The Insolvency and Bankruptcy Code (IBC), 2016 proposes to set up new institutional pillars to support the insolvency resolution and liquidation processes. One such pillar is the industry of insolvency professionals. Insolvency professionals (IP) are expected to play a critical role in the timely and efficient insolvency resolution of firms and individuals. Two specific provisions pertaining to IPs in the new law have gone largely unnoticed: (i) not just individuals but firms can also get licensed as IPs (ii) those residing outside India can practise as IPs on Indian corporate and individual insolvency-related matters. Both these provisions can have important implications for the regulatory structure of the IP industry once the law is implemented.
The regulation of professions in India has been a failure. Self-regulatory organisations in professions such as medicine (Medical Council of India), law (Bar Council of India) and accountancy (The Institute of Chartered Accountants of India) have consistently failed to enforce good standards. This hurts the interests of consumers availing the services of the professionals. IBC has stepped away from this status quo. IBC has proposed a system of multiple, private self-regulatory organisations called IP agencies or IPAs that will regulate the insolvency professionals. The IPAs will compete with each other on entry barriers, codes of conduct and supervisory framework. Imagine that instead of the current monopoly, there are two Bar Councils of India competing with each other to prove that they have the better lawyers as their members.
The proposed IP regulatory structure is largely similar to that of stock market brokers - perhaps the only success story in India in regulation of professions. The brokers are members of the exchanges, BSE and NSE who in turn are regulated by the Securities and Exchange Board of India. In case of IBC, the IPs will be registered members of the IPAs. The IPAs will have regulatory and supervisory powers over their member IPs. The Insolvency and Bankruptcy Board of India (IBBI) will watch over the IPAs as well as the IPs.
In this framework, the regulatory burden on the IPAs (and also on the IBBI) will be significantly higher when the IPs are firms instead of individuals. Given the critical role played by IPs throughout the insolvency resolution and liquidation processes, they must be held accountable for their conduct and performance. Holding an individual accountable is easier than holding a corporate body accountable. Every IPA will need to have adequate capacity to regularly monitor, inspect and supervise the firms licensed as IPs. This will also have an impact on the business model of IPAs.
Canada is one of the few countries that allows firms well as individuals to be licensed as IPs. They do so by placing different entry and compliance requirements on firms compared to individual IPs. The insolvency regulator in Canada has issued clear and detailed directives on the eligibility criteria for licensing corporate IPs (or trustees in their case) and individual IPs, and on the organisational structure of firms applying for an IP licence. For instance, a majority of the directors and a majority of officers of the corporate trustee must also be individually licensed as trustees.
This raises several open questions with regard to this specific provision in IBC. What will be the corporate structure of a firm licensed as an IP under the new law? Unlike other Indian laws on professionals, the IBC mandates a qualification exam for IPs. Will all the employees of a corporate IP need to pass the exam or will it suffice if the directors or partners of the firm alone are licensed IPs? When an insolvency resolution case is given to an IP from such a firm, will the name of the IP go in the records or the name of the firm? This also relates to the accountability question. Who will be held accountable for a particular case-the individual IP dealing with the case or the firm she belongs to?
The other provision of IBC that deserves attention is that persons resident outside India can get licensed as IPs and can also form an IP agency. No other Indian law explicitly treats foreign professionals at par with Indian ones. The manner in which this provision is implemented will signal India's willingness to display its maturity as a global market.
This provision raises several questions pertaining to the regulation of the foreign nationals. In the United Kingdom for example, the insolvency profession is very well developed. Does an individual or a firm, who is already licensed as an insolvency practitioner in the UK, need to take the Indian IP exam again? Or is it just a specific portion of the exam focused on the Indian landscape that will be relevant for her? How will the IBBI regulate an IP, or for that matter an IP agency, who is already under the supervision of the UK insolvency regulator? Does the foreign IP need to become a member of an Indian IPA in addition to her membership of a recognised professional body in the UK? Can an IP agency registered in the UK open an office in India and regulate Indian IPs? How can a level playing field be created for foreign IPAs and Indian IPAs to compete with each other? Are there related laws that need to be amended or repealed to allow foreign IPs to practise and to be regulated in India?
The implementation of this provision requires careful balancing. On one side is the need for expertise and experience to implement the IBC and to give Indian debtors and creditors access to the best possible IP services available globally. This is especially important since India does not currently have a developed IP industry. On the other hand, the IBBI needs to ensure that foreign IPs and IPAs are properly regulated such that they can be held accountable for their conduct and for liabilities arising out of their work in India.
IPs are central to the success of IBC. Poor regulation of the IP industry will lead to poor bankruptcy outcomes. Through the enactment of these provisions, Parliament has taken unprecedented and bold but welcome steps towards creating a new paradigm of regulation in India. Now that IBC is about to be implemented, the IBBI and the IPAs need to issue clear and detailed regulations and by-laws addressing the questions arising from these provisions before the IP industry becomes operational.
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