely new profession in itself. Every profession has its own Code of Ethics/Conduct which the professionals are to follow. In case of non-adherence to standard practice, disciplinary proceedings are to be initiated against such professionals or even suo moto action can be taken up by the Regulator against any Insolvency Practitioners if there are reasonable grounds to do so. The practice and the power to adjudicate has been given to the Regulators in India in terms of other independent professions recognized in India like Institute of Chartered Accountants of India is the authority to adjudicate upon disciplinary proceedings in case of any proceedings against Chartered Accountants, Bar Council adjudicates has the authority to adjudicate upon Advocates etc. The Insolvency Regulators across different jurisdictions have also been given similar power to adjudicate on proceedings against Insolvency Practitioners like ASIC in Australia, the Official Trustee in US and the Recognized Professional Bodies in UK. Hence, the regulator or the body regulating the conduct of Insolvency Professionals/Company Liquidators should be given the power to adjudicate upon disputes arising between the client and the professional or the Regulator and the professional etc. V. Professional Education & Qualifications of Insolvency Practitioners The course outline is to demonstrate that all of the required components are present in the course to the required degree of rigor. It is the responsibility of the Regulator/Institutes/Authority to review course outlines submitted to assure that they meet these standards required for a person to be qualified as an Insolvency Practitioner. More than just specifying the required components of the course, the outline of record states the content and level of rigor for which the professionals will be held accountable. The system is successfully operational in case of other professionals like Chartered Accountants, Company secretaries, Lawyers etc. in India. In terms of Insolvency Professionals a basic course structure is to be designed specifying the subjects and minimum of number of hours to be devoted on each of them. Generally, Insolvency 7 P a g e

8 Professionals are either practising Chartered Accountants, Company Secretaries or Advocates, hence the subjects they have already studied during getting their respective professional degrees can be dispensed with and only the additional subjects that they require to study as per the course outline should be mandatory for them. VI. Code of Ethics/Conduct for the Company Liquidators VI.1. Need for a Code of Ethics Stakeholders Involved Part of the complexity of insolvency is the broad range of stakeholders. Each stakeholder group has a unique perspective, expectations, and obligations. Often they have competing, mutually exclusive interests. The Practitioner also has his or her own legitimate interests which were dealt with in the preceding section. The natures of the interests of the various stakeholders are summarized below: - Creditors are parties to whom a debt is owed by the insolvent. A creditor will normally have traded with the entity with an expectation of being paid for services provided, goods sold, or moneys loaned; are parties whose rights of payment by their debtor are replaced by a right to a dividend; are usually disadvantaged financially; are reliant on the Practitioner s experience and skill in having their losses recouped; rely on the Practitioner to be informed about the administration; have some obligation and interest in informing and otherwise assisting the Practitioner in making decisions where creditor approval is required; are parties whose dividend payments are the outcome of work done by the Practitioner in realising or recovering funds; have power to approve remuneration; and may, if they have received a preference payment, be required to repay the preference, notwithstanding that they may have additional monies owed. Employees can be more immediately affected by the insolvency of their employer, in terms of immediate loss of wages, and accrued entitlements; 8 P a g e

9 can require particular attention and consideration by a Practitioner above and beyond other creditors. Suppliers are usually creditors of the insolvent with claims in the insolvency and may be subject to claims by the Practitioner, for recovery of preferences or for disputed retention of title claims; are persons whose support (for ongoing supplies or services to the insolvent) is often needed for a trade-on of a company in liquidation, receivership, voluntary administration or a deed of company arrangement; and can require particular attention by a Practitioner if such on-going support is required. Regulators have a statutory interest in the proper administration of the legislation; have statutory powers to review the conduct of Practitioners, including powers to initiate a review by the courts of the remuneration claimed; have available to assist creditors with complaints and concerns; have an obligation to government and the courts; and have a role in the registering of Practitioners The courts may assist the Practitioner in determining complex issues by giving directions, determining and enforcing rights of recovery, and protecting Practitioners as required; may determine the rights and responsibilities of all parties, including to review the decisions of Practitioners; may review the performance and remuneration of a Practitioner; rely upon the honest and competent representation of parties to assist the courts in making decisions in accordance with the law and to advance the interests of justice; expect and enforce high standards of conduct; and are available to Practitioners who can seek guidance and declarations The public has an interest in ensuring that the law is clear and understood, that it is upheld and also that commercial morality is maintained; has an expectation that improper conduct will be investigated and reported to the relevant authorities; and 9 P a g e

10 and also has an expectation that the insolvency profession is staffed by persons of high competence and integrity. Contributories have an interest in the entity s affairs being properly administered including so as to ensure that surplus funds, if any, are paid to them; and may also be creditors and have separate claims in that capacity. Directors have obligations under the law with a view to assisting in the proper administration of the insolvent, including in any recoveries for the benefit of creditors; can be personally liable for losses to the administration at the suit of the Practitioner, or in some cases the regulator, or the Australian Taxation Office; and may also be creditors or contributories and have separate claims in those capacities. The Bankrupt or Debtor has obligations under the law to assist and co-operate with the trustee; duties owed to them by the trustee, including to ensure that they and their property are protected from creditor claims. The Spouse of the Bankrupt Is often the joint owner of the matrimonial home with the bankrupt or has an interest in that and other joint assets, in equity or under family law, which the trustee needs to assess. The Official Trustee: undertakes the administration of the majority in number of bankruptcy estates with the remainder handled by Practitioners; may transfer the administration of estates to Practitioners. The Official Receiver: provides services to registered trustees in relation to the issue of statutory notices and the conduct of examinations. VI.2. Introduction and Purpose of the Code The primary purposes of this Code of Professional Practice (the Code) are to: Set standards of conduct for insolvency professionals; Inform and educate the Insolvency Practitioners as to the standards of conduct required of them in the discharge of their professional responsibilities; and 10 P a g e

11 Provide a reference for stakeholders against which they can gauge the conduct of IP s. Members should be guided, not only by the specific terms of the Code but also by the spirit of the Code. The Code applies to all Insolvency Practitioners in India insofar as they conduct or are involved in the administration of insolvencies, formal and informal. The Code therefore applies not only to liquidators and trustees, but also to lawyers, accountants, financiers and others who are eligible to be appointed as an Insolvency Practitioner. Eligibility criteria are established by law. Insolvency is a difficult situation for those involved. Every insolvency involves financial loss for creditors including employees who may also lose their source of employment. An individual and their family may lose their home and other assets. The consequent emotional stress often creates a difficult environment. Insolvency can result in financial and social disorder. The regime of insolvency law seeks to control this disorder, while a process of balancing the respective rights and entitlements of those parties is pursued. VI.3. Practitioners are fiduciaries. They are entrusted with property of the insolvent and required to deal with it in accordance with the law and consistently with the obligations and duties of fiduciaries; are appointed to implement the insolvency regime and to deal with and determine the rights and entitlements of all the parties involved; owe responsibilities to the creditors as a whole, not just to one creditor (except where appointed as a receiver or receiver manager) and other parties; are experienced and qualified professionals who are expected to display high degrees of application and professional competence; are subject to court and regulatory supervision; have specific legal obligations under the law, for example to: investigate the reasons for the insolvent s financial failure; report on the results of those investigations to creditors and the regulator; and pursue preferences and claims for insolvent trading if it is in the interest of creditors to do so. are required to exercise a high level of commercial and professional judgment; operate in difficult circumstances, often involving distressed parties, competing demands, strict deadlines, and complex legal, financial and factual issues; can be personally liable for debts incurred during an administration; 11 P a g e

12 are legally entitled to be remunerated for the work they do as a priority payment in the administration; and from time to time will accept and complete administrations even though there are insufficient funds to pay their remuneration and disbursements VI.4. Powers Practitioners are given extensive powers, including to: protect and preserve the assets of the insolvent from creditors pursuing their debts; compel individuals involved to answer and explain the circumstances of the insolvency; investigate and refer breaches of the law to appropriate authorities; and decide the claims of the various parties. VI.5. Duties and Obligations The standards of conduct expected of Practitioners have their origin in the special position Practitioners occupy. They have: extensive power and autonomy; control of assets; and power to adjudicate on competing, conflicting and often hostile interests In corporate appointments Practitioners become officers of the company and are required to adhere to the obligations and duties of company officers. These combine to create a complex web of fiduciary responsibilities. VI.6. Practitioners: owe a fiduciary responsibility to the parties involved; have a duty to be fair and act without bias in assessing the competing interests of stakeholders; have an important role in protecting the public interest, by identifying and reporting on a range of issues such as the misconduct of directors; and have important statutory investigatory and reporting obligations they are required to pursue even though the costs of investigation and reporting will reduce the funds available to creditors. 12 P a g e

13 This distinguishes a Practitioner s position from that of other professionals. Normal professional relationships have: an identifiable client who has willingly selected the professional; a contract for professional services which can be terminated at any time in accordance with the contract; contracted arrangements for remuneration; and may or may not have a fiduciary component. With the exception of receiverships, in insolvency there is no single client. In a receivership the Practitioner s primary responsibility is to maximize the return to the secured creditor who appointed them. VI.7. Supervision and Scrutiny Practitioners are subject to scrutiny by: creditors, (particularly through creditors meetings and committees of inspection); directors, debtors and others; regulators; and the courts. VI.8. Skill and Judgment Insolvency involves the difficult intersection of accounting, business and law. Skills are needed to handle a complex situation which invariably happens quickly, with immediate impact on a range of parties beyond the insolvent. There is great divergence in the types of commercial activities. The business of the insolvent company may range from that of a builder with two employees to an airline with several thousand, and the affairs of the insolvent individual may involve contentious family law disputes, or complex personal tax issues. Assets may be at risk of being disposed of, or serious business decisions may need to be made. Quick commercial judgment and business acumen are required, in particular in view of the fact that a positive commercial outcome by way of a return to creditors is all the more difficult in circumstances of limited funds. 13 P a g e

14 VII. CODE OF ETHICS: BASIC PRINCIPLES Conduct Members must exhibit the highest levels of integrity, objectivity and impartiality in all aspects of administrations and practice management. When accepting or retaining an appointment the Practitioner must at all times during the administration be, and be seen to be, independent. Disclosure and acceptance of a lack of independence is not necessarily a cure. Members must communicate with affected parties in a manner that is honest, open, clear, succinct and timely to ensure effective understanding of the processes, rights and obligations of the parties. Members must attend to their duties in a timely way. A Practitioner must not acquire directly or indirectly any assets under the administration of the Practitioner. When promoting themselves, or their firm, or when competing for work, Members must act with integrity and take care not to bring the profession into disrepute. Remuneration A Practitioner is entitled to claim remuneration, and disbursements, in respect of necessary work, properly performed in an administration. A claim by a Practitioner for remuneration must provide sufficient, meaningful, open and clear disclosure to the approving body so as to allow that body to make an informed decision. A Practitioner is entitled to draw remuneration once it is approved and according to the terms of the approval. Practice Management Members must implement policies, procedures and systems to ensure effective: Quality Assurance; 14 P a g e

15 Compliance Management; Risk Management; and Complaints Management. ANNEXURE I 15 P a g e