Insolvency Board Lays Down ‘Fit And Proper’ Criteria
Enforcement orders seem to be raining from the new regulator - the Insolvency and Bankruptcy Board of India (IBBI). At the beginning of this month MS Sahoo, chairman of IBBI, issued the body’s first-ever regulatory order, which pertained to the issue of registration as an ‘Insolvency Professional’. Subsequently, another order dated March 14, 2017 was issued by the IBBI on the same matter.
Who Can Be An Insolvency Professional?
The latest order has been issued in an application filed by the former company secretary of Zenith Birla (India) Limited under regulation 6 of IBBI (Insolvency Professionals) Regulations, 2016 for registration as an Insolvency Professional (IP).
As per 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 Rs 10,000. Currently, there are three registered IPAs:
- Indian Institute of Insolvency Professionals of ICAI,
- ICSI Insolvency Professionals Agency, and
- Insolvency Professional Agency of Institute of Cost Accountants of India.
- In this case, ICSI Insolvency Professional Agency had recommended registration of the applicant, who was a company secretary.
- He served as the company secretary of Zenith Birla (India) Limited from June 18, 2013 to July 30, 2016.
- The company – Zenith Birla (India) Limited – had accepted deposits in 2010-2011 and had subsequently failed to repay these deposits. Due to this, proceedings were started against the company and its officers.
- While considering the application for registration, it was observed by IBBI that three criminal proceedings were pending against the applicant under section 58A (10) of the Companies Act, 1956 before the Additional Chief Metropolitan Magistrate, Mumbai for contravention of section 58A(9) of the Companies Act, 1956.
- The applicant submitted that he was not employed with the company when it accepted the public deposits and even when he was employed, he was a company secretary, simpliciter.
- He argued that his role was limited in responsibilities, and the liabilities are of the company.
- He pointed out that no company secretary has been convicted of an offence for non–repayment of deposits by a company as per orders of the Company Law Board (CLB).
- He further submitted that the company’s non-repayment of deposits and non-compliance with orders does not cast any doubt on his integrity, reputation and character. And therefore, he is ‘fit and proper’ to be registered as an Insolvency Professional.
Insolvency Professional: Fit And Proper Criteria
With criminal proceedings pending against the applicant, IBBI decided that he was not a fit and proper person and not eligible for registration as an IP.
As per the Regulations, no individual shall be eligible to be registered as an IP if he is not a fit and proper person. For determining whether an individual is fit and proper under the Regulations, IBBI may take account of any consideration as it deems fit, including but not limited to the following criteria:
- Integrity, reputation and character,
- Absence of convictions and restraint orders, and
- Competence, including financial solvency and net worth.
The IBBI order goes into the legislative intent of the Insolvency and Bankruptcy Code, 2016, which is meant to provide a market-determined and time-bound mechanism for orderly resolution of insolvency wherever possible, and ease of exit wherever required. This ensures ease of doing business and most efficient use of resources.
The order correctly recognises that an IP plays an important role in resolution, liquidation and bankruptcy processes of companies and individuals.
When a company undergoes this process, an IP is vested with the management of the affairs of that company and he exercises the power of its board of directors.
Such a company could well be one of the largest companies in India, and he becomes the custodian of its property as he manages the affairs of the company as a going concern. Further, he examines each resolution plan to confirm that it does not contravene any of the provisions of the law in force. These responsibilities require the highest level of integrity, reputation and character. In sync with the responsibilities, the Regulations require IBBI to take into account integrity, reputation and character of individual for determining if an applicant is a fit and proper person.
One of the reasons for denying registration to the applicant in the case mentioned earlier was that it is material what others feel about an applicant who had three criminal proceedings pending against him. What was also considered material was what kind of association the applicant has had with a company which is repeatedly contravening the provisions of the Companies Act and ignoring several directions of the CLB. The applicant was representing the company before the CLB about this contravention. IBBI was concerned that such a person may not inspire the confidence of stakeholders who have to entrust him with property for management; especially under the corporate insolvency resolution process.
Insolvency Board Relies On SEBI’s Fit And Proper Criteria
While deciding on its ‘fit and proper criteria’, IBBI drew from the rulings of a High Court and the Securities Appellate Tribunal (SAT). In this, the criterion of ‘fit and proper’ was decided under various SEBI Regulations. The order passed by IBBI is comparable with the fit and proper person criteria framed by SEBI for the securities market. Both activities demand persons of high integrity manning the respective functions.
One of the common features of the regulations providing for registration of intermediaries by regulators such as SEBI, IRDAI, RBI, PFRDA, IBBI, or TRAI is that the applicant must satisfy the ‘fit and proper person’ criteria. In the securities market, there have been cases where on a mere prima facie finding of financial crime and filing of a charge sheet by CBI, SEBI has led to persons being seen as not fit and proper to continue to be associated with securities market. It will be interesting to see in future if SEBI, IRDAI, RBI, PFRDA or TRAI considers a person fit and proper under their regulatory regime, while IBBI does not, or vice-a-versa.
Sumit Agrawal is a partner at Suvan Law Advisors and Ex-Assistant Legal Advisor, SEBI.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.